Performance gap lays bare the differences between retail and industry super funds

In a superannuation environment where public perceptions of superannuation funds are only as good as the funds' latest returns, Damon Taylor writes that the global financial crisis has created an interesting new dynamic.

In an environment where investment performance remains the key, the global financial crisis (GFC) has highlighted the degree to which asset allocation has revealed stark differences between retail master trusts and industry super funds.

While industry super funds gained the ascendancy during the turmoil of the GFC, based largely upon their exposure to unlisted assets, it is the retail master trusts that are leading the way during the current equity market recovery.

For principal of Chant West Warren Chant, it will be interesting to see their evolution from here.

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“Over the 12 months to June 2010, the retail master trusts’ performance has been about 3 per cent better than it has been for industry funds,” he says.

“And that’s because markets were strong and they had more listed assets. Also, in this financial year we still had some further write-down of unlisted assets in the industry funds.

“Those two factors combined will show that in 2010, master trusts have performed quite a bit better,” Chant adds.

“But if you go back to 2009, they were quite a bit behind and I think what we would say is that retail master trusts over the last few years have recognised that if they want to compete with the industry funds, they have to be more prepared to invest in alternative assets.”

According to Chant, the retail master trust endeavour thus far has been to try and invest in the more listed versions of alternative assets.

“But I think there’s a growing understanding that they really have to invest in unlisted assets to some extent,” he says.

“So I guess we would say that within the retail master trusts, you only have to look at the way AMP has changed its strategic asset allocations, BT is looking to do the same thing, as is ING, as is Colonial First State.”

“They’re all looking at two things: one, whether they should be more active in their asset allocation; and two, whether they should have more alternatives and within that, a spread of listed and unlisted.”

From the master trust perspective, head of retirement products for Aon Consulting Peter Lewis says that while financial markets and the performance coming from them certainly present challenges, the Aon Master Trust has within its product set a range of investment options to suit the retirement planning needs of almost any individual, including Secure options that held up quite well during the GFC — with positive returns even during the financial year ended June 2008.

“The Aon Master Trust strikes daily unit prices, and therefore the investment options with a large exposure to listed sharemarkets will move to some degree with the market,” he says.

“Aon mitigates this market risk through diversification across asset classes, managers and investment styles. And within equities, the use of a number of different managers employing different approaches further reduces volatility.

“However, I would also argue strongly that our membership is supported by our education and engagement processes and [members] understand that as investment markets go up and down, they experience some movement in their returns if they have growth-oriented strategies,” Lewis says.

“We have a wide range of investment options with different risk/return outcomes and it’s about making sure that our members are in the right investment option for their specific financial objective. We can also validate this view by looking at the low number of member investment switches we received during the GFC.”

The greater challenge, from Lewis’s perspective, and one that he says Aon prefers to focus on, is that of maintaining and enhancing member engagement.

“At Aon, we believe that we have a much higher level of engagement with our membership, and its engagement that they value,” he says.

“One of the challenges that we face is to maintain and build on that and demonstrate value along that front.

“Aon Master Trust members are not just a number to us, not just one of the masses, so one of our challenges is to convince those working Australians that may not be fully engaged with their superannuation fund to take a greater interest and make active and appropriate choices,” Lewis continues.

“In the retail master trust segment, greater choice is where we can add value compared to the not-for-profit funds because we have that greater level of flexibility and choice, and it’s the engaged member who takes advantage of that.

“So our challenge is to maintain continuous development and bring innovative solutions to the market.”

Dynamic asset allocation

Yet the point made by Chant in terms of investment strategies is a valid one.

After all, there are a number of asset consultants in the superannuation industry who have been advising dynamic asset allocations or strategic tilts for some time now and yet, according to Association of Superannuation Funds of Australia (ASFA) chief executive Pauline Vamos, recent experience is encouraging all trustees to re-examine their strategies.

“So many investment experts and trustees were caught on the hop because asset classes were behaving in ways they never anticipated, and the correlation that they thought existed between various asset classes did not happen,” she says.

“So I think all fund operators have been forced to have a close look at their portfolios and what their current strategies mean in terms of the benchmarks they’re trying to get to.”

Describing a different perspective on dynamic asset allocation, director of wealth management products at AMP Andrew Hobern says that the key is ensuring products remain relevant to consumers across the broad spectrum.

“The key for me is that we strongly believe in dynamic asset allocation in the sense of life stages and making sure that the asset allocation, at a strategic level, changes as someone gets older,” he says.

“So we have a life stages product, which is pretty similar to what Cooper has recommended in that it makes sure that the asset allocation is not a ‘set and forget’ strategy forever.

“It does change as someone gets older, and is relevant to consumers throughout their working life and throughout their retirement.”

Lewis says that Aon had indeed observed the increasing use of dynamic asset allocation during the GFC.

“The Aon Master Trust sees the value-add from regular rebalancing to its strategic asset allocation and has been following this discipline for more than 10 years,” he says.

“Rebalancing to our strategic asset allocation enables us to keep more true to label.”

Of course, tradition dictates that one of the main points of difference between industry super funds and retail master trusts does in fact lie in each sector’s exposure to unlisted assets.

In the wake of the GFC, it has been suggested that while industry funds may move to more frequent unit pricing, retail master trusts may look to the greater use of unlisted assets within their portfolios.

For Vamos, that may come down to the number of baby boomers rapidly approaching retirement.

“I think as we’ve got an ageing population and as more people in retail master trusts are moving into their 60s and they’re going into de-accumulation, many of the retail master trusts will be looking at their portfolios in terms of de-accumulation,” she says.

“Master trusts will be looking to provide capital growth, but fairly secure returns as well, and it’s your unlisted that often provides that for them.”

“That alone may drive them to look at certain unlisted assets for certain portfolios.”

Vamos’ view is not one shared by master trust executives at AON or AMP — at least not for the time being.

Hobern says that there are a number of strategies that can be used to guarantee income streams for retirees, and that they are not contingent upon an exposure to unlisted assets.

“Generally speaking, we need to make sure that there’s an income stream for retirees, but that can be achieved in a number of different ways and doesn’t need to have unlisted assets or alternative assets,” he says.

“Ultimately, what’s required is that the funds are available for members when they need them — but obviously you need to balance up the expected return from different asset classes with the liquidity that those classes provide.

“We have some unlisted assets in property and in infrastructure, but generally speaking, master trusts will have some asset allocation towards unlisted and alternative assets — but it’s only going to be at a relatively modest level.”

With regard to unlisted assets, Lewis says that the Aon Master Trust holds only a small percentage of unlisted property within its pre-mixed options.

“However, considerations around ease of valuation and liquidity are important,” he says.

“So while we don’t have an outright aversion to unlisted assets, there are a range of other considerations that come into play.”

So while those two points — that is, dynamic asset allocation and investment into unlisted assets — may most often be pointed to as causes for the performance differential between industry super funds and retail master trusts, they are a point of difference at least some master trust executives seem content not to change.

Member engagement

The more important point of difference seems to lie in member demographics and engagement, which, according to Hobern, is strongly related to how most members enter retail master trusts.

“A large number of members in retail funds will have gone into it because there was a financial planner who was trying to make sure they had brought all of their super into one place and that it was under advice,” he says.

“So by definition, those who have a financial planner will be at least indirectly more involved in their financial assets by taking professional advice — and there’s a reasonably high number of people who will at least indirectly have an active interest in their financial affairs.”

Hobern says that with respect to the investment choice and flexibility that has perhaps attracted members to retail master trusts, the vast majority of super funds have the ability to provide choice to some degree.

“And certainly, most super funds are grappling with the process of how they give advice to members as well,” he says.

“Clearly, a master trust like AMP has always associated advice with the product set and we’ve always recommended that people take advice.”

Lewis states the demographics story for retail master trusts more simply.

“Look, I firmly believe that a member’s engagement or interest increases in line with the value of their account balance,” he says.

“On average, retail master trusts have a higher average member account balance than their not-for-profit counterparts — but at the end of the day, we do cater for a very diverse range of members by age, by income and by account balance.

“So we have to be cognisant of the fact that we do have a broad membership base, but one that is more engaged and more sophisticated and who wish to avail themselves of the inherent flexibility that we offer in our solution,” Lewis says.

“That’s why we have a large range of investment options to choose from, because the members are more sophisticated and take advantage of that.”

However, in looking to the future, Lewis says that retail master trusts in general, and Aon Master Trust in particular, are preparing well for the requirements of baby boomers approaching retirement.

“We’re well aware that the average age of our membership is also increasing, so making it easy for members to move from accumulation to retirement phase — making that as easy and as streamlined as possible — is vital,” he says.

“Because the notion of hitting a particular retirement age at 65 is, I would argue, one that is well and truly gone.

“Members may phase out of the workforce slowly or they may be knocking down their weekly hours gradually,” Lewis continues.

“The concept of a set retirement age is not what it used to be, so we’re well aware that demands resulting from changed work patterns and flexibility are going to increase, not decrease.

“The one-size-fits-all approach is simply not relevant to Australia’s workforce these days. Solution flexibility and a consultative approach is what is needed.”

From Chant’s perspective, retail master trust members are there not just because of advisers, but because of the adviser proposition.

“I think it’s probably fairer to say that members of retail funds are there because of an adviser, and the adviser’s proposition in many cases is this: they say that where they add value for you is constructing your portfolio and choosing the managers themselves, and they say they’re very good at that and better at it than the big retail and industry funds,” Chant says.

“Where advisers are putting people into a retail funds, the story is that they’re going to be able to produce better returns for you,” continues Chant.

“And so they need to put their clients into a vehicle that allows a lot of investment choice and there is of course, a cost in that.

“There’s no question that these things are more expensive than the equivalent in an industry fund.”

And for many superannuants, therein lies the issue. Very few average Australians are unaware of the very targeted industry super fund advertising campaigns drawing comparisons between the fees charged by each of the industry’s sectors.

Time and again it has been highlighted as an important difference but according to Lewis, the reality is that fees are converging.

“The differential in fees is narrowing all the time,” he says.

“The costs for the not-for-profit funds and the pressure on their fees is increasing as they try to build greater flexibility into their offer, and they’re finding that it does come at a greater price.

“But on the other side of the coin, retail master trusts and the Aon Master Trust are no different,” qualified Lewis. “We’re looking all the time to make sure we maximise efficiency and deliver value.”

Lewis says that AON Master Trust uses a combination of member and asset-based fees that provide rebates for larger individual account balances within the personal and pension divisions.

“So our members’ buying power is definitely evident there,” he says.

“With employers, we tailor pricing that reflects their particular group buying power and the benefit design of their sub-plan. So based on the benefit design and its level of complexity, we offer a tailored pricing structure.

“But we also review that pricing structure and the level of our fees to ensure that we offer value for money because it’s not just about price,” continues Lewis.

“Provided the members see value from the extra flexibility and the extra benefits provided, there’s a value for money proposition to consider.”

For his part, Hobern provides proof that contrary to what many people believe, the fee gap is one that many master trusts had already bridged.

“Our new product, AMP Flexible Super, the core module of that, the ‘set and forget’ strategy, is now cheaper than most industry funds,” he says.

“It’s cheaper than eight of the 10 largest industry funds and cheaper than the average of the 10 largest public offer industry funds. Its 65 basis points on an assets under management basis plus a $1.50 per week, and that compares very favourably with pretty much every fund in the marketplace.

“I think what we’re trying to do with our pricing is make sure that we are able to compete for members we may not have reached previously,” Hobern continues.

“So people who would otherwise have gone to an industry fund, we now have a competitive offer based on price for those markets, where previously we may have had a bias towards people who sought advice and who I guess were an older age group.”

Hobern says that AMP is attempting to have a relevant offer for everybody in Australia, even if they came into the master trust as an 18-year-old who was working in a retail environment.

“We now have a price competitive offer there and when they need additional features and things like that, they can access it from the same product,” he says.

“Sure, it will cost them more but they are paying for what the features are that they’re using.

“So at the bottom level, we’ll compete on price and at the upper level, we’ll compete on features and price, and we’re doing that because we think it’s the right thing for consumers, not because another sector of the industry is advertising prices.”

It seems avoiding talk of the competition that exists between industry super funds and retail master trusts is easier said than done.

Fortunately, competition is rarely a bad thing for consumers but despite that fact, Vamos says that the industry has to cease its short-term focus on returns.

“There are always going to be differences in each fund or master trust’s allocations and, as a consequence, their returns,” she says.

“I don’t think that’s going to change and nor do we want it to.

“We’ve got enough issues across this industry as it is and trustees, no matter what sector, must be able to invest long-term in the best interests of their members,” Vamos continues.

“That is paramount and ASFA, along with many other parts of the industry, are very very fed up with short-term focuses on returns.

“It’s just not in the best interest of anybody, particularly members — and that’s got to change.”

Looking at performance and the swings between each superannuation sector’s ascendancy, Hobern says that with 72 options on the AMP investment menu, he could guarantee that there would always be one that was outperforming industry funds and another that would be underperforming.

“Ultimately, it comes down to the asset allocation of the individual investment option that someone goes into,” he says.

“They all vary and different markets have different cycles to them, and will have different outperformance, and so on.

“We’ve spent a lot of time over the last 18 months developing what we believe is a market-leading product, something that is relevant for individuals, whether 18 or 65 or 85, something that’s relevant through their employment arrangements, something that’s relevant as an individual and something that’s relevant into retirement,” Hobern continues.

“It’s an all-in-one product because we think it’s the right thing to do to provide something that’s flexible, provides lots of choice for consumers, is competitive in terms of fees and performance and it should show consumers that we are very much committed to being a serious player in the superannuation market and that we intend to compete hard across all Australian sectors.”

Echoing Hobern’s statement, Lewis says that there is no doubt that the retail segment of Australia’s super industry will always be a strong and influential player.

“And that’s primarily because of our member engagement and our ability to innovate and offer new and enhanced benefits,” he says.

“There will always be members out there who will value that and who will always be attracted to our segment.”