Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Chant West puts the record straight on super
In an attempt to de-politicise the increasingly tense debate around the future of super, research group Chant West has published a summary of its views across a range of recently raised questions and ill-informed commentary.
Chant West, which last year had a changing of the guard with the takeover by Zenith Investment Partners, produced a statement for the media last week (January 28) under the heading: ‘Recent comments about super need fact-based response’.
Ian Fryer, Chant West general manager, former head of research and long-time employee, said: “Some recent comments from Federal Government members and Treasury’s budget papers on super questioning the merit of Australia’s super system call for a clear response based on facts, not one based on sentiment or ideology.”
He said no-one was questioning the need to improve some aspects of the super system, but the Government needed to ensure the issues were addressed in a way that did not simply create other problems for funds or, more importantly, for fund members.
“Some of the recent critical commentary on super doesn’t seem to align with the facts,” he said. “If we look at the relevant data to validate that commentary, it tells a very different story.”
Fryer covered five main points, addressing headlines prompted by claims from politicians and varyingly inspired commentators, which he felt should not go unaddressed. They were:
- “Our super system is a failure, it makes people worse off”
The long-term performance of the median super fund has far outstripped typical return objectives – a return of 8 per cent a year since the introduction of compulsory super in 1992. This is an outstanding outcome and much greater than the typical return objective of CPI plus 3.5 per cent (i.e. 5.8 per cent a year since 1992).
“Even when you look at the past 20 years, which includes three major share market downturns, the median growth fund has returned 6.3 per cent a year, which is still ahead of the typical real return objective. And these returns have been delivered through a concessionally taxed system that adds even greater value for members,” Fryer says
- “Owning a home is the best, fastest path to financial security in retirement”
Not surprisingly, the Retirement Income Review recognised that owning a home should be done in conjunction with super savings. However, Fryer warns that focussing solely on housing for retirement adequacy will lead to many more asset-rich but income-poor retirees.
“I think the super industry has a role to play in helping members better understand how home ownership and super can work together to achieve financial security in retirement,” he says.
- “Costs incurred by Australian super funds are some of the highest in the OECD”
The latest OECD data (2018) shows Australia’s administration costs, at 0.4 per cent of assets, is on par with other leading retirement income systems such as Canada, Denmark and Finland. But any comparison of fees across systems must be treated with great caution, Fryer says. Further, the Australian super system is consistently ranked in the top five systems in the world in the Mercer CFA Institute Global Pension Index. During 2020, it was ranked 4th.
- “There’s been a 13.6 per cent increase in the average MySuper fee on a $50,000 balance since 2014”
This claim is “a bit disingenuous”, Fryer says, as it ignores the introduction of a new fee disclosure regime in 2017 that required the disclosure of a wider range of costs than required previously. When we account for the change in disclosure requirements, administration fees are the same as 2014 and investment fees have actually fallen by 12-15 per cent since 2014.
- “$30 billion was paid last year in super fees, more than the $27 billion on electricity bills, $12 billion on water bills”
Can super fees be reduced? Yes. Are they reducing? Yes, they are. And recent APRA initiatives to reduce the number of funds and increase transparency should keep pushing fees down, Fryer says. “However, it’s always dangerous to simply look at the cost of any service without considering the benefits it generates.”
What benefits do super funds generate? For the year to September 2020, APRA-regulated funds, which represent about two-thirds of fund assets, accepted $120 billion in contributions, paid out $110 billion to members and typically generate over $100 billion in investment income each year (after investment fees and costs have been deducted). “The benefits generated by the super industry are far greater than the costs incurred,” Fryer says.
Acknowledging that there are some issues in the sector that need to be addressed, he remains concerned that this dialogue can destroy both confidence in the super system and engagement of everyday Australians with their retirement savings.
“This can only be bad for members and the long-term prospects of the whole retirement income system. We absolutely need to address issues to make the system work better but not in a way that seems to keep communicating that super is bad.”
