MTAA: In the money and in the frame

Background: The Canberra-based Motor Trades Association of Australia Superannuation Fund is Australia's best-performing industry fund. Led by Michael Delaney, the fund consistently beats all rivals; in the year to June it returned 18.9% against a median for super funds of 14.5%.

Industry observers drew a breath in July when the results were first announced and it looked as though Western Australia's Westscheme Trustees’ Selection had knocked Delaney off his perch. The MTAA had been the top fund over one, three and five year measurements.

But closer inspection of the figures reveals Westscheme enjoyed a one-off boost for transferring cash reserves into its fund. On that basis, Delaney was robbed of line honours, but for industry watchers MTAA remains the top fund.

Moreover, as the fees debate rages in the retail market, Delaney continually manages to cut expenses: the MTAA’s management expense ratio (MER) fell during the year, from 0.73% to below 0.7.%. This is a remarkable figure: retail funds can range between 1.5% and 2.5%, and several index funds cost more than 7%.

MTAA’s funds under management have risen from $3.1 billion to more than $4 billion and the group has continued to widen its overseas holdings, adding a New York car park operation to existing offshore direct infrastructure holdings such as the port of Gdansk in Poland.

Under Delaney's guiding hand, MTAA has become a pioneer of the fund industry. His strategy of directly purchasing assets rather than investing indirectly is increasingly popular. This week' s bid from Colonial First State for Victoria's gas pipeline company, GasNet, is the latest example of the trend becoming universal.

Delaney's approach is conceptually simple: half of his funds are invested in conventional listed equities and the other half are put in “alternatives”, particularly direct infrastructure. But his ability to make money for shareholders indicates an exceptional grasp of market complexities and a singular approach that is not sidetracked by market “noise”. Delaney's confidence in infrastructure investing despite higher interest rates proves the point.

Below, Michael Pascoe says that for his success, Delaney has been made the subject of a parliamentary "witch hunt". On video, Delaney suggests the Senate inquiry has been convened for some very "odd" reasons.

ASK ANY REASONABLE PERSON, a Eureka Report subscriber for example, what the major issues should be for a parliamentary review of the superannuation industry and the answer would be fees and/or taxes. South Australian Liberal senator Grant Chapman does not seem to be a Eureka Report subscriber.

Chapman is chairman of the Parliamentary Joint Committee on Corporations and Financial Services, which is holding an inquiry into “the structure and operation of the superannuation industry” that somehow looks like avoiding the vexed issues of fees and tax while perhaps giving industry funds a hard time.

The inquiry’s terms of reference are ringing alarm bells among the industry funds because they seem more than a little fishy. The issues have been nicely covered by Simon Hoyle in a Sydney Morning Herald feature Why industry funds are gloving up.

The inquiry inevitably came up during my video interview the MTAA Super managing director Michael Delaney. Delaney is circumspect but you can pick up the tone of his concerns in the interview. Both MTAA Super and the Motor Trades Association of Australia will be making submissions to the inquiry.

I’m not circumspect so I can say this inquiry does indeed look like a political witch hunt, a last sabre rattle of a lost ideological cause, a poor man’s attempt to get another Voluntary Student Unionism issue up and a dead waste of taxpayers’ money. If Chapman was genuinely concerned about the superannuation industry, his terms of reference would be focusing on the structural corruption of much of the fee structure, the desirability or otherwise of the vertical integration pursued by the big funds managers and the sense or otherwise of the present taxation of superannuation.

But he’s not. A cynical soul might think Chapman is leaving tax alone because Treasurer Peter Costello would kick hard him in the posterior if he dared mention it. It’s not in Costello’s interest to have a rational ruler run over his last budget’s big superannuation giveaway at the back end while maintaining tax on the front and middle. Costello justified it because it was easier than doing the right thing '” getting rid of tax on contributions or earnings '” which is about as lame as excuses get.

(That particular reform also doesn’t really do much for the average worker retiring while Costello is still in politics because their superannuation is simply too small to register much tax. The reform might sound good but it only benefits the relatively wealthy few. It will form the basis of another good scare campaign for the Government at the next election though '¦ “don’t vote Labor because they’ll tax your superannuation payout again”.)

As for why the more dubious practices of the for-profit companies and their trailing-fee-dependent sales force don’t feature in Chapman’s terms of reference, well, Delaney merely observes: “The inquiry looks odd to us is because there might seem to be some of the old ideological battles sitting behind it, about whether anyone ought to be doing this thing other than your long-standing insurers and bankers.”

I don’t think that is a cynical view at all. It would be cynical to suggest industry funds don’t donate money to political parties while plenty of big for-profit companies do. I’m always mindful of the warning I was given as a young cadet journalist not to become cynical because cynics can’t recognise good when it does occur, so I won’t suggest anything so tacky about this inquiry’s motivation.

The success of the better industry super funds has been something of an embarrassment for the right wing of politics; the mutuality of the things must seem a little too close to socialism for the more doctrinaire. The MTAA example must be particularly galling then because it’s an employer-sponsored fund '” the Motor Traders '” but yet it’s a fellow traveller with those other union-and-employer entities.

When Chapman has Michael Delaney casting subtle aspersions, I could form the opinion that the senator has misplaced the plot.

The MTAA has been the top-ranked super fund for several years. It gets very fine results and it does it for low fees. As we examined with Delaney a year ago, the MTAA team, advised by Access Economics, does so through running two funds, one a relatively standard market fund, the other a target fund that is heavily into infrastructure and utilities (click here).

As Delaney admits, the infrastructure/utility side is getting harder as more funds cotton on to the benefits, but opportunities still come along for the well-connected. For example, in the interview he mentions MTAA Super’s participation in the Macquarie Bank-led purchase of Icon Parking. MTAA Super, along with Australian Retirement Fund, Westscheme and Statewide Superannuation Trust, paid $US634 million last November for Icon and its 192 New York parking garages, mostly in Manhattan.

That might seem a long way from the average Australian motor trader’s business, but it’s an example of how the globe is being combed for the sorts of long-term assets that fit so well with super funds’ long-term goals.

And it’s all being done for relatively little expense. MTAA Super’s MER wouldn’t cover some financial planners’ trailing commissions. By way of comparison, I’ve heard of a “shame file” that circulates among the industry funds, detailing some of the more egregious examples of customers being badly served by the for-profit sector. I shall make a point of obtaining a copy in the near future. Watch this space.

The interview

Michael Pascoe: Congratulations, the MTAA has topped the super funds again. How did you do it?

Michael Delaney: Pretty much sticking to our model. It’s a proven model for us now because we’ve been doing it for five years. We varied it a little to enhance some things; to consist with the market but generally it’s still the two-portfolio strategy. We have 43% in a target return portfolio and the balance of 57% in the market. The market, of course, did extremely well but so also did our target return portfolio, which reflects its composition and what we’ve acquired over the years. We continue to acquire for it at a fairly fast rate over that past year, not least because we grew by a billion dollars since you last interviewed me a year ago.

What did you do that was different? What did you tweak?

We tweaked the mix of assets in the target return portfolio. We acquired some things that we didn’t have before, some different types of things; some landmark things actually that gave us more diversification and '¦

Such as?

We bought a near-to-monopoly of the parking stations of New York as one example. The other thing I think we would have tweaked is with our partner, and in many of these our partner is Macquarie Bank. We have a long-standing and productive relationship with them, the things we acquired actually performed beyond the hurdle race we set for them; which is to say, upon acquisition we found increasingly that there are capacities to increase the yield by, if you like, re-engineering them and that contributed greatly.

I suppose I can call New York parking either a utility or infrastructure or a bit of both. That whole sector, with so much money chasing it now '” is there any sign of it easing?

There are signs of change, Michael, and you’re right. We call it a utility but it is an infrastructure asset. Yes it’s changing in this way. With the very great volume of money chasing these sorts of things around the world prices are going up, yields are coming down and of course that just means you’ve got to work harder at it. I think I’ve seen you and your program report that the Americans have sort of moved into the market in a fairly substantial way. Goldman Sachs, for example, after the Macquarie model, so there’s more of us chasing the same things but that has two effects for us. One, it means that it might take a bit longer and cost a bit more to get these things; but the extensive portfolio of those things that we already have is as a result improving in value because of revaluations. These things are being priced in the market at levels that involve for us substantial growth.

It’s a sector that’s out of fashion in the stockmarket. Do you understand that?

Yes I do. I think it’s misunderstood and I think that the market may see a misalignment in there which isn’t the case for us. I need to point out that we are, if you like, a generational investor. We are taking our motor mechanics’ money today to give back to them in 30 years’ time so we can buy long-lived assets that are patronage-based, CPI-protected and which essentially have a growth capacity consistent with GDP at a minimum. So we think the market is perhaps marking them down beyond what they’re worth.

I think what’s driving it is the perception that the period of unusually low interest rates that we’ve seen throughout the world over the past two or three years is coming to an end. Pretty much all the jurisdictions we’d be compared with are putting them up and we’ve seen that and I think a lot of people and perhaps a lot of advisers think that those assets are interest rate-risked when in fact we don’t believe that they are to the extent that re-pricings would suggest and that’s because typically we, in all of those assets, will be buying dead interest rate cover at affordable prices with very long terms in them.

One of the great mysteries given how well most of the industry funds are going is that there’s a fear the Government might be out to nobble you. There’s a Senate Inquiry. What’s the particular concern?

Well it is curious. I don’t know what the concern is because if you take us as an example of the industry funds, we out performed in the ways you’re reporting for the past five years and it’s hard to see why we wouldn’t continue to do that, so what is there for one to look at? I’ve looked at the terms of reference very closely and I just find that so many parts of it deal with settled questions in terms of public policy. It is curious but that said, the Parliament’s entitled to enquire into anything at any time. We expect that and acknowledge that. We’ll certainly be putting in submissions and as an employer-sponsored fund we’re not in it for any perceived ideological reason. It’s a matter of a core service to the employers we represent nationwide and the reason that the inquiry looks odd to us is because there might seem to be some of the old ideological battles sitting behind it, about whether anyone ought to be doing this thing other than your long-standing insurers and bankers.

Is there a bit of a conundrum here, that here’s another super fund inquiry perhaps with the industry funds in the gun when on the financial planning side the Government doesn’t seem to be doing much about commissions which have been shown to be structurally flawed?

Well it is a curious contrast. On the one hand you have industry funds like ours that in essence charge next to nothing to provide this service. Our MER this year will be nicely below 70 basis points. Our members these days pay $1.25 a week for everything. We’ve just introduced a pension that is only going to cost $260 a year and so we can do all that and yet, yes, there are people out there, and particularly people who suffered through schemes and behaviours like Westpoint, that have paid out very large amounts of money and we know from matters adduced in court by ASIC that commissions at or above even 10% were taken from people in that construct.

Now we don’t believe there isn’t a place in the market for financial planners; there is. They’re necessary, they provide a valuable service. We do think there’s very legitimate and live debate about how they’re remunerated and whether everything has been disclosed; so, yes, with that not having been addressed and with very many people '” hundreds, thousands of people perhaps '” in Westpoint having lost money you would think that the focus of attention and public policy would be there in the first instance.

While the MTAA is doing very well, another billion dollars under management, have you seen members leave after getting advice from financial planners?

Oh indeed we have. We find people who’ve been turned into things that are just completely inappropriate and when they’ve sought to exit we’ve calculated the price of the exit and one sees some astonishing figures. I mean in some cases I’ve seen accumulated contributions being devalued or reduced by up to 60%.

Thanks for talking to Eureka Report.