Along comes Super Fund Performance, a report from the Australian superannuation industry, to say "yes, it is possible to identify with considerable confidence which funds will continue to out- or under-perform". The key differentiator: whether the funds are retail for-profit offerings or not-for-profit (sponsored by public sector, corporate or industry). Not-for-profit has been winning, and by a huge amount - an average of 2% per year for the past 15 years!
Below is a fascinating chart from the study. Especially interesting is that the not-for-profits always did better than the retail for-profit funds. It looks like a sure-fire way for Australians to narrow down retirement fund selection. Too bad the not-for-profit option doesn't exist in Canada and it doesn't look like pension reform via the government's PRPP proposal will change that soon.....
Why the out-performance?
- lower fees/costs - the report doesn't state the difference but a quick search in one comparison website, the Canstar Superannuation Star Ratings, shows MER ranges from about 0.4% at the very low end to 2.5% at the extreme high end. The big not-for-profit funds look to be in the 0.6-0.8% Total Expense Ratio range according to another comparison site, Selecting Super.
- economies of scale, but only among the not-for-profit funds; retail funds don't get any more efficient with size, which the report says is due to governance factors - "... either economies of scale are not available to retail funds, or the benefits are not passed on to members".
- embedded advice - the for-profit riposte is that their members get financial planning advice much more than clients of the not-for-profits, about twice as often according to Canstar. Investor Daily reporter Wouter Klijin says the not-for-profits are increasingly gearing up to provide advice, which he says will increase their costs and possibly/probably lessen their out-performance down the road. A big question is, of course, how useful the advice is, whether it is merely sales or client-interest-first, depending on the source. From which type of outfit would I want "advice"? That's a pretty easy call I'd say.
- Winner funds keep winning if, a) the fund investment manager stays on and b) there is NOT high fund inflow
- Losers start doing a lot better if, a) the investment fund manager is sacked and, b) there is a high fund outflow