No certainty industry funds out-perform says CFS

20 July 2018

The involvement of financial advisers and the higher proportion of older members in retail superannuation funds makes seeking to compare retail fund performance with that of industry funds a complex exercise, according to Colonial First State (CFS).

In a submission filed with the Productivity Commission (PC), CFS said it backed the views of Australian Prudential Regulation Authority (APRA) deputy chair, Helen Rowell that average sector-to-sector superannuation data was not meaningful.

CFS pointed out that the PC deputy chair, Karen Chester had herself questioned the validity of suggesting that industry funds had consistently outperformed bank-owned super funds.

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“The returns on superannuation depend on the assets and investment mix of the fund and how those investments perform over time,” it said. “Retail funds such as CFS have a much higher proportion of older members who are more conservatively invested, which means that, compared to funds with younger members, they will have lower returns over the long term.”

“Further, aggregate retail fund asset allocations are driven mainly by financial adviser recommendations which are in turn determined by a member’s needs and objectives, and tolerance for risk,” CFS said. “Hence the fund asset allocation is a product of thousands of decisions made by investors and their advisers when they are constructing their own asset allocation based on their individual circumstances.”

“It is therefore meaningless to compare fund or sector level returns,” the CFS submission said.

It said that while the Productivity Commission had sought to adjust the APRA performance data in order to compare returns, CFS believed that this had required too many assumptions and that the resultant comparisons were not appropriate or meaningful.

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Finally, a journalist who calls the BS out. Apples aren't oranges ISA...

Well said Walker........I think ISA just call it all " fruit " matter what colour it is, where it is grown or how it is eaten.

Thanks for the belly laugh.
Quite simply look at the actual returns CFS and other bank owned funds achieved over any time period you choose. Facts are quite inconvenient arent they.

Utter nonsense. I use a bank retail super fund for my clients and returns on my model portfolios have been on par, if not higher than most industry funds. It’s amazing what happens when you shift the needle to infra assets and ride a bull market. Wait for property prices and commercial yields to flatten and fall, that 30% in unlisted and private equity that Host holds will be slayed.

Felix, interested in how you reconcile your and like comments that the sky will fall, etc, etc. against actual evidence of the major industry funds outperformance over periods out to 20 years. Then again, I suppose a broken clock is right twice a day,

You're obviously yet another ISA troll, supping on the union teet from members funds. Or else Heddy using another name.

The "compare the pair" campaign is a brilliant marketing exercise. It takes a flawed concept and promotes it until it becomes so entrenched that everyone assumes it to be true.

If you want proof - just try to "compare the pair" when your comparison is between two industry funds. The tools are not there to do so. The entire argument is falsely framed as "industry funds" versus "retail funds", which is so completely bogus a concept as to be laughable. Yet it continues to be peddled, and to be virtually an accepted truth.

Fees are the other foolishness that is paraded as a "no brainer". Industry funds are rarely the cheapest funds, yet somehow this untruth continues. I'm not suggesting that fees aren't important but any honest comparison will show they are only one component of total returns to members.

However, for all of that, there is no doubt that (some) industry funds have done a brilliant job of helping their non-involved members obtain excellent returns in relatively simple super accounts.

Using Australian Super as an example, it has shown fantastic returns for its "Balanced" fund for the year to 30th June. Yet comparisons with other "balanced" funds are usually inaccurate, owing to the weirdly fantastical ability to call just about any asset or strategy mix, "balanced". If you take individual investment options from a retail fund and add in the asset allocation from Australian Super, you will find you can replicate the Australian Super returns quite readily.

Industry funds hold a near oligopolic control over superannuation cashflows through award provisions. This provides their funds with extremely valuable positive cashflow, which benefits members in many ways, including returns. The benefits of reliably positive cashflows cannot be overstated when looking at its influence on returns.

While it is true that the compare-the-pair concept is flawed, it is also true that many (but not all) industry funds SHOULD outperform, owing to their incumbent strengths. What surprises me is just how little the outperformance actually turns out to be when you genuinely compare the pair. I would have expected a far higher level of outperformance than actually exists.

So when you are bored one day, spend an hour or two comparing-the-pair using the various funds labelled as "Industry Funds". That exercise alone, will convince you that the now-standard comparisons of super funds are fatally flawed.

Next CFS will be asking that its expensive fees be excluded from the performance comparison of retails vs industry funds. Very Yes Minister.

The myriad varieties of financial products all being offered by the retail funds and with each having its grub wanting to take its bit from clients.

Yes Hedware....Superannuation fund management and advice should be free shouldn't it !!

Still waiting on your replies to my queries comrade Hed. Until you provide them, your comments here are uselessly biased and inane.

The industry balanced options are rarely very balanced.
Host plus for example;
Growth assets as per SAA Benchmark -76%
Aussie shares - 25%
International shares - 28%
Private equity - 6%
Infrastructure - 7%
Property - 4%
Other (Credit and Alternatives) - 6%

Defensive -24%
Infrastructure - 5% (apparently both a growth and defensive asset)
Property - 9% (apparently both a growth and defensive asset)
Fixed income 2%
Cash - 0%

This points to a VERY growthy + risk tolerant profile!

Also in the defensive was other 8%

Credit - 6% and Alternatives 2%

Depends on who is making the definition of 'balanced'. The above asset allocation example seems a reasonable in terms of current and anticipated global and Australian economic conditions, diversification of risk, management of volatility, potential return on capital and overall income sources. Cash might be a bit low, but presumably some of the funds invested can be made liquid in a short time if need be. Infrastructure, being long run is both growth and defensive. Likewise property allocations can be designed to be both given a spread across property types.

This allocation would not be out of place in a retail fund setting and one that a good independent financial advisor might suggest to his or her clients.

get're showing your inexperience here. those so called defensive assets are all subject to market fluctuations, currency risk, legislative risk, interest rate risk etc etc and should in no way at all be classified as "defensive". You've got rocks in your head if you think an unlisted infrastructure investment should be in the same category as defensive investments. It's just misleading, wrong and incorrect.

Really? With share market valuations stretched to record levels you think turning the blowtorch up to extreme and doubling down on equities is a good idea? Wow, clearly you aren’t a client facing adviser or one with any investment qualifications whatsoever. I’ll be sure to remind you of that next time you purport to be the true north of the moral compass.

No I am more the economist and so take a broader view of economic, industry and business conditions than many financial advisers. Financial advisers report to me and not the other way around. That's why I like professional independent financial advisors.

The whole business of bundling financial products into growth and defensive is a bit of a con as it is just a easy form of packaging to give planners a lazy day.

Interesting comment. So how do you ensure that a clients risk appetite is met? Defensive assets are exactly that - intended to get some return but their real position is to not decline in value in market downturns. Are you saying you read the economic conditions and adjust the risk of a portfolio based on your view of the positive/negative signs of the cycle? Sounds like your crystal ball must be perfect so as your clients are not exposed to risks they didn't accept.

The global economies, their industries, their businesses determine the income and capital value of those investment assets for those financial products you recommend. There's a lot wrapped up in economies, industries and businesses that is too much to cover here.

I appreciate your comment re clients' interests. You mentioned risks but I assume you take into account many other factors in your clients' lives and circumstances. That's what we expect of good financial advisors. I expect financial advisors to question economic and business forecasts. I expect financial advisors to read the goings on in politics, regulations, taxations to be able to assess potential impact on their clients.

I am saying that portfolios need to be adjusted in their holdings to meet economic and business cycles ups and downs and to reduce volatility and risk to the portfolio. Businesses work on anticipation and so should investors. I am not saying that clients' portfolios need frequent adjustments otherwise they lose by paying out fees (high in Australia compared to other developed economies).

Re your last sentence - risk is a whole topic in itself. There's good risk and there's bad risk. Just like opportunity costs.

To be positive about this, there are some very good financial advisors out there and who have done their clients well at reasonable rates and within the bounds of legalities.

The problem is this, most clients accept that the risk settings they agree to are 20 years plus and adjusted for major changes in life, that's why fixed strategic asset allocation remains an acceptable strategy. They are designed to take out business cycles, i.e. they operate across several business cycles. Then along comes DAA, implemented by shorter term asset allocators/economists suggesting it is possible to read the tea leaves and adjust. The jury is very much out on this as the it introduces additional risk, that is key man risk - i.e. the person making the calls getting wrong. But at least we know what your operational style is. Interesting you defend the Industry funds which is fine, but most of them hold SAA at high levels of risk, assuming near perfect foresight on the next few years.

I agree with your approach of a long term strategy with intermediate tactical adjustments accounting for economic activity, inflation rate et al. I have come across too many financial advisers who can't see past the financial products on offer to look into what those financial products are investing. Knowing the business as Buffett says.
There's plenty of managers of active funds that also don't have perfect foresight despite charging for that 'perfect foresight'.
I am not defending industry funds; I want retail funds to do better which is my interest. I thought the example of asset allocation spread was interesting particularly no cash and minimal fixed interest but then 2-3% is not much, other investments can be easily liquidated if necessary, and income stream probably higher than from cash.

Economists merely provide 'noise' which confuses clients. I've never seen an economist forecast anything correctly. If they could forecast accurately they wouldn't need to work.

Hedware, you are too priceless!

Adviser report to you do they Hedware, wowsers lucky things. The economist hey, that's nice for you, whats your outlook.... bottom up? You do know products are split into growth and defensive for a reason? To look after clients needs and objectives? How do you get that being lazy?? Once again you think planning is just superannuation , its a lot more than that, your reportees should be able to point that out to you.

another words you've never sat across from Mum or Dad. Never had to hand hold a client through a market downturn. That explains a lot. Seems like you're happy to throw stones from the cheap seats.

CFS suggests "Retail funds such as CFS have a much higher proportion of older members who are more conservatively invested..." (than members of industry funds). Any views on this statement?

Given the large populations in both retail and industry funds, then on a statistical basis, the age spread should settle into being reasonably similar for both types of funds.

Hedware, if your focus is on economics, then you may not have appreciated that industry funds have generally tended to keep the franking credits from pension phase members and share them proportionally with both accumulation and pension phase members, where retail funds generally apply the franking credits generated by a member to that members account (only). So you'd have to have rocks in your head to be in an industry fund pension account and giving away "your" franking credits to boost the returns of accumulation members. This is just one more reason why there are more pension account holders in retail funds, and why industry funds seem like they generate better returns under simplistic examinations.

LTC, Hedware isn't interested in facts especially those that may show issue with his illusions of the oh-so-infallible ISA funds. Every comment he make son here is blatantly biased pro-ISA and anti-retail or banking. I have posed several time quite telling queries on his opinions on all the known ISA problems, flaws and downright dishonesty and he avoids answering like the plague. He is obviously their troll through and through.

Well said..most advisers are using a mix of investments, a combination of active and passive managers, mutli-managers and single sector funds..all done to suit the clients needs. I've got records going back 18 years and my clients have outperformed industry super funds and standard retail funds using the Colonial First State mix of investments. 110% agree with the article.

Yes CFS has a good track record I am pleased to say.

The "Compare the Pair " campaign has been nothing but a con.....allowed to run uncontrolled, unsupervised for far too long.
It's just a fake marketing tool like the much of the food industry.
" Low in sugar"...." Low in fat".......compared to what ???
Industry Funds are the fast food drive-thru of the superannuation space........they run relentless and repetitive simplified advertisements appearing to be cheap, but when you analyse exactly what you are getting behind the glossy
visual, after a while it doesn't taste that good and too much of isn't good for you.

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