(Pictured: Warren Chant)
by Greg Bright
Maverick superannuation researcher Warren Chant has stepped up his criticism of the mandatory MySuper default funds for disengaged members with a measured presentation at the Frontier Advisors annual conference. He added that the regulation was favouring retail funds over industry funds.
Chant, the principal of Chant West Financial said: “We have always been critical of MySuper and we still are… MySuper was meant to be a simple low-cost product for disengaged members with greater transparency… No-one in this room would call their fund a simple low-cost product. They are complex and sophisticated.”
About 130 attendees at the conference included fund executives, trustees, managers and Frontier’s consultants.
“What MySuper did was to offer the only way for retail funds to compete by introducing more indexing. Having more passive management is a step backwards,” Chant said.
There were 29 retail MySuper funds, as at March 31, compared with 91 not-for-profit funds, 46 of which were industry funds. But only two of the 29 retail funds had reasonably active portfolios.
“Five of the biggest retail providers are now providing members with inferior products. That’s why we’re critical,” he said.
The actively managed retail funds had an average stated total cost per member of 134bps, but this was misleading, Chant said, and industry funds – all of which are mainly active – should not think they are competing at that price.
The active retail funds were mainly in the corporate space, so very few clients paid the stated rate. In fact, Chant said, the retail funds “loaded up” the administration component of the total fee because that was the easiest from which a discount could be given during negotiations.
“You are not competing against 134bps. You are competing against a much lower price than that,” he said. Frontier has a lot of industry funds among its client base and most of them had senior representatives in the room.
Another problem was that while industry funds on average over most periods delivered about 80bps better performance than retail funds, the comparative advantage no longer held as much weight because of the introduction of MySuper.
“Most of the funds you’re competing against have only been around for six months, so they can dodge that bullet,” he said.
“The good thing about MySuper is the increased transparency on costs. But we [Chant West] haven’t really changed our minds. We think that most people will be worse off.”
Interestingly, retail MySuper funds were much more likely to adopt ‘lifestyle’ strategies for member cohorts, whereby asset allocation becomes more defensive the closer the member gets to retirement. Of the 29 retail funds, 17 had lifestyle strategies. Of the 46 industry funds, only two had lifestyle strategies.
In response to a question from the audience, Chant said he was not endorsing lifestyle products. Chant West was neutral about them.
A criticism of lifestyle strategies is that they are unlikely to factor in anything other than age, although the QSuper MySuper default is generally considered the most sophisticated by taking account also of gender and a proxy for total net wealth, which is the member’s total balance.
Some have argued that, given the average member retires with about $240,000 currently and this would enable him or her to get an old-age pension, lifestyle funds should have much higher allocations to growth assets on retirement. The Government pension has similar characteristics to a Commonwealth bond and its net present value on retirement is slightly more than $240,000 depending on individual life expectancy.
As Don Ezra, the former Russell Investments executive and researcher, has pointed out, 60 per cent of a person’s spending in retirement comes from earnings in retirement. If people understood that, Chant asked, would they de-risk their investments prior to retirement?
Chant said he would like to see more research done on lifecycle funds before he gave them a tick.