The Grattan Institute report on superannuation fund fees, released last week, highlights an issue that has been dragging down superannuants’ returns for years.
But the report misses out on some key issues which we must address if we are to be as self-sufficient as possible and reduce reliance on the aged pension.
Grattan uses balanced funds for default performance review, but these funds simply don’t work towards getting their investors better than average returns.
The Australian ‘me too’ culture of complacence means large funds are more focused on what the competition is doing than on making innovative investment plans, and are unwilling to stick their necks out and do something different.
This leads to most funds simply tracking the average, and there’s no competitive pressure being applied for them to do anything differently.
There’s also a myopic focus on investment in Australian equities, which misses a whole universe of opportunities outside our borders.
With Treasury forecasting low growth for the next 50 years, it doesn’t make sense to be so overweight in Australian investments.
Dixon Advisory deputy chairman Max Walsh’s excellent article in the Australian Financial Review last week highlighted that the centre of gravity is moving to Asia, yet most fund managers have not done the heavy lifting required to ensure Australian investors are getting their share of this growth on our doorstep.
The Grattan report does suggest that high fee funds can offer outsized returns as they are able to invest into other asset classes that low-fees funds cannot.
But it glosses over the fact saying that such investments are often riskier, and the outperformance effect tends to fade over time.
Indeed, a number of asset classes listed in the report have demonstrably lower risk than traditional equities, which is in conflict with the author’s summary.
Nevertheless, there are many asset classes and opportunities that demonstrate multi-year outsized returns.
To dismiss any effort to harness those returns, I believe, panders to the culture of complacence.
A good example of where high fee managers have outperformed is Australian equity market neutral funds.
For most of this century, this group has provided investors with $2.54 of extra returns for every dollar paid in fees.
Over the same period, an investment in the average long-only Australian equity manager has not provided returns to justify the fees paid for the actively managed component.
Surely it is as much in the interests of super investors to access superior returns as it is to minimise costs.
The report highlights some low-fee funds as outperformers. But typically these funds are invested in illiquid assets – like direct property and infrastructure – that are difficult to price accurately.
The managers typically make a call as to what these assets are worth – ‘mark to imagination’ – and draw a straight line on performance for the life of the asset.
This gives an excellent picture on the balance sheet but is not based in reality.
As anyone who’s ever sold a house knows, illiquid assets are only worth what the market will pay for them, not what the asset owner wishes they were worth.
These assets are also difficult to exit, and this lack of liquidity will become more and more of an issue as these funds’ members retire and draw down on their assets – that’s a looming problem that the industry has known about for years.
The Grattan Institute report does not mention another key factor required for successful investing.
This is to seek to compound wealth while avoiding large losses. For example, a 50 per cent loss in the value of a portfolio requires 100 per cent return for it to recover, irrespective of the fees paid.
Avoiding large losses must not be conveniently ignored. With this in mind, allocation to some strategies that may have higher fees, but provide different sources of return, is vital.
Finally, the report misses the mark on consolidation. While intuitively it seems that consolidation should reduce administration costs due to scale, what isn’t taken into account is that MySuper accounts are filled with disinterested, younger members with small balances, leading to larger administration costs per member.
At the same time it’s well known that those with large super balances are moving away from funds entirely into SMSF and they’re taking with them the potential economies of scale. The report glosses over this issue.
Part of the issue is, of course, consumer apathy. Australians are notoriously uninterested in their superannuation, which allows the ‘culture of complacence’ to continue.
I hope the Grattan report will stimulate more interest in super and have people asking questions not only about fees, but about investments and returns as well.
Individual investors, financial advisers and asset consultants, as well as funds themselves, really must take more responsibility to overcome the culture of complacence and build a superannuation industry that genuinely services its clients.
Daniel Liptak, chief executive of ZG Advisors
Daniel Liptak has over 18 years’ experience in analysis, portfolio management, investment banking and risk management with firms including DB Ag, Goldman Sachs International, UBS and boutique Australian hedge funds. As chief executive of ZG Advisors he focuses on the search, due diligence and selection of alternative investments for investors.
