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SMSFundamentals: SMAs Hot, Retail Funds Not

SMSFundamentals | Jun 07 2022

The financial services landscape in Australia is changing with recent research showing a swing toward not-for-profit funds, while the popularity of managed accounts continues to rise.

-Australia experiences swing toward not-for-profit funds
-Ongoing rapid growth for managed accounts
-The importance of choosing an investment style

By Mark Woodruff

The swing toward not-for-profit funds

The retirement superannuation market in Australia has seen a major shift toward not-for-profit (NFP) funds, away from retail funds.

Analysis by Rainmaker International, a provider of research and information about the Australian financial services industry, shows NFP funds held 57% of all retiree funds under management (FUM) as at June 2021, while retail funds held 43%, down from 66% in 2015.

Attractions of the NFP funds include traditionally lower fees and simpler products, as well as significant performance benefits (which have evened out more recently), explains Alex Dunnin from Rainmaker.

The research company defines retirees as super fund members aged 65 or older. While retirees hold just one in ten member accounts, high superannuation balances explain how so few accounts comprise around one-quarter of the total money managed by super funds.

As two-thirds of all fees paid by fund members through their entire superannuation life will be spent after retirement, the retiree segment is the most lucrative for wealth management services providers that operate superannuation funds.

The ten largest funds in terms of retiree FUM account for two thirds of the market. The five largest funds for retirement superannuation are:

Managed accounts platforms within Australia's platform market

Following an analysis of data released by the Institute of Managed Account Professionals (IMAP) industry association, Rainmaker notes managed account platforms have continued their rapid growth.

Funds under administration (FUA) have increased by almost 50% per year in the last three years alone. In 2021, there was an 81% increase in FUA, fueled by strong market returns, inflows and platforms restructuring to include managed accounts functionality, reports the researcher.

Were it not for managed accounts, FUA on financial platforms would be growing at only half the current rate, with Rainmaker research showing the entire platform market in Australia is now holding $876bn, up from $721bn at 31 December, 2021.

While the share of managed accounts in the wrap platform segment had ballooned to 85% from 10% between December 2017 and 2021, Rainmaker notes a large part of the managed account growth was due to the migration of the BT Wrap platform onto BT Panorama in 2021.

Drilling down into the managed accounts market at the end of 2021, Rainmaker notes separately managed accounts (SMA's), an investment option also known as model portfolios, had a 52% market share.

These SMA’s are exhibiting double the growth of managed discretionary accounts (MDA’s), which are bespoke managed accounts assembled for exclusive use by financial planning groups and their private clients. 

Rainmaker's Dunnin explains, “SMAs are taking over from MDAs because they are easier for financial advisers to offer to their clients, requiring less complex regulation”.

MDA’s had a 40% market share, while the 8% balance related to investor-directed portfolio services (IDPS) wrap investment schemes.

The importance of style, when choosing your superfund

As measured by the MSCI World style indices, the first two months of 2022 combined exhibited the largest historical outperformance of the Value style of investing over the Growth style.

After conditions conducive to Growth over the last number of years, Rainmaker Information attributes the swing toward Value to inflationary concerns combined with the Russia/Ukraine conflict.

Following analysis of results earned by international equities options in super funds, John Dyall, Rainmaker’s head of investment research, points out that “leaning into one investment style over another has real world consequences for super fund members, particularly when market investment styles change direction.”

Rainmaker defines Value investing as a style adopted by portfolio managers who prefer to carefully pick and choose the stocks into which they invest based on detailed company specific analysis. This contrasts with Growth investing that is reliant upon market momentum for companies with fast rising share prices in an upbeat expanding economy.

Dyall suggests "Super funds that persevere with the wrong investment style, or that are too slow to adapt to changing investment style market conditions, could be costing the superannuation funds, and their fund members many millions of dollars in foregone investment returns.”

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