by Alan Dixon, Managing director of Dixon Advisory|
May 19, 2009 1:55PM |EMAIL|PRINT
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.