According to data from the Productivity Commission inquiry into the super system, retail funds have generated average annual returns of 5.4 per cent over 20 years, in contrast to industry funds producing 7.2 per cent.
Speaking to the House of Representatives standing committee on economics, both AustralianSuper chief executive Ian Silk and IOOF boss Renato Mota noted the key reason why industry funds have advanced returns is because they have higher allocations in unlisted assets, such as property, infrastructure and private equity.
Mr Silk described the class as “mid-risk assets,” sitting on the middle of a risk spectrum between bonds and equities.
“They have return characteristics that are not the same as but not dissimilar to equities, and risk and volatility characteristics that are closer to bonds, so they perform a very important moderating, stabilising role in generating long-run returns for members for the fund,” he said.
“They might not generate the strong outperformance of equities but, in the context of a balanced, diversified portfolio aimed to generate strong long-term returns, they’re a terrific contributor.”
Safety of unlisted assets needs to be better understood: IOOF
IOOF has around 10 per cent to 15 per cent invested in unlisted assets through its funds.
But despite admitting the class has generated stronger returns for industry funds, Mr Mota admitted the group is “hesitant” to allocate more to the space, prioritising the management of risk for its members.
He noted a number of factors such as liquidity, the categorisation of assets and valuation of liquidities come into play.
“I don’t think you can talk about returns without talking about risk,” he said.
“There’s a question around a lot of the unlisted assets. Are they in fact growth? Under duress, do they behave like a growth asset or do they behave like a defensive asset?
“There is no consistency or clarity across the industry around how they’re classified.”
Mr Mota added there needs to be clearer industry definitions for growth and defensive assets, so funds could more clearly take positions and inform members.
“One of the challenges with measuring risk is assets that aren’t valued everyday,” he said.
“The perception of the safety, if you like, of unlisted assets needs to be better understood.”
The Productivity Commission’s report also noted investment costs for unlisted assets are typically lower than for listed assets.
But Mr Silk countered the finding, saying it depends on the mode of investing.
“We have an investment team in-house that invests in the Australian equity market and global markets,” he said.
“They operate at a lower cost than our external managers. But property and infrastructure assets usually come at a higher cost to manage, because they’re more of a hands-on investment than direct equities.”
Masses leaving retail, more entering industry
Since the royal commission, there has been roughly $3 billion in outflows a quarter from retail funds and an inflow of around $4 billion into industry funds.
Mr Silk added many industry funds have better performances because their asset allocation is dynamic, in contrast to retail funds using a strategic allocation that is fixed.
Other differentiators impacting performance included retail funds, unlike industry or profit to member funds, generate a profit margin for commercial organisations, and they have a governance structure that has to balance the interests of shareholders and members.
But for many consumers, performance may not be the deciding factor for choosing a fund.
Mr Silk said AustralianSuper has seen a large number of new members join the fund in the last year and the company had spoken to a number of them.
“There’s a push-pull factor at play,” he said.
“Many people have decided to move from their current super fund. That’s the first action. The second action is to choose the fund they’re going to move to.
“A lot of the feedback we had was not so much about performance… but people were disappointed that organisations they’d expected to act with appropriate fiduciary standards had fallen short of the mark, and were looking for an organisation they can trust.”
