The Australian Prudential Regulation Authority (APRA) has stressed the importance of having adequate processes in place for mitigating the risks of investing in illiquid assets and ensuring adequate processes are in place for valuing these assets.

APRA market risk senior manager Craig Roodt said super funds which showed continued high outperformance relative to other funds, would likely point to a situation where trustees had probably not addressed the issues associated with illiquid investments.

"Anytime, where there is any significant outperformance, it is clearly a red flag," Roodt told delegates at yesterday's Australian Custodial Services Association annual conference.

"Clearly, we don't want things like funds going out and loading up on [illiquid] assets.

"If you have a very large allocation to illiquid assets, the problem is that you may not have addressed the valuation issues and I would start with the assumption that you haven't addressed the illiquidity issues."

Roodt was asked whether the outperformance of industry fund MTAA before the global financial crisis (GFC) and its subsequent fall in the performance tables during the GFC was a problem for the regulator.

"I can't speak about fund specifics, but I have said to funds that one of the issues with outperformance is that you don't want to be giving it back one day," he said.

Roodt specifically highlighted the issues during the crisis with the valuations of unlisted properties.

"Trustees should be asking: 'If every other asset is going down in value, why haven't my assets gone down in value?'" he said.

"The only answer seems to be: 'These things aren't trading, there is no market sentiment, [or] I don't have an up-to-date value.' Those are not very good reasons.

"I might be a little naïve about these things, but I'm not sure under what circumstance I would pay more money for something I can't get out of."