Unlisted securities outstripped their listed cousins last year, sparking debate over their relative merits.

One of the investment decisions that separated better-performing superannuation funds from less successful ones during the 2008-09 financial year was the balance of listed and unlisted securities in their portfolios.

Australian listed property securities, the so called A-REITs, lost an average of more than 40 per cent of their capital value during the year to June 30, while unlisted property securities lost an average of about 12 per cent.

Other types of unlisted securities, such as infrastructure funds and private equity funds, also proved more resilient and less volatile than their listed counterparts.

These outcomes have sparked debate about whether listed and unlisted assets are fundamentally different and whether super fund members should favour funds with large holdings in unlisted assets.

According to consulting group Chant West, growth portfolios in its superannuation survey fell by an average of 12.9 per cent in the 2008-09 year.

Chant West says the range of exposure to unlisted assets in industry funds is 14.5 per cent to 42 per cent. The average return of growth portfolios in industry funds was a loss of 11.9 per cent. The range of exposure to unlisted assets in mastertrusts is zero to 23 per cent. With that lower exposure to unlisted assets, the performance of growth portfolios in mastertrusts was weaker ??? a loss of 13.5 per cent compared with the overall fall of 12.9 per cent and the 11.9 per cent fall of industry funds.

The principal of Chant West, Warren Chant, says: ???Industry funds went through the year with much higher allocations to unlisted assets than their mastertrust rivals. They benefited from this exposure.???

A research paper by MLC Implemented Consulting senior asset consultant, David Klug, argues that the advantage currently being enjoyed by super fund members whose funds have a heavier weighting to unlisted property assets is illusory (apart from a short-term timing effect) because it is due to a valuation lag.

Klug says: ???The debate is about whether listed and unlisted property markets have intrinsically different investment characteristics or whether they are simply subject to a valuation lag effect."

His conclusion is that there are not great dissimilarities between the two and that, ultimately, ???unlisted and listed property markets will produce similar performances over rolling 10-year periods???.

The data shows that over the past five years, rent has made up 87 per cent, on average, of Australian listed property trust income. Other sources of income include construction and development.

He says: ???Over the past few years, the proportion of non-rental activity has increased but rental income has never dropped below 80 per cent of total income. The Australian listed property sector is still largely a rental story. Allegations that the industry has lost its property characteristics are not tied to the evidence.???

On the issue of gearing, Klug says Australian listed property trust gearing ratios (loans as a proportion of assets) climbed steadily over a decade from a low of about 10 per cent in the mid-1990s, peaked at an average of 39 per cent in 2004 and have since come back to about 30 per cent.

He cites Mercer data that shows unlisted funds with average gearing of 20 per cent last year. He argues that much of the 10 percentage-point difference can be accounted for by a valuation distortion. As unlisted trust valuations catch up with listed trusts, their gearing ratios will increase.

Klug says an analysis of the rolling one-year returns of the two sectors in Australia, Britain and the US shows a pattern in which unlisted returns lag the listed sector by six to 12 months.

The managing director of the consulting group Watson Wyatt in Australia, Andrew Boal, says it would be dangerous for super fund members to contemplate switching funds without gaining an understanding of the assets in the fund they were thinking of moving to and how those assets are valued.

Boal says: ???When it comes to property, the valuation factors include the occupancy rate ??? and likely future rate ??? rental income and assumptions about the trend of future income, the impact of new building stock and so on. Valuations will vary depending on how many of these factors are used.

???You can make a broad statement that the valuation of listed assets tends to be more forward-looking, with a heavier emphasis on future prospects, while the valuation of unlisted assets tends to be backward looking, with more emphasis on historical performance.

???But you need to know how the actual assets are being treated."

Not all funds with a bias to unlisted assets have done well. The Motor Traders Association of Australia Superannuation Fund balanced option was the top performer in the SuperRatings performance tables for its 2007-08 returns but was last out of the 50 funds surveyed by SuperRatings for the 2008-09 financial year.

The fund has big investments in unlisted infrastructure and property assets managed by Macquarie Group, which have had their values written down over the course of the year.

Boal says: ???You can't make assumptions. You have to know each fund in detail.???

Listed or unlisted

* The worst performing asset classes in 2008-09 were global-listed property, Australian-listed property, international equities and Australian equities.

* Losses on unlisted property securities were much less than listed property.

* Experts argue the difference can be accounted for by a ???valuation lag??? and that super fund members should take great care before switching funds on the basis of last year's figures.