tip off

The Super disaster lurking for the unwary

Bernard Keane’s article last week raises some excellent points but also obscures the massive danger for regular Australians making decisions about their super.

From a starting point, it is clearly a good idea that consumers get to see the returns super funds have made. However, there is a significant danger that consumers will forget the simple warning that ’past returns are not reflective of future returns’ and make decisions that could seem them losing out twice.

Industry super funds do have a clear advantage over retail super funds — they are usually significantly cheaper and generally have better fee structures. The big industry super funds have a total fee of approximately 0.5% per annum. This compares to the big retail super funds such as MLC, AMP and Colonial First State which charge in the range of 1.5% to 2.5%. Not surprisingly, this means you should expect to see around 1.0% to 2.0% better performance from industry funds over the long term.

However, the first set of super tables that will come out will set a very dangerous precedent that will encourage people to join super funds that could be headed for some very poor years ahead. Here, I repeat the table from Thursday’s article.

The top 25 super funds have 21 industry funds in their list.

If your super fund doesn’t appear on the top 25 funds, typical human nature would be to consider dumping your super fund and joining one of the top 25 funds which are almost all industry funds.

However, this could be a very dangerous strategy. The two key drivers of returns are asset allocation and fees. You should expect most industry funds to have outperformed by 1 or 2% p.a. over the survey period. The leading industry funds have actually outperformed by 4 to 6% p.a. which is a huge difference. If it sounds too good to be true, it usually is.

Before you roll out of your existing super fund and in to a new fund you need to actually have a close look at the assets inside your current super fund and the super fund you are looking at entering. Most of the poor performing super funds have all of their investments listed on the open market. They have therefore copped the full brunt of the GFC and show low returns. However, many of the super funds in the top 25 list have over 25% and in some cases (such as the top performer MTAA) more than 50% of their assets in an unlisted form. To get a unit price for the super fund these assets are valued by property valuers or accounting firms. Many of these valuations are only down 5% to 15% from the November 2007 peak. Such valuations have always taken a long time to adjust to the reality of the new marketplace and as such we continue to believe that many assets will have to be valued down a further 10% to 30% before they reflect fair value.

Last month, it was revealed in the AFR that for 15 months the $7 billion Industry Superannuation Property Trust had refused redemption requests from its members. This is a huge warning sign for retail investors. If you roll in to a super fund that has unlisted assets right now you could end up paying substantially more for assets than you should. You could easily compound the losses you have already suffered.

So if you are thinking about moving to an industry fund I would take a closer look at those that don’t hold substantial unlisted assets such as Unisuper or First State Super so you know that the unit price you are paying is fair and transparent. With other industry funds you might be walking directly in to a bear trap.

3
  • 1
    Andrew Baker
    Posted Tuesday, 19 May 2009 at 4:36 pm | Permalink

    The title and conclusions of this article are inappropriately alarmist. There is no “massive danger” for Australians considering placing their super with an industry super fund.

    It is correct that on average industry funds have outperformed retail funds over the longer term by about 1% or so. It is also correct that in the past year, that gap has blown out to about 6% as Alan Dixon states.

    But it is not right to fully attribute that difference to unlisted assets which are about to plummet in value. The average industry fund had 21% of its assets in lower liquidity assets at June 2008 and this would have risen by only 2-3% at the bottom of the equity market in March, thaks to funds’ strong inflows. It’s unlikely any of them exceeded 50% exposure, and most would not have exceeded 25%. But this is far from the whole story - industry funds have been stockpiling cash, with an average 7% allocation. This has also helped protect returns in the equity bear markets.

    If a 25% devaluation was applied to unlisted assets, the average fund might fall by about 5% over a period of time - some more, some less. But let’s put this into context - we’ve just been through an environment where sharemarkets have been regularly rising and falling 5% in a DAY!

    In fact, the devaluation process has already started and hardly anyone has noticed or cared. MTAA’s Target Return portfolio has fallen by about 12% in the past 3 months, for example. So far from it being an impending disaster for the unwary, it is already being dealt with.

    If indeed the average industry fund was progressively devalued by 5% - well guess what, that just takes us back to the 1% margin that has prevailed for years. Hardly case closed on “very poor years ahead”. More likely, the impact will simply be lost in the noise of the returns from funds’ many other assets, as has been the case so far. For virtually all industry funds, shares will continue to be the dominant impact on returns.

    I agree that no investment decision should be simply on the basis of past returns, and the status of industry fund portfolios is an important topic. It’s one that deserves more accurate, and less sensationalist analysis than is the case here.

  • 2
    Harvey Tarvydas
    Posted Thursday, 21 May 2009 at 11:25 am | Permalink

    Good on ya Dix (& Crikey).
    Much needed alert.
    Lets see who gets alarmed.

  • 3
    meski
    Posted Thursday, 21 May 2009 at 3:06 pm | Permalink

    How is it sensationalist to advise against making a hasty decision to move your super from a low performing to a high performing fund? You’d essentially be selling at your current super fund’s low point, and buying into a super fund at a relative high point.

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