Big funds, big fee appetites

PORTFOLIO POINT: Australia’s biggest super funds charge the highest fees, but tend to underperform.

The big names of the Australian super funds management industry are also our biggest fee gougers, with IOOF, AXA, MLC, AMP and BT heading the list of most expensive balanced funds last year.

These fund managers charged fees of up to 2.5% for one of the most basic of all investments – the balanced fund – according to research conducted by SuperRatings for the 12 months to August 2010.

The survey covered the 50 largest balanced funds in the country, which have relationships with about 81% of all superannuation investors. What’s more, our analysis shows that the funds with the biggest fees also tended to deliver the worst returns.

Based on a combination of fees and returns, IOOF subsidiary Spectrum Super’s United Capital Growth Fund presented the worst value balanced fund product in the market.

According to the SuperRatings research, the 50 largest balanced funds charged an average of 1.2% per annum, or $596 on a $50,000 investment. Average returns from the sample were 4.3% over the last year, –3.1% over three years and 3.1% over five years.

However, investors who put $50,000 into the Spectrum Super product had to cough up $1247 in fees or about 2.5% for bottom-quartile returns.

Spectrum’s United Capital Growth Fund posted a net return of only 2.3% in the year to June, and investors who had their money invested since 2007 are now sitting on an annualised returns of –7.4%.

-The biggest fee gougers
Fund Name	Option Name	Fee on $50k Balance	Fees as % of $50k Acc Bal	5 Year Return (% pa)	Rank
IOOF Spectrum Super - Employer	Spectrum Super - United Capital Growth Fund	$1247	2.5%	0.1%	49
AXA Super Directions for Business	AXA SD Bus - Multi-manager Balanced	$1211	2.4%	1.1%	46
MLC MasterKey Business Super	MLC MKey - Horizon 4 - Balanced Portfolio	$1143	2.3%	1.8%	40
AMP Flexible Lifetime - Super	AMP FLS - AMP Balanced Growth	$1110	2.2%	1.6%	43
BT Lifetime Super - Employer Plan	BT Lifetime Super Emp - BT Multi-manager Balanced	$1,051	2.1%	-0.1%	50
* Option sizes are derived from the most recent option size data provided by Funds. Fees data is taken from the most recent publically available PDS or official fund communications. * Investment Returns are net of fees and taxes and are taken from the 31 August 2010 SuperRatings Fund Crediting Rate Survey (FCRS). * Investment management fees include investment performance fees disclosed by the product issuer.

• To see the full SuperRatings table of fees and performance data, click here.

Only two other products performed worse from an investment perspective over the past three years. Balanced funds marketed by MTAA Super and the South Australian-based Statewide Super reported returns of –8.6% and –7.7% respectively.

However, MTAA’s product was among the cheapest on fees, according to SuperRatings, with the public offer industry fund collecting $431 or 0.9% from investors with a $50,000 balance.

SuperRatings managing director Jeff Bresnahan says some superannuation investors had paid a heavy price during the global financial crisis for selecting a poor performing fund.

“Being in the wrong fund over a significant period of time can cost you a significant portion of your retirement dollars,’’ he says. “There is an argument to say that fees in the retail funds sector are too high and the removal of automatic advice in some super funds in 2012 should go some way to reducing costs.’’

The lowest fee operators included Colonial First State’s diversified fund (0.4%) and Telstra Corporate Plus (0.6%). Despite their low fees, both products outperformed Spectrum Super and the five most expensive funds by a long way.

The Colonial First State fund delivered an average return of 2% over the past five years, while the Telstra offering yielded 4.4% a year, putting it among the top-quartile performers.

The Telstra fund’s glistening performance caught the attention of IOOF, which poached chief investment officer Steve Merlicek at the end of last year to improve the returns of the Spectrum Super fund and other products.

“I think it’s fair to say we’re encouraged by our recent performance given it’s off the back of the recent appointment of Steve Merlicek was the Telstra fund’s chief investment officer,’’ says IOOF spokeswoman, Melinda Hofman.

The sharp divergence on fees and returns across the balanced fund sector is increasing pressure on underperforming big fund managers to move clients into more functional products.

Bresnahan said some fund managers such as AMP may be compelled to take such action to retain customers. “Will they move the members of poorer performing funds into better-performing products? That will be the big question in the next few years.’’

The second most expensive balanced fund for fees was AXA’s Super Directions for Business multi-manager product. On a $50,000 account it chewed up $1211 in fees, which equated to a management expense ratio of 2.4%. This included an asset administration fee of 1.53%.

Investment returns were also poor, with the fund returning –5.1% over three years, ranking it 43rd out of the 50 balanced products covered by the survey.

AXA spokesman Michael Zappone questioned the accuracy of SuperRatings’ representation of fees and charges associated with the Super Directions product. “The SuperRatings survey assumes that all AXA Super Directions Balanced Fund members pay the maximum asset fee of 1.53% per annum, whereas the actual average fee paid by members is 0.98% per annum,’’ he says. “What this means is that the return for the average member is 0.55% higher than the figure outlined in the survey.’’

MLC’s MasterKey Horizon 4 Balanced Portfolio marketed to business super clients was the third-biggest fee charger. It was able to rake in fees of up to $1143 on a $50,000 account, equating to a 2.3% management expense ratio.

The fund returned 4.3% in the 12 months to the end of August – in line with the industry average – but it has generated a bottom-quartile annual return of 1.8% over five years.

MLC corporate affairs manager Ric Shadforth also criticised SuperRatings’s research methodology, saying that the Horizon 4 balanced fund was more expensive to manage because it gave investors exposure to some alternative assets such as private equity.

“So while fees are an important consideration, investors shouldn’t make decisions based purely on which fund has the lowest fee, as it may not meet their investment needs,’’ he says. “SuperRatings’research unfortunately applies a basic one-size-fits all methodology that is more consistent with industry fund pricing structures and does not reflect the complexity of the employer-sponsored market.’’

BT and AMP also cleaned up on fees in the 12 months to the end of August. Fees collected through AMP’s Flexible Lifetime balance fund accounted for 2.2% of retail investors’ funds. This product has also been a shocker for investment performance, having recorded bottom-quartile annual returns over one, three and five years.

It is so bad that AMP has closed the fund to new investors, replacing it with a new offering.

Another outstanding example of high fees for underperformance is BT’s Lifetime Super multimanager balanced fund. This fund is the fifth most expensive for fees, with investors enjoying a management expense ratio of 2.1%.

Its claim to fame, though, is that it was the only balanced fund in the survey to produce negative annual returns over the last five years. Since 2005 it delivered an average annual return of –0.1% compared to 3.1% for the rest of the market.