Hidden Risks of Industry Funds - 15th June 2009
One part of the article which I was a bit surprised but pleased to see was a discussion of the hidden risks of industry funds. Over the past few years it has been hard to miss the strong marketing push by industry super funds focussing on the issues of low costs, non-profit structure, and no commissions to advisers. All of these are great and good reasons for basing your decision on which super fund to choose. Another element of the recent marketing campaign has been the out-performance of these style of super funds compared to retail funds offered by profit-driven organisations. Because in the end this is what it comes down to, which fund is going to provide the best return after fees. Up until the most recent data, industry funds have led the pack. But as the Choice article reports, the public need to be careful before jumping across to an industry super fund in the chase for better returns. The reason for this is the potential problem surrounding unlisted assets. The following is the particular section of the article relating to unlisted assets:
Are the returns reported by not-for-profit industry funds really as strong as we're led to believe?
When Chant West consultants looked at the performance of "growth" funds, which have between 61%-80% in property and shares, it found industry funds reported 6% higher returns than retail funds in 2008. One theory, which is now being examined by the regulator APRA, is that the rosy returns could be propped up by industry funds' heavy investment in direct property, unlisted infrastructure and private equity.
As unlisted property is valued every three months at best, industry funds' 2008 figures may not reflect the full extent of the commercial property market's slump. In contrast, retail funds invest in property trusts listed on the Australian Securities Exchange - the value of trusts changes every day (although the trusts' underlying property investments are less regularly appraised).
Industry Fund Services, a group representing the industry funds, defends the figures, claiming listed property trusts tend to be more highly leveraged (they borrow more) with an additional layer of fees. "Often their investors have sought to sell their holding, further pushing the price down," says a spokesman. "That's not the case with unlisted property, where several industry funds group together to buy a property for a long term."
Others, including Stephen Bartholomeusz from Business Spectator have commented on the looming problem - see A Super Discrepancy and it is one I think superannuation members should be fully aware. As the article suggests, unlisted assets may have held up better through 2008 but to say that there was very little downward movement in prices would seem to be extremely optimistic.
The greatest concern is for those considering jumping into an industry fund as depending on their choice they face purchasing units which have inflated prices for these unlisted assets. Therefore if you have experienced the tough conditions of 2008 and the beginning of 2009 through using listed assets and now decide to make the move to a fund which holds a large amount of unlisted assets you face experiencing worse than average returns compared to what you would experience from staying with the listed assets.
Please don't take this as a criticism of all industry super funds. There are a number of industry funds which are low cost plus do not provide large exposures to unlisted assets or at least give you the choice if you do not want that exposure. The key point is to take care if you are thinking about moving to another super fund. Make sure you research the underlying investment approach so that you protect against jumping out of the frying pan and in to the fire.