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SMSFundamentals: 2022 Fat Cat Funds Report

SMSFundamentals | Oct 19 2022

This story features PLATINUM ASSET MANAGEMENT LIMITED, and other companies. For more info SHARE ANALYSIS: PTM

SMSFundamentals is an ongoing feature series dedicated to providing SMSF trustees with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

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By Rudi Filapek-Vandyck

For ten years now, Stockspot has been publishing an annual review of Australian superannuation funds, with an eagle eye focus on management fees and costs, including ranking the best and worst-performing funds.

The report has been aptly named the Fat Cat Funds Report.

The 2022 Edition marks the tenth annual edition and can be downloaded in full via the following link:

Below are the recent key trends as identified in the 2022 Fat Cat Funds Report.

One other snippet worth repeating:

"Australians can boost their super by around $245,000, on average, between the ages of 35 and 65 simply by moving from a super fund charging investment fees of 0.5% per year instead of 1.5% per year."

Key Trends In 2022

Global financial markets experienced very high volatility in the 2022 financial year.

The first trend we uncovered in this year’s report is that some prominent funds claimed that they are less impacted by the volatility. They put this down to a high amount of their funds being in unlisted assets.

They claim that the valuation of these unlisted assets is not affected by market movements because they are long-term investments.

These funds, therefore, boasted that they had achieved the best super fund performance last financial year.

These funds do not disclose what unlisted assets they hold, what methodology is used to value them or when and how often the unlisted assets are revalued.

For example, Hostplus reported a +1.6% performance in the 2022 financial year for their balanced fund, whilst their peers reported performances averaging -4.7%.

One explanation for this difference could be that some of the unlisted assets in the Hostplus balanced fund have not been revalued to reflect the falls in the listed markets as at June 30.

Anyone contributing to the Hostplus balanced fund could therefore be paying more for their units than a member of a fund which has more listed assets.

Hostplus and IFM, the wholesale fund holding many of the unlisted assets of Hostplus and other industry funds, vigorously defend the lack of disclosure claiming commercial sensitivity. However, industry funds and private equity bought many listed assets such as Sydney Airport and Crown Casino because they believed these assets were undervalued by the market.

The funds were able to make that assessment due to the disclosure required for listed assets. The same standard should be required for unlisted assets so that other potential investors can make their own assessment of the real value of those assets.

The overriding principle is that all super funds should be held accountable to high standards of disclosure and transparency for all of the assets they hold. This protects the rights of millions of Australians whose retirement depends on the integrity of the superannuation industry.

The second major trend coming out of the report for this year is that contrary to common belief, increasing the size of a super fund through mergers does not necessarily lead to better outcomes for members. We found no evidence that larger funds outperform smaller funds.

The performance of merged funds has not improved and, contrary to expectations, management fees for large and merged funds have remained the same or in some cases increased.

Several of the largest super funds in Australia have been increasing their administration and investment fees to members despite growing in scale. This runs counter to the common belief that larger funds achieve economies of scale.

Since investing is zero-sum, any fund that increases its fees puts its members at a disadvantage compared to other funds.

The third trend is that indexed funds continue to outperform active managers. This has been evident in the 10 years that we have published the Fat Cat Funds Report and the reason is simple. Active managers compete against each other, and therefore, as a group, cannot outperform the market.

Former market darlings, like Platinum ((PTM)) and Magellan ((MFG)), have been replaced by new and better-performing fund managers. Super funds and their asset consultants are unable to consistently identify winning managers in advance. What all these fund managers have in common is that they charge high management fees and additional fees for ‘outperformance’.

The safest and most reliable way for most people to invest for the long-term is through low-fee index funds.

Finally, it is encouraging to see that underperforming funds, in part due to high fees, are being closed by regulators. In the coming years we expect that the integrity of the superannuation industry will be increasingly challenged by the obligation of trustees to ensure that they report fund performance based on transparent disclosure of the value of all assets in the fund.

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