Table 1 shows for the average of the industry funds and master trusts in the study, the fees disclosed (base and performance), our adjustment to account for non-disclosure, and the ‘true’ total fee.
We can see from the table that:
- Industry funds on average have higher investment fees than master trusts, and this applies both before and after we adjust for non-disclosed fees. On our ‘true’ fee measure, the difference is about 10 basis points.
- The industry as a whole understates ‘true’ investment fees by about 15%, and this applies equally to industry funds and master trusts.
At first sight the fee differential between the two groups is counterintuitive. Industry funds have the same sort of scale as master trusts when it comes to negotiating fees and, unlike master trusts, they have no profit margins to add. The reason their fees are higher comes down to their different investment mix.
The main difference between the two groups is in their allocations to alternative investments and unlisted assets (mainly direct property). Alternative assets, in particular, command higher fees and, within those fees, include a higher element of performance fees. Over the past couple of years, at least, those allocations have been justified because the returns from alternative and unlisted assets are what have given industry funds the edge in performance. (They also account for the fact that industry funds have paid out more in performance fees, which they would certainly not begrudge.)
These differences are highlighted in Table 2. It shows that the average industry fund allocation to alternative and unlisted assets was 32% at June 2008, more than five times that of the average master trust. This was a major contributor to the material outperformance of industry funds over recent times. In the five years to June 2008, they averaged 10.7% per annum, compared with 9.0% per annum for the master trusts.