Stockspot founder Chris Brycki says industry funds perform better because they load up their Portfolios with risky assets.
The Productivity Commission is wrong to conclude that industry superannuation funds beat bank-owned ones because they are gun investors, ratings house Chant West says.
“The main reason why industry funds have performed better is their use of unlisted assets such as property and infrastructure, which have performed very well over many years,” Chant West head of research Ian Fryer said.
Chris Brycki, a former UBS portfolio manager who now runs online investment adviser Stockspot, said industry funds performed better because they loaded up their portfolios with risky assets. “These guys put themselves on a pedestal as geniuses at picking assets but it’s just because their portfolios are crammed with more risk,” he said. “Our view is that fees and asset allocation account for almost all of the differences in performance.”
On Friday, the Productivity Commission released fresh analysis revealing a gap of 200 basis points in the relative performance of non-profit funds compared with retail funds.
The non-profit market is made up of industry funds such as AustralianSuper, Hostplus and HESTA, along with corporate and public sector funds. While some of the difference might be explained by unreported expenses and measurement errors, the gap was mostly down to asset selection, the commission said. In short, industry funds were better at picking one company over another, or this toll road over that airport. Combine this acumen with lower fees and industry fund outcomes were better on average.
But Mr Fryer disagreed with the commission’s conclusion. He said the performance difference could be attributed to a so-called “illiquidity premium” of about 140 basis points.
“Industry funds can invest in these illiquid assets as they have stronger cash flows due to industrial awards and enterprise agreements, and their members are less like to take out their money,” Mr Fryer said. “This means they can invest in long-term assets knowing that they won’t need access to that money for a long time.”.Mr Fryer also has some broader concerns about the commission’s assessment. “The report says the majority of super funds have underperformed a benchmark constructed by the PC,” he said. “But there are problems with their benchmark and in our view it has been significantly overcooked.” If the benchmark is too high, as Chant West contends, super funds may look like bigger underperformers than they really are.
The Productivity Commission’s work on returns by asset class will form part of a final report to government at the end of the year. It is developing recommendations for making the system more competitive and efficient. A draft report in May recommended selecting the 10 best performing funds for a “best and show” shortlist.
Mr Brycki insists the performance divide is attributable to industry funds such as Hostplus mischaracterising their growth assets as defensive ones.
Market conditions of recent years have led portfolios with more growth assets to do very well, catapulting these funds to the top of league tables prepared by Chant West and others. “These funds are gaming the ratings systems,” Mr Brycki said. “It is a high-risk strategy, particularly for older Australians nearing retirement needing cash flow soon. “If markets fall so will their super balance; they need more defensive investments to cushion and protect their retirement savings.”
Mr Brycki said the Australian Securities and Investments Commission defined defensive assets as cash or government bonds. But some super funds classified their unlisted infrastructure and property assets as defensive too. “Some large funds misstate their defensive assets by over 20 per cent, which could mean ‘balanced’ funds are actually ‘high growth’,” Mr Brycki said. The majority of Australians have their super in a balanced fund. But there is no consensus within the industry on what constitutes a balanced fund.
Each year Stockspot releases its Fat Cat Funds Report, a guide to the funds with the highest and lowest fees. As in previous years, the “golden fat cat” goes to ANZ’s OnePath offerings, which are being sold to IOOF.
This year’s report also compares the performance of super funds with an index fund of equivalent risk. Over five years, only 4 per cent of balanced funds beat the index. “People in default super funds would benefit greatly if all money simply went into a low-cost index fund,” the report says.
By Joanna Mather – Extract from the Financial Review