Industry super fund outperformance figures questioned

Chant West, Industry Super Australia (ISA), industry super fund outperformance retail super fund, 'bank owned funds'Industry Super Australia is overstating the extent to which industry super funds outperform retail funds, superannuation research and consulting firm Chant West has claimed.

“Almost every time a performance survey is released it is quickly followed by some commentary from ISA [Industry Super Australia] extolling the superior returns of industry funds over what it calls ‘bank-owned’ and retail competitors,” said analysis by Chant West.

The firm acknowledges that industry super funds have been “strong performers over many years”, but argues that claims of outperformance have been overstated.

“It is perfectly reasonable for the industry fund movement to use this outperformance in their marketing, as long as the research they use to support their case makes fair comparisons and is transparent. Unfortunately, that is not the case with most of their releases.”

“The reality is that retail funds have underperformed industry funds, but not nearly to the extent claimed by ISA.”

Data compiled by Chant West shows ISA claims industry fund outperformed ‘bank-owned funds’ by 2.2% over a 10 year period, to 31 March 2016. But compared to a “broader SuperRatings SR50 Balanced category” this outperformance was only 0.9%. Using the same comparison the outperformance was also lower over one, three and five years. Over 7 years retail super funds outperformed industry funds by 0.5%.

Chant West says the differences “are too great to go unexplained”.

“While there are slight differences in the asset allocation ranges for the risk categories – Chant West’s Growth category has 61 to 80% growth assets while the SuperRatings Balanced category quoted by ISA has 60 to 76% growth assets – these are not nearly enough to explain the different results.”

“Nor is the fact that Chant West’s retail category contains funds that are not bank-owned. Our retail category comprises 13 bank-owned funds and 9 others.”

Chant West says a key reason for the different between its numbers and those released by Industry Super Australia is that ISA’s analysis includes 6 “legacy pre-FOFA products” which deduct investments fees, administration fees and adviser commissions in calculating their net returns.

“This produces relatively poor results for bank-owned funds and unfairly distorts any comparison with industry funds.”

“We estimate that, for the bank-owned funds included in ISA’s analysis, those administration fees and commissions for the 6 legacy products amount to about 1% per annum on average. That goes a long way to explaining the differences between ISA’s performance table and Chant West’s.”

However Industry Super Australia “completely rejects” the claims by Chant West.

“Chant West’s performance comparisons present a wholly misleading picture of the net returns actually experienced by members of retail and bank owned super funds. Commissions, fees and costs that reduce returns by a staggering 1-2% per annum for members of retail and bank owned fund are ignored. As a consequence Chant West’s seriously downplays the extent of retail and bank-owned fund underperformance,” said Industry Super Australia.

“ISA relies on the fully transparent approach taken by SuperRatings. SR data takes account of the crediting rates declared to members. It is calculated to include any implicit fees and costs which lower returns. It does not include dollar based fees of industry funds or retail funds which are explicitly charged to members so a like for like comparison is made.”

“Not surprisingly the retail sector tries to obfuscate performance calculations when returns are negative or low, and their higher charging structures become more visible. In 2010, the FSC proposed to implement Chant West’s approach to calculate returns (omitting their higher administration fees and commissions), but dropped this proposal in the face of widespread criticism including the Cooper Review who called their approach ‘illogical and misleading’,” said an ISA spokesperson.

It should be noted that this comment in the final report of the Super System Review (Cooper Review) was in regards to reporting performance to fund members on a pre-tax and other costs basis. It was not directed at the methodology used by Chant West to report investment performance.

Given that member benefits can only be received on an after‐tax basis and after all costs are paid, it is illogical and misleading for investment returns to be reported to members on anything other than an after‐tax basis and after all costs have been deducted.  Before‐tax reporting allows investment managers and trustees to take less care in managing the consequences of their investing style ….  At the same time, revealing gross returns with tax and costs to give the net return allows members and other stakeholders to analyse how costs and tax are managed.   Standardised reporting showing both gross and net investment returns on an after‐tax and after‐cost basis would ensure greater transparency and accountability.

Super System Review, Final Report, Part 2

The Super System Review recommended the development of a reporting standard by APRA. In 2014 APRA released Final Reporting Standards for Superannuation (SPS) 702: Investment Performance. This document sets out a standard for reporting ‘net investment return’ (investment return less “investment fees, indirect cost ratio investment costs, other investment costs and taxes on investment income after investment fees and costs”) and ‘net return’ (net investment return less administration and advice fees and costs, related tax expenses and benefits and “other fees and costs and other related tax expense/benefit, that would be charged for an example member”).

Chant West says the outperformance by industry super funds “has a lot to do with the structure and dynamics of the industry and their influence on asset allocation”.

“It has little to do with the profit margins built into retail products or the governance models of industry funds. Industry funds have performed well because they have looked beyond traditional asset sectors, committing substantial amounts to alternative and unlisted assets. They have also benefited from being more active in managing their medium-term asset allocations. The fact is industry funds have proven to be astute and far-sighted investors.”

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