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Portfolio holdings disclosure rules "feeblest on the planet": Report

A new report from Morningstar calls out the faults in the Portfolio Holdings Disclosure regulations, particularly as they pertain to unlisted, private equity and bond investments.

The report's author, head of manager selection Grant Kennaway, says the PHD regulations in their current form don't enable an investor to compare portfolios, nor can the data be used to understand the true risks of a portfolio.

This means the super system operates in a dark void for investors, he said, adding that a consistent finding for the global research house has been that "Australia has the feeblest investment fund disclosure requirements on the planet".

Kennaway takes particular issue with the lack of disclosures required around unlisted and private equity investments, with funds not forced to disclose the values and weightings of individual assets. They also only have to provide the total value and weighting of the asset class. For unlisted equity, just the name of the fund manager is needed.

"Currently, this allows some super fund investors to play a game of 'Where could my Canva holding be?'," he said.

He called the current requirements "appallingly weak", pointing to the initial conditions outlined in the draft regulations which required funds to provide full disclosure of individual infrastructure assets and private equity funds, including the value and weighting of individual assets.

He also called out the disclosure requirement of assets such as bonds, where only the issuer need be named. He said this renders the disclosures meaningless.

"Simply listing the issuer of a bond tells investors nothing about its credit quality and interest-rate risk," Kennaway wrote.

"If a superannuation fund were to invest in an external bond fund, it need only disclose the name of the fund manager, obscuring whether the investment was in Australian government debt or emerging-market bonds, and so on."

He added that, as it stands, Australians wishing to invest sustainably have no regulatory enforced way to know if they're exposed to fossil fuels aside from what they might find in listed equity disclosures.

"The only asset class where portfolio disclosure really occurs in Australia is in the listed equity section, which holds many of the most well-regulated (and lowest-risk from a disclosure sense) assets on Earth and is the least problematic area for these regulations to focus upon," Kennaway said.

Couple all this with the fact that disclosures are only semi-annual and don't cover managed funds, Kennaway said Australia's current requirements "do not exceed the lowest bar that Morningstar sees in disclosure requirements in other global markets".

"More-granular disclosures and identifiers would have allowed portfolio constructors to conduct deeper analysis to better support end investors in reaching their investment goals. There is no way that individuals or groups could identify fraudulent activities using the now-required data," he wrote.

"In Australia's compulsory superannuation system, investors' best interests are not being served by weak portfolio holdings disclosure regulations."

Read more: Portfolio Holdings DisclosureMorningstarGrant Kennaway