Fees to blame for lower net return in retail funds: APRA

The Australian Prudential Regulation Authority (APRA) has released its comparison of retail and industry funds, and industry funds have come out on top.

The review examined the performance of large APRA-regulated superannuation funds between July 1, 2001, and June 30, 2006. APRA said the aim of the research was to understand the differences in net returns across different superannuation fund types.

When the regulator compared the balanced or growth investment options in retail and industry funds, retail funds were found to generate significantly lower net returns on average.

APRA found that “while some retail funds earned relatively high net returns and some not-for-profit funds earned relatively low net returns over the five-year period, retail trustees using balanced or growth investment strategies for default investment options generated significantly lower net returns on average than not-for-profit trustees using balanced or growth investment strategies”.

And APRA said fees are to blame. The study found that the main component of differences in net returns between fund types is expenses.

“Retail fund expenses, explicit and embedded, lower the net earnings of the retail sector relative to the not-for-profit sector,” APRA said.

The study examined the net return and fees for an investor with a $50,000 starting balance in each fund type.

“This confirmed the net underperformance of retail funds compared with not-for-profit funds and showed that retails funds have higher fees (annual, entry and exit) than other fund types on average.”

The APRA research found that while there are few “statistically significant differences” in returns between corporate, public sector and industry funds, retail funds “sometimes displayed significant differences when compared to the other fund types”.

“The research examined the components of net returns to determine the main drivers of differences in average net returns across corporate, public sector, industry and retail superannuation funds over the five-year period,” the APRA statement said.

The components examined were asset allocation, investment manager skill, fees, investment expenses and taxes.

APRA said its study found that neither asset allocation nor investment manager skill explained differences in net returns between fund types.

APRA deputy chairman Ross Jones said the regulator surveyed trustees to gather detailed data on funds. The study examined a representative sample of 90 corporate, industry, public sector and retail superannuation funds, each with more than $200 million in assets at June 30, 2005.