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SMSFundamentals: Fat Cat Superannuation Funds Feed Off Fees

SMSFundamentals | Oct 04 2019

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Fat Cat Superannuation Funds Feed Off Fees

A new report reveals what investors may already know, that "fees make all the difference" to final outcomes for superannuation members' retirement savings, with many funds struggling to generate returns strong enough to cover the negative impact of high investment fees.

Investors reap the best returns when super funds charge less than 1% in fees
-QSuper and UniSuper claim the largest numbers of low-fee, high-return funds
-ANZ and AMP own the largest numbers of high-fee, low-return super funds
-Index funds on average beat 90% of super funds.

By Nicki Bourlioufas

The 2019 research, Fat Cat Funds Report 2019 from investment adviser, finds the best-performing superannuation funds charge less than 1% in investment fees. Stockpot calls these top performers the ‘Fit Cat Funds’. This year they were led by QSuper and UniSuper. By contrast, the worst-performing funds charge average fees of more than 2%. This year these ‘Fat Cat Funds’ were led by ANZ Bank ((ANZ)) and AMP ((AMP)).

To come up with its ratings, Stockpot analysed 600 of Australia’s largest superannuation funds to find the best and worst performing funds. It then ranked the funds on how they performed after fees over five years, compared to other funds in the same asset category.

Super members come out best when fees less than 1% 

High fees affect everyone, regardless of their age or stage. A member of a superannuation fund that charges less than 1% in investment fees would be $200,000 better off at the end of their working life than someone in a fund that charges 2%, the report found.

The people worst affected will be those now aged in their 20s and 30s who have more years of work ahead of them. However, people nearing retirement are also badly affected by fees. Although their investment strategies usually become more conservative, and thus fees drop, the larger size of their portfolios means they are losing a big slice of their returns. 

Across the industry, superannuation funds charged the highest fees for aggressive funds, followed by growth, balanced and moderate risk funds. However, the total average fee charged across these four categories by the best-performing funds – the Fit Cats – was less than half that charged by the worst-performing funds – the Fat Cats. 

The Fit Cats charged a total average fee of 0.93% across the four risk categories – 1.08% for aggressive management, 1.01% for growth funds, 0.82% for balanced and 0.81% for moderate risk funds.

The Fat Cats charged a total average fee of 2.07% across the categories – 2.61% for aggressive, 2.38% for growth, 1.79% for balanced and 1.5% for moderate.

“Our analysis shows that there is approximately $7 billion sitting in the largest 40 Fat Cat Funds, costing Australians $150 million in fees every year!” Stockpot says.

ANZ and AMP the worst of the Fat Cat Fund managers

ANZ/OnePath topped the list of Fat Cat Funds for the seventh year running, Stockpot says, being responsible for 11 out of the 40 worst funds.  ANZ shares the honours with AMP, which also had 11 Fat Cat Funds. As well, Stockpot gave Fat Cat Fund ratings to four Perpetual funds, three MLC funds and three Zurich superannuation funds.

By contrast, Stockpot gave its Gold Fit Cat Fund Award to QSuper, which manages nine Fit Cat Funds. QSuper manages $100 billion in superannuation investments.

The Silver Fit Cat Fund award went to UniSuper, which won gold in 2018. Bronze went to AustralianSuper, which has four Fit Cat Funds. AustralianSuper is the country’s largest with $160 billion under management for 2.2 million members.

“Despite having different investment strategies, the one factor these three funds all had in common was investment fees of well under 1%,” Stockpot says. “Every Fit Cat Fund had fees of less than 1% with an average fee of 0.76%.”

Indexing the answer to high fee drag on member returns 

Stockpot argues superannuation funds should use indexing investing, noting the “index funds on average beat 90% of super funds”.

“Investing is one of the few places where the more you pay, the less you get,” the report says.

“Because indexed portfolios are low cost, they beat almost all higher cost funds over the long run,” the report says.

Investing in an index means buying shares in all companies that make up that index, in the same proportion. This passive investment strategy aims to mimic, or replicate, the performance of the index.

Stockpot argues that superannuation managers choose not to index because of conflicts of interest that remain despite several government inquiries into the financial services industry.

“All of the players in the super game have a vested interest to appear to be ‘active’ in making adjustments to their recommendations from year to year,” the report says. “Consultants to superannuation funds want to earn recurring fees, and fund managers need a reason to justify their high six or seven figure salaries.” bills itself as “Australia’s most experienced investment adviser”, established with the aim of doing away with the “high fees, confusing jargon, endless paperwork and lack of transparency” that give the wealth management industry “a bad name”.   

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