Industry funds may struggle to outperform retail competitors in the future, with the ongoing effect of regulatory changes gradually breaking down their stranglehold on mandated contributions.
Under the current Coalition Government policy, there is the potential for any MySuper product to become eligible to receive mandated contributions.
According to Tria Investment Partners managing director Andrew Baker, a serious challenge to industry fund dominance is still several years off but there are other factors to consider.
The unbundling of advice costs in a Future of Financial Advice environment, as well as the cut to portfolio costs thanks to MySuper, has meant the lower costs associated with industry funds are slowly disappearing.
“Indeed retail may prove lower cost in some cases going forward,” Baker said.
In relation to exposure on unlisted assets, he said it could be argued that industry funds were only able to take on large illiquid positions due to large net inflows guaranteed from mandatory contributions.
“If retail funds had been able to compete for those contributions, they would have enjoyed more secure net inflow positions, and may have taken on higher illiquid exposures, increasing returns to their members,” Baker said.
Equally, open competition for contributions may have resulted in less secure net inflow positions, thus leading to lower illiquid exposures and potentially lower returns as an industry, he added.
“The really interesting question is, having enjoyed the advantage of large net cash inflows for a number of years, have industry funds outperformed as much as they should have?” Baker said.
“Those net cash flows are now eroding as fund memberships mature and age, and higher balance members look to SMSFs; some smaller industry funds are already finding themselves constrained in their illiquid exposures.”
