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The future of industry funds lies in member segmentation akin to the financial planning model and sustainable value propositions that no longer focus solely on growth and price, writes KRISTEN PAECH.
For many years now, industry funds have been indiscriminate in their campaigns to grow their membership bases, differentiating through price and a virtuous “no commissions paid to financial advisers” policy. This strategy served them well during a high growth environment where costs were low, inflows were strong and steady and members were contentedly achieving double digit returns. But with consolidation afoot and the underlying growth rate of industry funds slowing, Tria Investment Partners has questioned the sustainability of such models, and suggested the future lies in redefining value propositions better tailored to members’ needs.
In its 2008-09 Industry Fund Review, Tria predicts the rate of net annual inflow into industry funds will halve from about 10 per cent of their total assets to 5 per cent of assets within the next few years. Industry fund assets stood at $194 billion at 30 June 2008, up only fractionally on 2007’s $191 billion due to falling investment markets. Retail assets by comparison were down from $371 billion to $342 billion, the report notes. Andrew Baker, managing partner at the firm, says after four years of growth driven by investment returns, the pendulum has begun to swing the other way.
The industry fund “redemption rate”, which currently runs at about 7.5 per cent annually, is gradually drifting up as members age and start to retire. The report notes member contributions added 2.2 per cent of assets in 2008 – well down on 2007’s 4.3 per cent but comparable to 2006. Baker says employer contributions could come under pressure from the cut in maximum deductible contributions announced by the Rudd government in the 2009 Federal Budget. And net transfers resulting from smaller funds rolling into larger funds, which last year contributed 4 per cent of the 10 per cent net inflow, will eventually dry up.
Furthermore, rising costs, the need for scale and bigger and better management teams, and poor investment returns are driving consolidation in the sector. Baker believes funds experiencing slowing or negative growth and upward cost pressure will be forced to raise their fees, and will be unable to keep up with the services that members will increasingly demand. “The sector is starting to mature, the organic growth rate is starting to slow, and the disparity between funds is going to become pretty sharp in the next five years,” he says. “In an environment where you’ve got no growth and rising costs it’s a bit disastrous.
