For 14 years, Chant West has been in the business of comparing super funds. And for 14 years, we have been calling for improved disclosure standards in areas such as fees, insurance and investment performance. Because only when consumers – and their advisers – can compare funds on a like-with-like, ‘apples-with-apples’ basis, will they be able to make informed decisions based on reliable facts.

At present, the super disclosure regime is a mishmash of statutory requirements, some of which are open to selective interpretation, and unenforceable ‘guidelines’ which individual funds either follow or not depending on whether it suits them. It is abundantly clear that the industry is not going to move voluntarily towards uniform disclosure, so the industry regulator (ASIC in this case) has to do it for them.

Until that happens, consumers who rely on information ‘from the horse’s mouth’ (ie from the fund itself) risk comparing apples with oranges. And we, as researchers, will continue to have to make a mass of adjustments to publicly-disclosed information to convert those oranges back into apples.

At present, funds do not disclose their fees on a consistent basis. For example, administration fees are a tax-deductible expense to the fund, and the fund passes on the benefit of that deduction to the member. However, the way in which different funds do so varies.

For example, some funds deduct a net fee of $85 from the member’s account, and that $85 is what they disclose in their Product Disclosure Statement. Most funds, however, deduct a gross fee of $100 and pass on the $15 tax benefit to the member (typically by way of lower contributions tax paid). In those cases, the fee disclosed is $100. The end result for the member is the same, but the mechanics are different. To enable fair comparisons, we gross up the fees where the fund shows them net of tax.

The treatment of member protection costs is another area of difference. This is where the fund is required by law to limit its administration fees on accounts of $1,000 or less to no more than the member’s investment earnings in that year. In years of low or negative returns, this can be a substantial cost for funds with a large proportion of small accounts, and that cost is borne by all members. The fee disclosure regulations are not precise, so some funds include these costs in their published management costs while others don’t. In our view, all costs should be included and, where a fund fails to do so, we adjust the costs accordingly.

A similar issue arises with performance fees paid to investment managers. We believe the intent of the regulations is that these should be fully disclosed in relation to past experience, and reasonable estimates given in relation to future expectations. Most funds, however, have chosen to interpret the regulations differently and give no indication of the likely impact of these fees on future performance.Again, we make adjustments to at least include the latest historical performance fees.

But the greatest distortion in the area of fee disclosure comes from the non-disclosure of fees paid to the underlying investment managers in fund-of-funds products (hedge funds and private equity).

By way of illustration, Table 2 shows the typical fee structure for a hedge fund-of-funds. The example is based on a targeted return for the investor of at least cash + 3% (after fees). To achieve this return, the hedge fund needs to generate a gross return of about 12%. Out of this gross return, the total fees paid are about 6.2%, leaving 5.8% for the investor.

The fees that are typically disclosed, however, are just the 2.2% accounted for by the fund-of-funds manager. The additional 4% paid to the underlying managers is typically not disclosed.

In the case of private equity, the fee structure is similar except that the underlying managers’ performance fees usually require them to meet a target rate of return. However, the end result is that the total fees for private equity and hedge fund-of-funds are similar in magnitude – and so is the degree of non-disclosure.

As the average default fund invests about 10% in hedge funds and private equity, default option fees are potentially understated by about 0.4% per annum. This is material.