How default fund status give industry funds an edge

Lower investment fees do not lead to higher net returns, according to actuarial research house, Chant West.

In an analysis of the superannuation industry celebrating the 25^th anniversary of compulsory superannuation in Australia, Chant West has pointed to the relative outperformance of industry funds over the period, but also pointed to the fee equation.

“The performance we report is net of investment fees, so one might think that differences in fees would play a part,” the analysis said. “Do lower fees lead to higher net returns? The answer is no – in fact the opposite.”

It said the investment fees incurred by industry funds had been, and still were, significantly higher than those incurred by retail funds (0.66 per cent per annum pa versus 0.56 per cent per annum) due to the fact that industry funds had been long-term investors in unlisted assets, primarily property, infrastructure and private equity.

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“Industry funds on average have 20 per cent of their growth options allocated to these asset sectors compared to five per cent in the case of retail funds,” the Chant West analysis said.  “These assets, by their nature, are relatively expensive to manage and so entail higher fees.”

The analysis said Chant West was not suggesting that higher fees led naturally to higher returns but it was suggesting that how funds invested was all-important.

“If investment in high quality unlisted assets is likely to result in superior risk and return outcomes for members, then surely the higher investment fees are justified,” it said.

However it said there were philosophical and practical reasons why industry funds had been such strong supporters of illiquid, unlisted assets – “from the earliest days of compulsory superannuation it was attractive for them to be able to point at physical assets and say to their members 'you own that' ".

“Over time, the illiquidity premium also played a part in that these unlisted assets performed rather better than their listed counterparts.  Also, the fact that these assets were valued relatively infrequently meant they were not susceptible to the everyday volatility of listed markets," it said.

Chant West aid another key factor was that, compared to retail funds, industry funds had always had more certainty about their future cash flows.

“This stems from their status as default funds in so many awards, meaning they could rely on a steady flow of Government-mandated compulsory contributions,” the analysis said.