In releasing its 2009 fund ratings, Chant West stresses the need to assess funds in the right context. There is no single ‘best’ fund. Rather there is a wide range of funds that cater for different market segments and, within those segments, display strengths and weaknesses in particular areas. The right fund for any individual or organisation is one that is strong in the areas that are important to them.

Different types of fund tend to rate more highly in different market segments. For example, the top 10 rated funds in the personal super category include nine not-for-profit funds and just one commercial master trust. Yet in the ratings for medium-sized corporate plans (those with assets of between $10 million and $50 million) the list is completely different, with master trusts taking up four of the top six places.

The reason, says Chant West principal, Warren Chant, is largely to do with fees and the range of services provided. “In the retail market the not-for-profit funds have a distinct cost advantage. While some of the better master trusts may provide more investment choices and often a wider range of services, typically their costs are significantly higher.

“Individuals are price takers, but in the medium-sized corporate market companies have more bargaining power. As a result, they can generally negotiate competitive fees with master trusts that compare favourably with not-for-profit funds.”

The cost advantage of not-for-profit funds is reflected in the top 10 overall ratings for personal super products, as shown in Table 1. The 10 funds, which are listed alphabetically, include just one commercial master trust – Mercer.

Table 2 shows the highest-rated funds overall for medium-sized corporate plans, again listed alphabetically. We have only shown the top six funds in this category, as the universe of funds is much smaller than for personal funds. In this category, four of the top six funds are commercial master trusts, while AustralianSuper and Sunsuper are the sole representatives from the not-for-profit sector.

The Chant West ratings are based on six criteria: organisational strengths, investments, fees, insurance, administration and member services, that are weighted according to their relative importance. Investment carries the most weight (40%).

The investment analysis concentrates on the multi-manager options that are the defaults for most funds and so account for the majority of members. “We look closely at the fund’s governance regime, its asset consultant, any in-house resources and how its portfolios are constructed,” Chant says.

“Past performance is relevant but it only counts for a small portion of our assessment. Having said that, we can’t ignore the strong performance history of not-for-profit funds which, as a group, have outperformed master trusts over most periods during the past seven years.

“That’s mainly due to their greater exposure to unlisted assets, particularly direct property, infrastructure, private equity and hedge funds. The differences are quite marked. Industry funds have a strategic allocation to unlisted assets of about 25% versus 7% for master trusts, which place a greater premium on liquidity.

“In assessing funds, members need to clearly understand that there is this key difference between the two groups. And they should also be aware of the associated risks – for example, the risk (however small) of not being able to access your money when you need to (too many illiquid, unlisted assets) versus the risk of earning lower long-term returns (too few unlisted assets).”

Table 3 shows that high level investment expertise is not confined to any particular type of fund, with nine not-for-profit funds and one commercial fund ranked in the top 10 for investment.

Account-based pensions are now recognised as the preferred way to fund retirement income, especially for anyone over 60. This, together with the growing awareness of tax-effective transition to retirement strategies, has seen pensions shape up as the new battleground in the competitive superannuation marketplace.

“This is another area where not-for-profit funds might be expected to dominate because of their low fee proposition for individual investors, but the reality is somewhat different”, Chant says.

“Industry funds in particular have been slow to develop their own pension products, partly because they have experienced little demand for them in the past. Many have preferred to badge the generic product issued by Industry Super through Members Equity. That is changing, and pensions are becoming a central component of almost all superannuation offerings.

“While the not-for-profit sector has been slow to realise the potential demand for pensions, the commercial sector has stolen a march on them. So much so that some providers now have pension assets outstripping their accumulation (super) assets.”