{"id":2575,"date":"2017-09-18T23:42:31","date_gmt":"2017-09-18T23:42:31","guid":{"rendered":"https:\/\/www.prosolution.com.au\/?p=2575"},"modified":"2018-03-08T17:17:13","modified_gmt":"2018-03-08T07:17:13","slug":"industry-super-funds-need-accountability-transparency","status":"publish","type":"post","link":"https:\/\/wealthcoach.com.au\/stage\/industry-super-funds-need-accountability-transparency\/","title":{"rendered":"Industry super funds: a call for greater accountability and transparency"},"content":{"rendered":"

\"Industry<\/a><\/p>\n

 <\/p>\n

Many people invest their super with industry super funds because they feel its the best (low cost, good returns) and simplest option. I agree that industry funds are almost always a better option than retail (bank owned such as Colonial, BT, AMP, MLC, OnePath, etc.) funds and often better than SMSF’s too. However, I have some concerns with industry super funds that warrant your consideration. In fact, I think these concerns make industry funds a lot less attractive than what they might first appear – particularly if you have a high balance (i.e. more than $100k to $200k).<\/p>\n

Using AustralianSuper\u2019s \u2018balanced\u2019 option as an example<\/h3>\n

AustralianSuper is the largest industry super fund in Australia managing nearly $120 billion on behalf of its 2.2 million members (UniSuper is a distant second managing $60 billion). I have selected its \u2018balanced\u2019 investment option for the purposes of this blog.<\/p>\n

AustralianSuper benchmarks its \u2018balanced\u2019 option investment returns against the \u201cSR50 Balanced (60-70) Index\u201d which is provided by SuperRatings, an independent research firm. This benchmark provides the median (mid-point) return from the largest 50 super funds under review by SuperRatings that have between 60% and 70% of its assets invested in growth-style investments. In my opinion, this is a weak benchmark and is chosen more for marketing purposes rather than creating financial accountability.<\/p>\n

AustralianSuper (and other industry super funds) has invested a reasonable amount of members\u2019 monies (circa 15% in the balanced option) in various unlisted private equity and infrastructure investments (which are important asset classes to have some exposure to in a well-diversified portfolio). Unlisted investments lack a great deal of transparency and their investment performance almost entirely depends on astute asset selection (i.e. \u2018picking\u2019 the right<\/em> investment). The rumour in financial circles is that some of these investments have done poorly. Given this, it\u2019s even more important to have a higher level of accountability through having tighter and more meaningful benchmarks. That is, benchmarks which better reflect the types of assets they are investing in (including their risks and volatility).<\/p>\n

It\u2019s a peer-to-peer benchmark<\/h3>\n

The aforementioned benchmark provided by SuperRatings is more of a peer-to-peer benchmark rather than an investment performance benchmark. It allows you to compare AustralianSuper\u2019s performance to other super funds. However, what it doesn\u2019t reflect is AustralianSuper\u2019s performance compared to the market. What if all industry funds are doing poorly compared to the market? After all, as a super investor, you are paying AustralianSuper to invest your money to achieve a better return than you could achieve on your own. The \u2018market\u2019 return is available to anyone and everyone (via low cost index funds). AustralianSuper charges its members 0.57% p.a. in investment fees \u2013 which is twice as much than a well-diversified index portfolio would cost. So, it makes sense to ensure you are getting something for paying double the fees, right? If you are paying higher fees then it is reasonable for you to expect higher returns.<\/p>\n

Opaque and little accountability<\/h3>\n

Sometime ago I asked myself the question \u201chow do the industry super funds\u2019 investment performance compare to the index?\u201d (and maybe more people should be asking these questions). I set about trying to undertake this comparison and it was a difficult task to complete because of the lack of publicly available information and very limited information available from the research houses.<\/p>\n

AustralianSuper doesn\u2019t publish its historic asset allocations (i.e. where and how they have invested). The only publicly available historical information is the asset allocation contained in its annual report. But it only began publishing that in the financial year ended June 2013. Therefore, it is impossible to benchmark returns before this date.<\/p>\n

Here\u2019s what I have found<\/h3>\n

The table below sets out AustralianSuper\u2019s balanced option returns compared to the benchmark indices that I have selected (click here<\/a> for a listing of the indexes I have used).<\/p>\n\n\n\n\n\n\n
Financial years<\/strong><\/td>\n\n

Last 1 year<\/strong><\/p>\n<\/td>\n

\n

Last 3 years<\/strong><\/p>\n<\/td>\n

\n

Last 5 years<\/strong><\/p>\n<\/td>\n<\/tr>\n

AustralianSuper<\/td>\n\n

12.44%<\/p>\n<\/td>\n

\n

9.23%<\/p>\n<\/td>\n

\n

11.41%<\/p>\n<\/td>\n<\/tr>\n

Index benchmarks<\/td>\n\n

10.60%<\/p>\n<\/td>\n

\n

8.65%<\/p>\n<\/td>\n

\n

12.87%<\/p>\n<\/td>\n<\/tr>\n

Difference <\/strong><\/td>\n\n

1.84%<\/strong><\/p>\n<\/td>\n

\n

0.58%<\/strong><\/p>\n<\/td>\n

\n

(1.46%)<\/strong><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

You will note that AustralianSuper has done better in the shorter term but failed to beat the index over the longer term. That said, even 5 years is a too short time frame. I would prefer to rely on data from a longer time period i.e. 10 to 20 years. This performance is consistent with what the studies show us (see here<\/a>). That is, that some active fund managers can beat the market one or maybe two years in a row but typically fail to do so consistently over the long run. My guess is that AustralianSuper\u2019s performance over a longer period is just as bad or worse than over 5 years.<\/p>\n

A 1.46% p.a. differential in investment returns might not seem like a lot. However, if the differential persists, it will mount up. For example, the difference between a return of 7.50% p.a. and 8.96% p.a. (being 1.46% p.a. higher) on a super balance of $150,000 is projected to be just short of $200,000 or 31% after 20 years (i.e. projected balance of $637,000 versus $835,000 in 20 years).<\/p>\n

Whilst my assessment is \u2018high level\u2019, the underlying thesis is likely to be correct<\/h3>\n

I acknowledge that there are a couple of inherent weaknesses with my analysis above. Firstly, as I have already noted, the time period is short. Secondly, the indexes chosen are the \u201cbest fit\u201d but may not be perfect. If I had more information about the underlying assets, I may have been able to choose more appropriate indexes. Thirdly, the asset allocation would have changed throughout the year and this would have an impact on the numbers. However, I have done the best with the limited amount of information available to AustralianSuper\u2019s 2.2 million members.<\/p>\n

Whilst these inherent weaknesses might change the benchmark returns, I doubt any difference would be material. I would certainly encourage AustralianSuper to publish a comparison to the market (indexes) and I\u2019d be happy to stand corrected.<\/p>\n

Pick up your game industry funds<\/h3>\n

No doubt you have seen the industry super funds advertising on T.V. which use the tag line \u201cbanks aren\u2019t super\u201d (see http:\/\/www.banksarentsuper.com\/<\/a>). The message behind the adverting is that bank-owned retail super funds are expensive (over-priced) \u2013 which is correct \u2013 I have no argument there. However, industry super funds are far from perfect themselves! In my opinion, they need to improve in 3 ways:<\/p>\n