Spoiled for Choice

Choice of fund will fundamentally change the superannuation landscape within the next five years. There has been minimal switching between funds to date, but that will change given Australians’ employment mobility.

Whenever a worker changes jobs their new employer will ask them which fund they want their super sent to. Every time that happens, people will be encouraged to do their homework and choose a fund that they understand and are comfortable with. Slowly but surely they will learn to discriminate and exercise their right to choose, rather than have their employer make the decision for them.

In this environment, consumers will need help '” a guide '” in choosing a fund. Fund ratings are one source. In December, Chant West Financial Services published its 2006 ratings for both corporate and personal super funds. This article focuses on the highest-rated (5 Apples) personal funds and shows how there are significant differences even among this group that consumers should be aware of. The clear message: do your homework.

Chant West reviewed 98 funds, including 58 personal funds, of which 25 were given the highest rating. All 18 industry and public sector funds also received the highest rating, as did seven commercial master trusts.

Ratings were awarded after funds were compared with industry best practice on six main criteria: organisational strengths (10% weighting), investments (40%), fees (15%), insurance (10%), administration (10%) and member services (15%). Each section has a sub-set of detailed criteria and weights. A score is determined for each of the main criteria to give an overall rating for the fund.

Investments carry the most weight so are the biggest single influence on Chant West’s ratings. The assessment of investments relates primarily to a fund's multi-manager options; this is because most members are invested in those options. The review looks carefully at the quality of the fund's asset consultant, any internal investment resources, the governance regime and the structure of the portfolios.

Investment beliefs and processes, and the quality of a fund’s people are given more weight than past performance, which is not always a reliable indicator of future performance. In fact, past performance counts for only 4% of the overall assessment, which is why the first table lists funds’ consultant as well as their performance.

The table shows the performance of the funds' default options '” where most members are invested. For master trusts that do not have a default option, a comparable multi-manager option is shown. The clear messages from the table are:

• Industry funds, as a group, have been the best performers over the past five years.
• That outperformance has not been at the cost of additional risk; in fact their risk (or volatility) has been lower than that of the other types of fund.
• Public sector funds have performed very well over the past three years.
• The performance gap across the groups has narrowed in recent years.

This performance gap is not surprising. Industry funds pioneered the use of alternative assets, an important component of their outperformance. More recently many master trusts have responded by introducing similar strategies into their portfolios.

Chant West believes it is unlikely that any group will enjoy “first mover” advantage in the future to the extent industry funds have in the past. Also, all of the leading funds now employ first-rate asset consultants and operate under a strong governance regime. As a result, the differences in performance is not expected to be great across these funds over the long term, certainly not as great as they have been historically . This is reflected in the ratings.

CHANT WEST’S TOP-RATED FUNDS
Personal super funds given the 5 Apples rating for their performance to December 31, 2005. Default options
Fund	Asset Consultant	1 year (%)	3 years (%)	5 years (%)	Std Dev 5 Years (%)
Industry fund (14)
AGEST	Frontier	15.7	13.2	6.5	5.6
CBUS	Frontier	15.8	13.7	8.2	5.4
HESTA	Frontier	13.7	13.2	9.4	4.9
JUST	Frontier	13.8	12.3	7.8	5.2
STA	Frontier	16.5	14.2	8.4	5.5
ARF	JANA	15.8	13.9	9.3	4.9
CARE	JANA	13.9	13	8.8	4
EQUIP	JANA	14.3	13.6	9	4.8
HOSTPLUS	JANA	14.9	13.7	8.7	4.4
REST	JANA	12.7	12.3	9.2	3.6
MTAA	Access	18.7	15.8	10	4.9
WESTSCHEME	Access	17.3	13.9	8.1	4.8
ASSET	Intech	13.6	11.7	6.1	5.7
SUNSUPER	Russell	15.2	13.2	8.4	5.3
Median		15	13.4	8.6	4.9
Public sector fund (4)
QSUPER	QIC	15.6	14.6	7.5	7.2
FSS	JANA	14.8	13.3	7.2	5.7
TRIPLE S	Russell	15.6	14.2	7.7	6
WSS	Mercer	15	13.4	n/a	n/a
Median		15.3	13.8	7.5	6
Master trust (7)
AMP	Mercer	15.3	12.8	n/a	n/a
CFS	Mercer	14.6	12.1	n/a	n/a
MST	Mercer	14.9	12.6	7.2	5.3
MLC	MLC	15.3	13.1	6.9	6.2
PLUM	MLC	15	13.1	7.1	5.7
BT	Intech	13.6	12	n/a	n/a
RUSSELL	Russell	14.8	12.9	6.8	6
Median		14.9	12.8	7	5.9
Note: Returns are net of investment fees and tax. Triple S and WSS are tax-exempt funds. An 8% tax rate has been assumed to give an approximate after tax return for comparison purposes.

FEES & INSURANCE

Public sector funds were found to still have the lowest fees of all groups, as shown in Table 2. Industry funds also have low fees compared with personal master trusts, even when adviser commissions are excluded. All industry and public sector funds scored 5 Apples for fees; most master trusts scored 3 Apples. Consumers need to consider whether the extra cost of a master trust is warranted.

Chant West believes a fund’s fee structure should make clear any commissions paid to advisers. The total dollar amount of commission may well be fair and reasonable for the advice provided. For example, in the case study below, annual fees of $320–330 may be reasonable for ongoing advice on investment options and level of insurance cover. Of course, if you are not receiving this service, you should not have to pay for it.

Rating insurance is particularly difficult because premiums (a key criterion) depend very much on the individual's circumstances, such as age, gender, occupation and smoking status. Within each type of fund, premiums can vary widely. For example, for a 34-year old white-collar male, the highest industry fund premium is three times that of the lowest industry fund premium. A similar ratio holds for the master trusts. Our ratings for insurance range from 3 to 5 Apples for each type of fund. Insurance is a prime example of where consumers must determine the cost in each fund according to their individual circumstances.

HOW INSURANCE PREMIUMS COMPARE
Case study: $200,000 death and TPD cover for a 34-year-old male with a $50,000 account balance
Fund type	Annual Costs ($)	Insurance ($)	Total ($)	Commission ($)
White-collar male
Industry Fund	424	207	627	Nil
Public Sector Fund	261	169	430	Nil
Master Trust	996	195	1,231	319
Blue-collar male
Industry Fund	424	316	736	Nil
Public Sector Fund	261	209	470	Nil
Master Trust	996	278	1,315	328

Note: Annual Costs include management costs (administration fee,
investment fee and standard adviser commission where applicable)
and an estimated contribution fee of 2% for some master trusts.

There has long been a view (hotly debated) that industry funds are not really cheaper than master trusts because they don't provide the same level of service, or make personalised advice available within their standard fees.

Leaving the issue of advice aside, the research found that in the highest quality funds there is little difference in the depth and quality of member services across all types of funds, as shown in the next table.

The personal divisions of the leading corporate master trusts do have an edge, however, largely because of the quality of their call centres and their focus on member education.

Of course, these are generalisations and they do not apply to all funds within a group. For example, the industry funds participating in the Education key initiative received the highest rating for member education and communication materials.

Note: With Corporate Master Trusts we are referring to the personal divisions
to which members are typically transferred when they leave their employer.

Last year, Chant West was asked for its view on the likely makeup of the superannuation industry in 2010. Forecasts were based on government statistics available at March 2005 and on an overall growth rate for superannuation assets of 10% per annum (which is similar to Treasury and ASFA estimates).

The final table summarises the forecast. One point of interest is that, contrary to the consensus that prevailed when choice was introduced, the self-managed sector is tipped to grow at a slower rate than the industry as a whole as people come to realise the costs and complications involved and the quality of the alternatives available.

A major leakage is forecast from the corporate funds sector, and will peak 2005-06 as companies decide to outsource rather than seek APRA licensing. Thereafter, this sector is also expected to grow more slowly than the industry as a whole.

Chant West expects the big winners will be industry funds. As consumers become better informed and educated, the value proposition of industry funds will become more compelling. The same applies to public sector funds, some of which will convert to public offer status and leverage their key advantages of scale, strong past performance and perceived security. Both of these groups are expected to gain more than their current share of the nation's super savings in the years ahead.

FUTURE VIEW
Likely makeup of industry assets in 2010
Fund type	Expected Growth (%pa)	March 2005 ($b)	March 2010 ($b)
Corporate	5	65	45
Industry	16	104	220
Public Sector	14	123	235
Retail	12	235	415
SMSF	5	160	205
Other	n/a	23	20
Total	10	710	1,140

Note: Chant West expects assets of corporate master trusts to fall by about $30 billion
over the next 12–18 months, with the core growing at about 5% per annum.