Just a moment please, while i don my titanium-lined protection suit…

Members of the super fund industry are particularly sensitive at the moment, so anything that i may say here will undoubtedly be taken incorrectly, misquoted or distorted in some other way. Previous attempts to bring a bit of plain English to the super funds debate has resulted in defensive attacks (if there can be such a thing). Regardless, i am going to push on and continue to discuss the super industry, its various power plays and some of the issues that individual members should look at when trying to gain a greater understanding of their super fund.

Today we are looking at Industry Funds – the group of superannuation funds that have adopted a marketing brand of “Industry Fund” to help market their offerings in a member-choice environment. My methodology is entirely my own, rather bereft of academic rigour in its implementation as it is really just me taking some time to look through the various fund websites in an attempt to compare the investment returns for the 1 year period through to the 30th June 2009.  A reasonable person would expect the Industry Fund website to offer a simple listing that a person could use to quickly gain an insight into how the funds various strategies and decisions have impacted on member accounts in that period – but perhaps i am being unreasonable in making that suggestion…?

Firstly, we need to realise that this is not a homogenous group. Each fund is different from the others. The investment options are different, the fees vary and the service offerings differ. For a list of the funds, visit the Industry Super website. There are 16 super funds mentioned.

Given that there does not seem to be an easily accessible listing for a person armed with little more than Google (let’s face it, the bulk of people will use Google as their first point of reference), we will simply go to each website and see if we can identify the 12 month return to the 30th June. Here is my listing. Simply because of formatting issues, i am placing the return first then the super fund name and then the particular option being measured…

• -13.30% – Australian Super Balanced
• -12.40% – CBus Core Strategy
• -13.10% – Host Plus Balanced
• -12.30% – Hesta Core Pool (Balanced)
• -9.50% – CareSuper Balanced
• -23.98% – MTAA Super Target Return Fund
• -13.37% – LUCRF Super Balanced
• -10.90% – Media Super Balanced
• -13.70% – TWUSuper Balanced
• -12.65% – First Super Growth (Default)
• -9.99% – NGS Super (Diversified – calculated by me from monthly returns so quite possibly not precisely correct)
• -11.90% – AustSafe Super Balanced
• -7.82% – REST Super Core Strategy
• -11.80% – REISuper Balanced
• -13.58% – SPEC Super Balanced
• -12.50% – Legalsuper Moderate (Default)
• -20.745 – Westscheme Trustee’s Selection
• -7.20% – Sunsuper (Balanced but to 31st July 2009)
• -7.71% – Tasplan Balanced
• ? – Meat Industry Employee’s Super – Could not locate returns to the 30th June on website
• -9.93% – Catholic Super Balanced
• -12.39% – BUSS(Q) Balanced

Ok.. what can we deduce from all these figures?

To start with, i have listed 22 funds when there are only 16 listed in the Industry Funds website. Naming groups with public domain words is always going to cause a bit of confusion to the average bystander. Lots of funds are “industry funds” and they may or may not be members of the “Industry Funds” grouping. Again, for the casual observer,  it is all shades of grey. These figures are simply those i have found on the relevant websites. They may be right or they may be wrong – if it is important to you then you should do more research into the relevant fund.

Like most diversified investments, the returns for all funds in the year to 30th June 2009 are negative. This is to be expected. It has been a rather torrid time to be investing for the long term, with traditional “growth” investments such as shares and property showing large drops in prices in a reflection of the global credit squeeze.

Another point of note – and one that i will admit annoys me immensely, is the large divergence of returns. What grates on my financial planner mind is the idea that a marketing campaign can be deemed to be legal or even ethical when it asks the uninformed to compare an “Industry Fund” to an “average retail fund” when that group of Industry Funds can display such diverse returns. It is highly illogical to draw universal conclusions when there is no real agreement on what is the “average” industry fund or what is the “average” retail fund. They really do not exist, and to put the suggestion into the public mind through a massive advertising campaign is, in my opinion, simply wrong. Anyway, off my soapbox i go…

It is clear that something is amiss when we have such a large range of returns. The more extreme variances can be explained rather easily. These funds would generally have a higher exposure to what are called “unlisted” investments.

That is most easily understood if we think of what a “listed” investment is. For our purposes, a listed investment is a share or security that is listed on a stock exchange. That means the price of the investment will be determined by the last sale. It means that the actual value of the investment may not be truly reflected as the price alters with each sale (roughly). For example, BHP’s assets would have a value on their balance sheet based on all sorts of valuations and methodologies. People buy and sell the shares at a higher or lower price to that balance sheet value depending on their impression of the outlook for BHP’s business. Some might sell because they have to and take whatever price is available. Others may set a price limit and wait patiently to see if their preferred price is reached. With large companies that are in demand (like BHP or Telstra etc) there is a high likelihood that on any given day you can sell that share and someone somewhere will buy it. Maybe not at the price you want but it will be able to be sold. That is the point of listed markets – they offer a way of buying and selling parts of a business that would otherwise be very difficult to buy or sell as an entire entity (after all, who has lots of spare billions to buy BHP?).

Now “unlisted” assets are those which are not listed on an exchange. It could include commercial properties (or industrial or retail etc) and it could include operating businesses (such as energy companies, water companies, research companies etc). Clearly it is going to be harder to value those businesses – as we do not know their actual MARKET value on any given day because we are not going to sell them. We may have an idea of what we think it is worth but that does not mean that this is the likely market price. A lot of super funds hold unlisted assets in their portfolios. There are many reasons, and if a fund can be reasonably certain of its cashflow and of not needing to sell those assets quickly to meet member redemptions, then unlisted assets can be very helpful in a portfolio. In 2008, those unlisted assets appeared to hold up very well when compared to their listed equivalents. However, the primary issue here is a timing difference. Sooner or later the value of a business will be the same whether it is listed or not. For example, an electricity transmission business will have a fairly reasonably stable value as its primary business is usually controlled by regulations and the profit is actually built into the price, along with normal capital costs. This can make such a business a very good superannuation asset. However, if that same business is listed on the stock exchange then its price will be impacted by broader market trends and concerns, sometimes leading to a large difference between the share price calculated value and the “real” value of the company. However, sharemarkets eventually return to sanity – and eventually the price of a share in that company will reflect something close to the “real” value. Similarly, if all equivalent listed companies are running at a massive discount to their “real” price then a time is reached where that real price no longer applies – anyone looking to buy a business will logically begin to see that the lower shareprice on the listed business makes it a cheaper buy than the price the unlisted (same company) is suggested as being worth.

So we have seen a period of time where credit has been more scarce. Simply put, it does not really matter whether your business has a debt in it or not – there is less money around for anyone else to buy it, and that is what we have seen with a lot of the unlisted assets held in super funds.

Remember, you must not take these 12 month returns as being anything more than a reflection of current market turbulence, and a fund with a large percentage of unlisted assets may or may not still be applicable to you. This is where you need to do more research or seek advice from someone who can help you with it. If you are with one of those super funds that are impacted then your first port of call would be to contact the fund itself and seek further information on where their specific assets stand. There are inevitably going to be fund-specific issues that are not obvious at first glance.

Industry funds have a lot of advantages. They also benefit from a number of awards that require payment to specific funds – and this can help a super funds’ cashflow which in turn means a reduced chance of having to sell assets in bad times (like last year). They are the ideal vehicle to hold unlisted assets and if such a strategy is carefully implemented and monitored then it should provide stability and comfort for its members.

Obviously, industry funds of just about any sort are very helpful if you do not want any advice, as the fee structure assumes you will receive no advice, and therefore they are usually cheaper than most retail funds you will encounter.

However, dont’ be fooled by ANY comparison between “Industry Funds” as a group and any other group of super funds. The world simply is not that simple and it is highly likely that any such analysis is fundamentally flawed. Be careful when drawing any conclusions. Some retail funds are very competitive even on price, and some employer funds are extremely competitive as the employers have negotiated discounts or rebates with the relevant fund managers.

The ChantWest website is a very good source of information on comparing super funds. There is an update on the site of the 2009 fund returns. Although it is a good update and includes the usual very high level of professionalism and robust research, i would disagree with the overall comment that Industry Funds have outperformed. The reason is that it is comparing “growth” fund returns because those are the ones that most reasonably reflect the higher growth asset (share and property) exposure for most industry funds. However, in my experience the balanced funds are the default funds in most retail offerings, and the uninformed member who doesn’t want to make a selection is generally going to end up there. This is arguably an incorrect comparison, as “balanced” and “growth” funds have different mixes and therefore comparing a growth fund level of asset mix with a balanced fund mix is not really a good thing to do. Again, i am going to get on my soapbox and point to the advertising of the Industry funds which basically suggested that you will simply be better off in an industry fund than in a retail fund. The average industry fund member is in a default fund that has characteristics of a growth fund. The average retail investor in a default fund will be in a balanced fund. For this reason, i see the ChantWest report headline as being just another cloud of fog that the uninformed must negotiate in order to make a valid decision on their super.

For example, an individual who decided that the Industry fund advertising sounded good and who then rolled over a large sum of money from another fund (that may have been a retail fund with listed assets whose price was down at the time) at the beginning of the 2009 financial year would have been paying a very high price for the unlisted assets that their new fund purchased. Again, not all funds have such high exposure to unlisted assets – but the advertising blatantly fails to make this clear with the result that that fund member would have been considerably worse off than they may have been simply leaving their assets where they were.

As usual, feel free to raise any issues that these figures and thoughts may bring to mind.

And remember the golden rule – None of this is advice and you should not act on anything contained in this note without either doing further research or seeking professional advice that takes account of your personal financial situation, goals and objectives.

Also remember that i am a financial planner, and even though i deal with a lot of people with industry super funds, the bulk of people i deal with hold retail funds and the business i am a part owner of earns a fee from this. So feel free to consider me biased (i’d argue that we are not but there is no reason you should listen to me, is there?) and to ignore anything i say or comment on. Use this statement as a basis for going out there and doing more research of your own. Visit an Industry Fund financial planner if you get the urge. Like me, they charge an hourly rate and you are not obligated to act on their advice one way or another. Alternatively, there are a number of “do-it-yourself” sites out there through which you can obtain data (not really information though) and discounted entry to a lot of funds if that is the way you want to go.