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Written by Kris Wrenn – Senior Adviser
Each year performance comparisons are released for Super funds and the spotlight tends to be on industry funds. Recently my fellow adviser Michal Park released a “2-Minute Tuesday” regarding industry Super funds and how they may not be representing themselves accurately and I definitely endure the same frustrations… firstly, the fact that they invariably do not compare “apples with apples”, and secondly, that people continue to be coerced by the same fallacy – that industry funds are low-cost.
Comparing apples with apples – it’s all in the investment mix. Anyone with a Superannuation account has heard of multi-sector fund options such “Conservative”, “Balanced’, or “Growth”. Some providers will call them “Defensive”, “Diversified” and “Aggressive”. Others will have their own spin on it completely; “Lifestage” or “Lifecycle”. The list goes on and on. They are all the same in one way; they invest across all or most of the commonly accepted asset classes, that is; Cash, Fixed Interest (bonds/debt securities), Australian shares, Global shares and Property/Infrastructure, all packaged up together, not segregating the investments.
Advantages of a multi-sector fund include that they are diversified and that the level of risk that they will incur can cater to the risk appetite of the investor. But herein lies the problem when it comes to comparing one with another… across the industry, there is no set % that must be assigned to each asset class and, more importantly, there is no set % that must be assigned to defensive/growth assets in order for a fund to use the various terms, such as “balanced”. Furthermore, there isn’t even a clear determination on what constitutes a “defensive” asset and what is a “growth” asset.
The result of this… one “balanced” option may have a completely different amount of growth assets such as shares than another “balanced” option.
For purposes of this article, I am going to consider the asset class “Property” to be a “growth” investment. Not all platforms do! I consider it a growth asset because history shows it can and does have the same growth potential as shares, and likewise it can and does have the potential for very high volatility and potentially large capital losses in the short/medium term.
On the basis that Property is a growth asset, I have encountered balanced fund options that have a 50%:50% split between growth and defensive options, others (most) will tend to have a 65%:35% or 70%:30% split. Often, however, they will have a % allocated to growth assets in excess of 80%. In fact, once when reviewing a Hostplus account for a member a couple of years ago, I was astonished to find that despite it having a “balanced” title, they had a “growth” component of over 90%, namely because the fund considered the Property/Infrastructure exposure to be defensive in nature.
This then invariably creates a significant difference in returns depending on how the various markets perform. For example, if a “balanced” option has 80% growth assets, and the share markets do very well in a given period, then that fund will almost undoubtedly perform better than the “balanced” option that has 50% growth assets. How then do research bodies attempting to compare Super funds compare apples with apples? Add to this that the fund managers generally have broad ranges that they are allowed to vary the asset class weightings on any given day, and it is nigh impossible.
Making it all about the fees – it’s all they’ve got, and yet it’s a total fallacy. I have always found it both ironic and amusing that industry Super funds spend millions of dollars of fund members money each year advertising, in order to tell members, or rather potential members, how low cost they are. It goes without saying that they could be even cheaper were they to stop advertising. But believe me, that’s not even the start of it. How low cost are they in reality?
In my experience when reviewing an industry fund Super, let’s say a balanced option, there are usually two main ongoing fees that constitute the total; 1/ a % based management fee, or MER, dependent on the option chosen, and then 2/ some form of “admin fee”, which is usually a small fixed $ amount + a % of the balance. The MER tends to be lower for more conservative options and higher for more aggressive options but generally will range between around 0.4% and 0.8% p/a, so let’s call it 0.6% p/a. The admin fee might range between 0.1% p/a and 0.3% p/a, let’s call it 0.2%. So total ongoing fees, just by way of demonstration, might be around 0.8% p/a.
Now industry funds will argue that 0.8% p/a is low cost for a balanced fund option that gains exposure to a range of diversified assets covering all the asset classes; Cash, Fixed interest, Shares and Property. And I’m not going to disagree with that. But I do want to make two points on this:
1/ There are cheaper means to invest. Almost every Hudson member will know that we have been a big advocate of “index funds” for many years and we definitely still are. We usually use them for the core holding for most members. Such funds, available under numerous platforms, generally have an ongoing management fee of between 0.3% p/a and 0.4% p/a, depending on the index in question. There are index funds that aim to mirror the returns of the Australian share market, others that mirror a global index and invest across numerous countries, and others that mirror the market of more specific sectors; commercial property, small companies or even small countries (the emerging markets). The point being, it’s possible to have exposure across all these areas, within your Super, and at an ongoing cost half that of an industry fund. Please don’t get me wrong, this doesn’t mean it’s the best thing to do. This is just to demonstrate that industry funds are not necessarily the cheapest option out there.
2/ Fees are not everything, and more specifically, lower fee funds DO NOT necessarily guarantee a better return. Over the last 25 years, Hudson has made use of many fund options that have higher fees than index funds, but that has a past performance well in excess of the index return, net of fees. i.e. they charge a higher fee, but investors have been rewarded with a higher return.
In summary, generally, when you see performance comparisons it is an attempt to compare a “Balanced” fund with other “Balanced” funds, or “Growth Vs Growth” etc. However, given that Super funds have discretion regarding the level of growth Vs defensive assets in their various packages, it is basically impossible to truly compare the “value-add” from the fund managers that are supposedly underweighting/overweighting each stock.
Furthermore, even if you could get over this hurdle, putting a value on financial advice is even harder again. In my past dealings with clients, there have been cases where I have saved a client thousands a year in fees. However, I have also worked with clients to increase their age pension by $10,000 per annum, sometimes over a 5 year period and legitimately yielding them an extra $50k in benefits. I have used the recently introduced catch-up concessional rules to save clients over $10,000 in tax just last financial year alone. I revise investment weightings based on changing market conditions, stay abreast of changing legislation so as to maximise contributions/minimise tax and use strategies to protect clients from potential short-term falls in the share market The list goes on and on in terms of the “value-add” an adviser can provide, and it is impossible to factor such things into a performance report.
In closing, from a “management fee” perspective, industry funds are not particularly low cost and never have been. Even if they were, although important, fees are not everything and receiving quality advice can make a life-changing difference to your retirement assets/income.