Top rated funds still offer plenty of variety
Over the next 3 to 5 years, choice of fund will fundamentally change the superannuation landscape. Switching between funds has been minimal to date, but employment mobility will change that over time. Whenever a worker changes jobs their new employer will ask them which fund they want their super sent to. Every time that happens, people will be encouraged to do their homework and choose a fund that they understand and are comfortable with. Slowly but surely they will learn to discriminate and exercise their right to choose, rather than have their employer make the decision for them.
In this environment, consumers will need help – a guide –in choosing a fund. Fund ratings are one source. In December, we published our 2006 ratings for both corporate and personal super funds. This article focuses on the highest rated (5 Apples) personal funds and shows how, even within this elite group, there are significant differences to be aware of. The clear message for consumers is that there is no substitute for doing your homework.
Our ratings universe covers 98 funds in total. These include 58 personal funds, of which 25 received our highest rating. All of the industry funds and public sector funds we rated (18) received our highest 5 Apples rating. We also awarded 5 Apples to 7 commercial master trusts.
A Chant West rating sums up our overall view on the merits of a particular fund relative to industry best practice. It takes into account six main criteria: organisational strengths (10% weighting), investments (40%), fees (15%), insurance (10%), administration (10%) and member services (15%). For each of the main criteria we have a further sub-set of detailed criteria and weights. We determine a score for each of the main criteria to arrive at an overall rating for the fund.
Investments carry the most weight and are clearly the key to our ratings. Importantly, our assessment of investments relates primarily to a fund’s multi-manager options. This is because most members are invested in those options. We therefore focus on the quality of the fund’s asset consultant, any internal investment resources, the governance regime and the structure of the portfolios.
Investment beliefs and processes, and the quality of the people involved, are far more important to us than past performance, which is generally not a reliable indicator of future performance. In fact, past performance counts for only 4% of our overall assessment. This is why in the table below we show the fund’s consultant as well as its performance.
Table 1 below shows the performance of the funds’ default options, which is where most members are invested. For master trusts that do not have a default option, we show a comparable multi-manager option. The very clear messages from the table are:
- Industry funds, as a group, have been the best performers over the past 5 years.
- That outperformance has not been at the cost of additional risk – in fact their risk (or volatility) has been lower than that of the other types of fund.
- Public sector funds have performed very well over the past 3 years.
- The performance gap across the groups has narrowed in recent years.
This latter point is not surprising. Industry funds pioneered the use of alternative assets, which has been an important component of their outperformance. More recently many master trusts have responded by introducing similar strategies into their portfolios.
We believe it unlikely that, in future, any group will enjoy ‘first mover’ advantage to the extent that industryfunds have in the past. Also, all of the leading funds now employ first rate asset consultants and operate under a strong governance regime. As a result, we do not expect the differences in performance across these funds to be very great over the long term – certainly not as great as they have been historically – and this is reflected in our ratings.
|TABLE 1: PERSONAL SUPER FUNDS RATED 5 APPLES - PERFORMANCE TO 31 DECEMBER 2005 (% PA) – DEFAULT OPTIONS|
|Fund||Asset Consultant||1 Yr||3 Yrs||5 Yrs||Std Dev 5 Yrs|
|Industry Fund (14)|
|Public Sector Fund (4)|
|Master Trust (7)|
|Note: Returns are net of investment fees and tax. Triple S and WSS are tax exempt funds. We have assumed an 8% tax rate to give an approximate after tax return for comparison purposes.|
Fees & Insurance
Our research continues to show that public sector funds have the lowest fees of all groups – see Table 2 below. Industry funds also have low fees compared with personal master trusts, even when we exclude adviser commission. All industry and public sector funds score 5 Apples for fees. Most master trusts score 3 Apples. We believe that each consumer has to consider his or her individual circumstances in deciding whether the extra cost of a master trust is warranted.
In disclosing fees, we believe it is essential that commissions paid to advisers be clearly set out. It is quite possible that the total dollar amount of commission is fair and reasonable for the advice provided. For example, in the case study below, $320 to $330 per annum may be reasonable for ongoing advice on issues such as which investment option should I choose and how much insurance cover should I have. Of course, if you are not receiving this service, you should not have to pay for it.
Rating insurance is particularly difficult because premiums (a key criterion) depend very much on the individual’s circumstances – e.g. age, gender, occupation and smoking status. Within each type of fund, premiums can vary widely. For example, for a 34-year old white-collar male, the highest industry fund premium is 3 times that of the lowest industry fund premium. A similar ratio holds for the master trusts. Our ratings for insurance range from 3 to 5 Apples for each type of fund. Insurance is a prime example of where consumers must determine the cost in each fund based on his or her individual circumstances.
|TABLE 2: CASE STUDY – 34 YEAR OLD MALE / $50,000 ACCOUNT BALANCE / $200,000 DEATH & TPD COVER ($)|
|Fund Type||Annual Costs||Insurance||Total Cost||Commission|
|White Collar Male|
|Public Sector Fund||261||169||430||Nil|
|Blue Collar Male|
|Public Sector Fund||261||209||470||Nil|
|Note: Annual Costs include management costs (administration fee, investment fee and standard adviser commission where applicable) and an estimated contribution fee of 2% for some master trusts.|
There has long been a view (hotly debated) that industryfunds are not really cheaper than master trusts because they don’t provide the same level of service, nor do they make personalised advice available within their standard fees.
Leaving the issue of advice aside, our research clearly shows that, in our universe of highest quality funds, there is little difference in the depth and quality of member services across all types of funds – see Table 3 below.The personal divisions of the leading corporate master trusts, however, have an edge, largely because of the quality of their call centres and their focus on member education.
Of course, these are generalisations and they do not apply to all funds within a group. For example, the industry funds participating in the Education Key initiative receive our highest rating for member education and communication materials.
|TABLE 3: PERSONAL SUPER FUNDS RATED 5 APPLES - MEMBER SERVICES (SCORES OUT OF 10)|
|Service||Weight (%)||Industry Fund||Public Sector||Master Trust|
|Call Centre /IVR||35||7.7||7.1||7.8||8.6|
|Note: With Corporate Master Trusts we are referring to the personal divisions to which members are typically transferred when they leave their employer.|
Our View of the Future
Last year, we were asked for our view on the likely make-up of the superannuation industry in 2010. We based our forecasts on the Government statistics available at March 2005 and on an overall growth rate for superannuation assets of 10% per annum (which is similar to Treasury and ASFA estimates). Table 4 below summarises our view. One point of interest is that, contrary to widespread opinion when choice was introduced, we expect that the self managed sector will grow slower than the industry as a whole as people come to realise the costs and complications involved and the quality of the alternatives available.
We also see major leakage from the corporate funds sector. This leakage will peak in 2005/06, as companies decide to outsource rather than seek APRA licensing. Thereafter, we expect this sector also to grow more slowly than the industry as a whole.
The major winners, in our view, will be industry funds. As consumers become better informed and educated, the value proposition of industry funds will become more and more compelling. The same applies to public sector funds, some of which will convert to public offer status and leverage their key advantages of scale, strong past performance and perceived security. Both of these groups, we predict, will gain more than their current share of the nation’s super savings in the years ahead.
|TABLE 4: LIKELY MAKE-UP OF INDUSTRY ASSETS IN 2010|
Growth (% pa)
|Note: We expect assets of corporate master trusts to fall by about $30B over the next 12 to 18 months, with the core growing at about 5% per annum.|
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The information above is based on data supplied by third parties. While such data is believed to be accurate, Chant West does not accept responsibility for any inaccuracy in such data. Past performance is not a reliable indicator of future performance. The products, reports and ratings do not contain all of the information that is required in order to evaluate the nominated service providers, and you are responsible for obtaining such further information.
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and Chant West warns that: (a) Chant West has not considered any individual person’s objectives, financial situation or particular needs; (b) individuals need to consider whether the advice is appropriate in light of their goals, objectives and current situation; and (c) individuals should obtain a Product Disclosure Statement from the relevant fund provider before making any decision about whether to acquire a financial product from that fund provider.