Rather than name a ‘fund of the year’, super consultancy
Chant West has produced lists of the top funds for a series of different market
segments, saying that the right fund for any individual or organisation is the
one that is strong in the areas that are important to them.

The individual
retail market, for example, would be wise to take advantage of the cheaper
not-for-profit funds. The medium-sized corporates, on the other hand, with the
bargaining power to negotiate fees, would probably be better served by the
wider investment choices and services of a master trust, the report said. The
Chant West ‘Apple’ rating took into account six main criteria: organisational strengths,
investments, fees, insurance, administration, and member services.

These were
weighted according to their relative importance; with investments carrying the
most influence at 40 per cent. Most of the investment criteria (70 per cent),
depended on the funds’ governance regime, its asset consultant, in-house
resources, and how its portfolios were constructed. “These factors were
weighted heavily because they feed directly into the future performance of a
fund, which is what we are most interested in,” Ian Fryer, research manager at
Chant West, said.

“The league tables published by other ratings agencies in the
newspapers every month tend to put the focus on past performance, and are too
short term.” Past performance accounted for 10 per cent of the ‘investment’
criteria in Chant West’s ratings. “Past performance is relevant, but it only
counts for a small portion of our assessment,” principal at Chant West, Warren
Chant, said. “We can’t ignore the strong performance history of not-for-profit
funds which, as a group, have outperformed master trusts over most periods in
the last seven years.”

However, Chant acknowledged that the outperformance of
the industry funds was due mainly to their greater exposure to unlisted assets,
particularly direct property, infrastructure, private equity, and hedge funds.
Industry funds had a strategic allocation to these assets of 25 per cent, while
master trusts had only about 7 per cent. “It is true that many of the
alternatives are yet to be revalued, but that is not the whole story,” Fryer
said.

“These unlisted assets really have outperformed, and they have provided diversification
as well.” Fryer conceded that it has been easier for industry funds to build up
holdings in alternatives, as the members tend to be less engaged and unlikely to
switch out of a fund, even since the introduction of choice. “Obviously with retail
funds, members chose to enter those funds, and they can just as easily choose
to leave,” Fryer said. Many retail funds experienced runs on their funds in the
early 1990s with investments in listed property trusts, and so they are much
more cognisant of keeping liquidity high, even at the expense of better returns,
he said.

The market downturn has increased superannuants’ awareness of market and
longevity risks, resulting in a high proportion of fund members in a recent survey
switching to more conservative investment strategies and also favouring products
that combat longevity risk. The major concern among 49 per cent of respondents
to the Retirement Planning: the impact and opportunities survey, commissioned
by global actuarial firm Milliman, was the impact of the credit crisis on
account balances. This was followed by the 30 per cent who worried that
inflation would weaken their savings.

The survey was put to 1,000 superannuants
aged 45 years or more with balances of $50,000 or greater, and was conducted by
Sweeney Research between September 29 and October 15. It showed that 38 per
cent of respondents had changed the asset allocations of their super accounts,
and that 20 per cent of this number had done so in the last six months. Of
those switching recently, 79 per cent moved into conservative options.

Identifying
other concerns, the survey found that 31 per cent of respondents worried about
their financial security in retirement and that 21 per cent were concerned they
would outlive their retirement savings. Super funds could do more to combat these
security and longevity risks, Wade Matterson, practice leader at the
North Sydney office of Milliman, said. “We’re at an
extreme where all risk is being taken on at an individual level. We don’t want
to go to the opposite extreme where all risk is being deferred to institutions,
but we want to be somewhere in the middle.”

Survey respondents were provided with
a description of a guaranteed lifetime withdrawal benefit (GWLB), an investment
product sold in the
US
that locks-in returns at a set level each year. Used in both accumulation and drawdown
phases, it aims to preserve capital and combat longevity risks. While 41 per
cent of respondents said they would switch to a fund offering this product,
their enthusiasm dimmed when the prospect of an additional cost was introduced.

Only 51 per cent said they would expect to pay for the feature. “It drives home
the fact that in
Australia,
when you’re developing products, fees play a key part,” Patterson said. Low
costs and capital growth emerged from the survey as the most important features
of superannuation products: while 82 per cent of respondents said low fees were
the most important feature, 78 per cent prioritised protection from inflation.

When
asked to assess the quality of superannuation funds, 40 per cent answered their
fund had performed as expected, while 23 per cent said performance was a little
worse than expected and 17 per cent said it had been much worse than expected. This
compares with the 10 per cent who regarded the performance of their fund as a
little better than expected and the 3 per cent who saw it as much better than
expected.

Overall, however, 42 per cent of respondents were fairly satisfied,
and 14 per cent very satisfied, with the performances of their funds. Patterson
said this outcome was probably due to a consistent message from funds and
government, emphasising long-term. “Communication is a part of the response.
But if [the downturn] is prolonged, you need a solution in the long-term,”
Patterson said. See ‘Providing your members the ultimate comfort’, page 26.