Fryer says the lack of disclosure has arisen from debate around the interpretation of the Explanatory Statement to the Corporations Act Amendment Regulations 2005. “From some funds’ point of view, fees taken out of excess returns are not important, as long as the net return is achieved,” he says. “But we think it is pretty clear that the statement says funds need to declare all fees, gross of tax. Even leaving that aside, the true level of fees is something members would expect to be told, especially now that the spotlight is turning back to fees… Most funds realise these fees exist, but they are reluctant to disclose them because no-one else is doing it. They are just going to look at each other waiting for someone else to move first… Whoever declares all of the underlying fees first is going to look really expensive compared to the other funds. This needs leadership or regulation from a body such as the ASIC.”

Even discounting the non-disclosed underlying manager fees, the lead manager fees for most alternatives are more expensive than traditional asset classes. While retail master trusts have been improving their efficiency over the past few years, these reductions in fee margins have been largely offset by increased investment fees, due to greater allocations to alternative assets, the report says.

Industry fund fees have increased by 12 basis points over the past three years (partly because of the growing cost of compliance, promotional budgets, and improved fee disclosure), due to higher investment fees from increased allocations to alternative assets and the impact of performance fees.

Some funds have offset the higher investment fees of alternatives mangers by cutting costs in other areas of the portfolio, such as enhanced-indexing their equities exposure. According to the report, the main factors affecting fees charged by an industry fund are the allocation to alternatives, performance fees, and size of fund.

Among the industry funds over $7 billion, the report found UniSuper had the lowest fees. But UniSuper has only 7.5 per cent in alternative assets whereas HESTA and Cbus (the two most expensive industry funds) have 18 per cent and 19 per cent in alternatives respectively. HESTA also includes performance fees of 25 basis points, whereas UniSuper does not disclose any performance element in its investment fee.

These higher fees may be justified, however, by better performance. Chant West’s latest quarterly returns survey found Cbus and HESTA were top and bottom of the first quartile respectively. UniSuper, while still performing well, fell in the mid to lower second quartile.

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