Master trusts bridge performance gap, but industry funds to win super race

The investment performance gap between industry funds and commercial master trusts is likely to narrow further but industry funds will still be the major winners of increased market share over the next five years, according to the latest report from superannuation consultancy Chant West Financial Services.

The report, published last Friday, includes some market share predictions for the major categories of super funds between March 2005 and March 2010, based on an annual growth assumption of 10 per cent overall. Industry funds are expected grow an average 16 per cent a year, from a total of $104 billion to $220 billion by 2010. Public sector funds will grow second-fastest, at 14 per cent, from $123 billion to $235 billion. Retail funds are third, with a 12 per cent annual growth rate, from $235 billion to $415 billion. Corporate super and the SMSF market will grow the least – both 5 per cent – but corporate super will actually decline, from $65 billion to $45 billion because of outsourcing. SMSFs will grow modestly from $160 billion to $205 billion over the five years. Chant West says: “The major winners, in our view, will be industry funds. As consumers become better informed and educated, the value proposition of industry funds will become more and 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, we predict, will gain more than their current share of the nation’s super savings in the years ahead.” But the going will not be easy for industry funds because the whole industry is going to look a lot more retail in its flavour than it does today. The report says: “Over the next three to five years, Choice of Fund will fundamentally change the superannuation landscape. Switching between funds has been minimal to date, but employment mobility will change that over time. 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.” The latest report confirms several trends in the differences between each category of funds, the main one being the continued, but declining, outperformance of industry and public sector funds. The clear messages, according to Chant West, 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 latter point is not surprising,” the report says. “Industry funds pioneered the use of alternative assets, which has been an important component of their outperformance. More recently, many master trusts have responded by introducing similar strategies into their portfolios. “We believe it unlikely that, in future, any group will enjoy ‘first mover’ advantage to the extent that 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, we do not expect the differences in performance across these funds to be very great over the long term – certainly not as great as they have been historically – and this is reflected in our ratings.”