Retail master trusts ride the market recovery

The retail master trusts were amongst the first to be impacted by the global financial crisis, but as Damon Taylor reports, they have also been first to regain momentum on the back of the gathering market recovery.

It seems very hard these days to talk about superannuation and investment returns without talking about the competition that exists between retail master trusts and industry super funds.

Yet while the financial crisis’ disruption of world share markets and world economies has affected all sectors of Australian superannuation, the industry’s key challenge remains the same.

Super funds are charged with providing for the retirement needs of individuals and, according to Richard Gilbert, chief executive officer of the Investment and Financial Services Association (IFSA), retail master trusts stand ready to do exactly that.

VIEW ALL

View all

“Overall, master trusts have probably had fewer challenges than industry super funds as a result of this financial crisis,” Gilbert said. “Having more listed assets within their allocations, there haven’t been the same shocks for their members.

“Members of retail funds have seen changes on the stock market filtering through to their units day by day,” Gilbert continued. “They haven’t had to witness lumpy stock revaluations and possibly haven’t needed as much reassurance.

“Inflows and returns have slowed down, but all super funds have had to deal with that.”

Interestingly, Chris Allen, director of RSM Bird Cameron Financial Services, said it had been the structure of retail master trusts that had dictated how they fared throughout the financial crisis and that daily unit pricing had been as much a weakness as a strength.

“The thing that sticks out is the multitude of choice available underneath retail master trusts,” he said. “And that choice is significantly greater than what can be found within industry super funds.

“But the negative element of that choice is daily unit pricing,” Allen continued. “Clients knew every day how they were faring and, depending on how they were allocated, they may have seen the diminution of their super to the point that it was a serious concern for them.

“But there is that significant choice, so a lot of it depended on how the client was invested.”

On the back of research revealing a strong end to the 2008-09 financial year for Australia’s median superannuation fund, Warren Chant, director of research house Chant West, said because retail master trusts were much more invested in listed assets, their returns had been more adversely affected than their industry super counterparts.

“Industry funds have approximately 28 per cent of their investment in unlisted assets,” Chant said. “Retail funds [only had] 9 per cent.

“So with listed markets affected much more adversely, there was always going to be a difference in performance.”

For Chant however, differences in performance came down to a difference in mindset and investment strategy.

“Traditionally, most retail providers set a strategic asset allocation and only change it if any of their major assumptions change,” he said. “They don’t get involved in market timing.

“Not-for-profit funds are more likely to have a medium term outlook and to adjust their allocations accordingly,” Chant continued.

“And with the GFC (global financial crisis) highlighting the importance and placement of unlisted assets, there are an increasing number of retail funds considering similar medium-term tilts.”

But regardless of whether the retail super challenges were unique, all funds were affected by the global financial crisis, and for Pauline Vamos, chief executive officer of the Association of Superannuation Funds Australia (ASFA), there were a number of strengths in the master trust approach.

“Master trusts did a number things right in meeting the challenges of the financial crisis,” she said. “The first was keeping up communications — that was vital.

“There was also only a certain percentage of their portfolios that became illiquid and frozen,” Vamos continued.

“Their returns have gone down and there’s been an impact on revenue.

“But ultimately, master trusts were able to meet their obligations and survive what the financial crisis threw at them.”

Yet the challenges of this environment went beyond performance. The effects of this financial crisis were always going to give rise to the possibility of significant member switching, either between funds or between investment options, but according to Vamos, the anecdotal evidence is that such movement was negligible.

“Within master trusts, people had financial advisers and long-term strategies,” she said. “Clients were educated and they therefore understood the importance of sticking to the strategies they already had in place.

“What movement there was would only have been from those members approaching retirement.”

From the adviser perspective, Allen said member movement, whether between super funds or between allocation options, had depended on the individual client.

“Allocation switching came down to the client and perhaps how long they had been with you,” he said. “With those clients that were taken on in the lead up to the GFC, we tended to build up pretty big cash reserves due to the general nervousness we were feeling.

“We felt things were getting out of whack,” added Allen. “But admittedly, we could not have predicted the severity or length of this downturn and the downturn in returns.

“It’s really only now that those clients with a bit more cash are starting to move slowly towards the more aggressive assets.”

For other clients, those who were already onboard with RSM Bird Cameron, Allen said allocation changes had not been enormous across the board.

“We’ve seen some massaging and tilting and adjustment on a needs basis,” he said. “But there haven’t really been any wholesale changes.

“And though some of our practices have lost clients, there have been others that haven’t lost any,” Allen continued. “Throughout the crisis we’ve tried to stay at the coal face with our clients and help them with the situation whenever possible, and I’d say that helped with retention.”

Echoing Allen’s appraisal, AMP’s director of wealth management products, Andrew Hobern, said AMP had only seen modest switching at the investment level.

“And it had a correlation with events on the stock market,” he said. “There were switches from shares to cash, but on the whole, they were less than expected.

“People took the advice they were getting not to get out of growth assets at the bottom of the market,” Hobern continued.

“And in the last few months, as return trends have been reversing, they seem to have been well served by that decision.

“In terms of fund switching, there’s been no change — no more are going out than are coming in.”

Of course, the other side of the member movement question is how super funds have handled any reduction in inflows that has resulted from the global financial crisis.

Yet the message seems to be that maintaining inflows has been a problem for all super funds and not for retail master trusts in particular.

Vamos said all inflows above superannuation guarantee contribution had been under significant strain.

“A lot of the inflows that were due to voluntary contributions have dried up,” she said. “And people have gone conservative.

“Add those factors to the changes that we’ve seen to contribution caps and there was never any doubt that master trust inflows would be affected.”

Probably in the best position to give insight into master trust inflows, Hobern admitted that AMP had seen a decrease in the number of voluntary contributions its members had been making.

“But those voluntary contributions haven’t dried up completely,” he pointed out. “We’re still seeing members salary sacrifice and taking advantage of co-contributions when they’re available.

“Levels are down from the peaks of 2007, but AMP is focused on ensuring our members’ confidence in superannuation and long-term savings,” Hobern continued. “And that is probably one of the biggest opportunities we have to get those sorts of inflows back.”

Taking a big picture approach and looking at overall trends in member movement between funds, changes to investment options and the state of superannuation inflows, Chant emphasised the importance of staying positive about super as well.

“We’ve probably seen a few more changes to investment options within the retail sector as investors were guided by financial planners,” he said. “But it’s been well documented that anything above SG (superannuation guarantee) has pretty much dried up.

“And, unfortunately, there’s not a great deal the industry can do about it except by being positive about super and educating people,” Chant continued. “If you’re in a balanced fund with 70 to 80 per cent of your superannuation allocated to growth assets, it’s a fact of life that every five years you can expect a negative return.

“This has just been the worst one we’ve ever had — it’s been about six times bigger than anything anyone would or could have expected.”

Of course, it’s difficult to talk about either inflows or performance in the super industry without talking about the competition that has been generated between retail master trusts and industry super funds.

Research houses usually point to asset preference as the key to understanding the performance equation, but Vamos said such comparisons were difficult.

“The underlying assets of anyone’s superannuation account are always going to have an impact on performance regardless of where we are in the market,” she said. “So it’s important to invest in a broad number of assets and to get asset calibration right.

“When one investment goes down, another should go up,” Vamos added. “The financial crisis had an immediate impact on property and equities, but we’re only now seeing an impact on unlisted assets.

“And that difference in timing is a good reason for funds and their members not to have knee-jerk reactions.”

However, Vamos warned that comparing master trusts with industry super funds was not appropriate.

“In an industry fund the majority of members are in the default fund,” she said. “They’re being offered a very different service and value proposition.

“The members of master trusts want flexibility, control and the use of a financial planner to assist and manage their financial outcomes,” Vamos continued. “Where industry fund members have a great deal of trust in their trustees.

“Both are valuable, but both are very different.”

In similar fashion, Allen said when stacking up retail and industry super funds there was no doubt each sector’s unlisted asset exposure was going to be significant, but he pointed out that fair comparisons had to go further than that.

“By way of daily unit pricing, the performance of a master trust’s overall balanced fund has been mauled versus the balanced options within an industry fund,” he said. “And the difference was in the unlisted property and other private assets held by industry funds, those that weren’t subject to the daily machinations of the market.

“But it’s difficult to compare apples with apples in this.”

Allen said from his perspective, superannuation attracted three different types of customers in retail, industry and self-managed super members.

“But there’s also an overlap between those three options,” he said. “Industry super funds have been fantastic for employee type situations and have taken their opportunities to go beyond that space.

“Retail funds, on the other hand, offer control over the investment of large amounts of super,” Allen continued. “And we often see people with large account balances coming into them from industry funds looking for advice and ideas about what they should do.

“The two sectors cover completely different spaces and that makes any sort of direct comparison difficult.”

Returning the analysis to the investment preferences and stereotypes of industry and retail super funds and whether they were changing as result of such heated competition, Gilbert said while investment stereotypes were true on average, the situation was by no means cut and dry.

“On average yes, master trusts tend towards equities and industry funds tend towards the unlisted, but that doesn’t mean there isn’t any crossover,” he said. “It’s difficult to generalise like that.

“Each sector’s preferences come back to individual circumstances,” Gilbert continued. “For a number of years, industry funds haven’t experienced any massive changes to inflows — they’ve had the luxury of being able to buy and hold quality unlisted assets.

“But the GFC forced the repricing of those assets. It changed that situation for them and I suspect we’ll see changes to the policy around revaluing unlisted assets as a result.”

For his part, Hobern admitted that recent analysis of the super industry had indicated that asset allocation was a major driver behind performance differences.

“But as long-term investors that will come and go as markets change,” he said. “Some funds use medium-term tilts while others stay where they are; choices either way are going to have a significant impact on performance.

“As the financial crisis has shown us, any fund manager that has a bias towards listed assets is going to see a much more responsive impact on performance whether the market goes up or down,” Hobern continued. “Unlisted assets will lag behind that, but at some point they’ll be affected just the same.

“In our case, we have a wide range of product sets and investment styles that give our customers choice because for us, there is no one-size-fits-all approach.”

Another angle to the industry and retail super debate comes in the form of what is charged to members with respect to fees and commissions.

After all, industry super advertising campaigns have mounted a strong case that these charges are a key differentiator between the two superannuation sectors.

Yet Gilbert believes the 40-year predictions being used are less than adequate proof of the point.

“If you’re paying for advice and you’re getting that advice, of course you’re going to be paying more,” he said. “But making 40-year projections is difficult and those 40-year returns are based on 10 to 15 years of bull markets.

“So if people have taken the word of those campaigns there would have to be some pretty disappointed investors out there,” Gilbert continued.

“Ultimately, competition will win this out, but as an industry we have to ensure that our current regulation doesn’t kneecap the players offering that competition to the market.

“If the current trend continues, we’ll end up with a concentrated industry with only five or six players and, for the good of our consumers, that’s the last thing we want.”

Allen admits that the industry super funds’ efforts in advertising their product have been impressive.

“I think it’s been a brilliant advertising campaign,” he said. “And I think that similar campaigns from the FPA (Financial Planners Association) or IFSA have been non-existent when it comes to coming back at them.

“But again, I’d say that the material doesn’t compare apples with apples,” added Allen. “And the thing that needs to be stripped out of it is that there aren’t many financial planning practices out there that are charging people commissions out of their superannuation portfolios.”

Allen said among the financial planning industry colleagues that he had spoken to, none were charging commissions in the way that industry super advertising campaigns were leading people to believe.

“If a trailing commission is being charged, the financial planner must be providing ongoing advice, whether it is through a fund or delivered straight to the individual,” he said. “And within industry funds, that type of advice costs extra.

“But because there isn’t a campaign refuting the industry super point of view, I think most people take it to be true.”

Offering evidence that fees and commissions should not necessarily be synonymous with retail master trusts, Hobern reiterated that AMP offered its members a wide variety of choice, right down to the sorts of charges their account balances would bear.

“So if people want a low-cost offer that is as competitive as any other superannuation product out there and one that doesn’t pay commissions, that product is available,” he said. “The AMP Flexible Lifetime Super Easy is such a product and it gives our members a choice on whether to obtain advice and, more importantly, how it is paid for.”

Chant offered a more detailed perspective on the question of super fees.

“When they say fees in those advertising campaigns they mean investment and administration fees,” he said. “And on that basis, what they’re saying is accurate — industry funds are undoubtedly cheaper than retail funds.

“But breaking it down to basis points, an industry fund might charge its members 95 basis points in investment fees and 20 points in administration fees for a total of 115 basis points.”

By contrast, Chant assigned 85 basis points to retail super investment fees, 70 basis points to administration fees and 60 basis points to adviser commissions, making for a total of 215 basis points.

“Now to make a fairer comparison, those last 60 basis points should be taken out, as retail fund members should be getting advice for that,” Chant said. “But that still leaves the advantage with industry funds — 115 versus 155.

“But the issue that’s getting lost in the competition debate is that the real difference is about much more than fees,” Chant continued. “It’s got a lot more to do with where each sector is invested.

“A difference of 40 basis points isn’t a lot when we’re talking about investment returns of negative 13 per cent.”

Evidently, competition has become ‘par for the course’ within the superannuation industry and, looking back, it seems Choice of Fund was just the beginning.

More recently, it has been movements in the realm of advice definitions and single-issue advice that have been making waves, but, according to Gilbert, it may be too early to tell what competitive effects such movements will have.

“The one thing that is for sure is that the squeeze will be on advisers,” Gilbert said. “At IFSA we applaud the [the former Minister for Superannuation and Corporate Law Nick Sherry’s] decision on the provision of limited advice, but we believe there is scope for it to go further and to make advice even more scalable.

“But the bottom line is this,” continued Gilbert. “If you’ve got a superannuation account balance of $300,000 to $400,000, you’re going to ask for a full financial plan — you’re certainly not going to invest that without advice.

“There’s absolutely no reason planners should see their positions as being undermined.”

By contrast, Vamos was under no doubt that the provision of limited advice would have a significant effect on the superannuation landscape.

“If master trust trustees obtain authorisation to provide their members with single issue and fee-for-service advice,” she said. “And if they continue to offer full-scale financial planning as well, the full scale of advice is there.

“It allows them to tailor their advisory services to the individual member, and that could put a real question mark on the blanket advisory fees that are out there now.”

Vamos added that she believes the industry could see tailored advice services where members paid for advice when they used it cropping up more and more in the near future.

“The basic thing though is that funds and their trustees still need a licence in order to give advice,” she said. “So will it mean that we’ll see more funds getting financial planning licences? No.

“But it should give rise to a lot of opportunities for new financial planning arrangements within super.”

It is perhaps not surprising that financial advice, fees and performance are at the centre of the industry super versus retail master trust debate.

Yet the reality is that sectors of superannuation exist for a reason — they give superannuants a choice and, in the case of retail master trusts, give access to a range of options and flexibility that are probably not as prevalent within industry super funds.

From Chant’s perspective, the options offered to members by retail master trusts have a firm place in superannuation without being for everyone.

“Industry super funds offer a basic range of multi manager options that will include three to four diversified options and around half a dozen specialised options,” he said.

“A retail fund, by comparison, could have 200 to 400 investment options and are really designed for a financial planner.

“So if that’s the kind of service that a person is looking for, wrap accounts do that,” continued Chant. “But I think that the percentage of people wanting that is very small and that most would prefer to have experts making those decisions for them in industry funds.”

Talking about what is available under a retail master trust, Hobern listed a wider range of investment options, comprehensive advice, strategies for transition to retirement and a wider range of insurance cover as just some of the features available.

“If someone is looking for flexibility and adaptability, they can have that,” said Hobern. “But at AMP we have products for a simple set of needs as well.

“We are always focused on consumer needs and aim to provide our members with a product set that is suitable throughout their lifetime.”

One perspective on the fees charged by retail master trusts is that they are the trade-off for the increased flexibility and choice that is available. And the obvious question is whether that advantage is worth the price. For Vamos the answer is obvious.

“If it wasn’t worth the price, people wouldn’t be investing,” she said. “It’s like anything — I don’t have an expensive car but I have friends who do, and for them it’s worth paying the extra $20,000.

“They get value from that where I, myself, wouldn’t,” Vamos continued. “And that’s why I don’t support this debate.

“Both sectors are providing services that members want and I believe the industry should be applauded for offering that kind of choice.”

It seems certain the competition between industry super funds and retail master trusts isn’t going to lessen or disappear anytime soon, yet looking at master trusts outside of the debate, Gilbert said there were a number of things that could be said about their current position.

“The one thing that’s for sure is that they haven’t put their prices up,” he said. “If anything, those prices are coming down.

“They’ve had to cut costs and deal with retrenchments, but they’ve survived and now stand ready for an upturn in the market.”

Reflecting upon what might lie ahead for master trusts, Allen said they would continue to build on current functionality.

“Functionality has been a strength for master trusts but industry funds are catching up quickly,” he said. “So master trusts will want to maintain and build on that functionality and flexibility.

“The catch is that they have to be mindful of a few other things that may have to occur,” Allen continued.

“They will need to be satisfied with different return levels, their costs and revenues are likely to be under pressure and all the while industry super funds will be working on whatever advantages they already may have.”

Chant’s predictions for the master trust sector of superannuation point to tough investment decisions in the very near future.

“I think they’re looking at much harder decisions on where to invest,” he said. “But I think their investment habits and strategies are changing, and that has to be a positive.

“The Achilles’ heel for master trusts, and one that may need to be addressed, is the tendency for people leaving corporate funds to be placed into the personal wealth section of superannuation,” continued Chant.

“Yet industry competition remains strong and I am confident that the retail sector will work hard to meet it.”

As Australia’s superannuation industry emerges from the global financial crisis, Vamos said a lot of master trusts would be looking at their whole value proposition.

“With the changes that they’ve seen in the market and the pressure that’s been placed upon income, the heat is well and truly on,” Vamos said.

“But retail master trusts continue to provide an alternative to self-managed super and continue to be the vehicles of choice for financial planners looking after the total wealth position of their clients.

“They are clearly in a strong position within this superannuation environment.”