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Cuffelinks Newsletter Edition 256

  •   1 June 2018
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Another week, another headline-grabbing slam on our superannuation system. According to Mercer's Global Pension Index, Australia has the third best system in the world behind only Denmark and The Netherlands. Gosh, the others must be terrible when the Productivity Commission says,

"Structural flaws - unintended multiple accounts and entrenched underperformers - harm a significant number of members, and regressively so. Rivalry between funds in the default segment is superficial and there are signs of unhealthy competition in the choice segment (including the proliferation of over 40,000 products)."

The Draft Report Overview runs to a hefty 571 pages so we have reproduced the Executive Summary here. It recommends that anyone should "only ever be allocated to a default product once, upon entering the workforce". The fund will be selected from a 'best in show' shortlist of 10. The problem here is that fund performance varies over time according to risk exposure, styles that deliver in certain types of markets, portfolio manager changes, etc. This year's top quartile fund is often next year's bottom, and the 'expert panel' chosen to select the funds will have many factors to juggle and overcome personal preferences. For example, a check on the Top 10 cheapest funds and the Top 10 best performers over the last three years shows no fund on both lists.  


Watch the hand-wringing when a 'best in show' fund has a poor year, with complex justifications for a 15-year-old stacking shelves in a supermarket who chose the fund for the rest of their life.

The Commission has observed some funds underperform over many years and the results are not fully explained by size, asset allocation or costs. One-third of funds do not beat their benchmark. A typical worker with a bottom quartile fund will retire with 53% more if they had invested in the top quartile. Here's the MySuper fund distribution:    

Productivity Commission Report, Individual funds with MySuper products, 2005 to 2016.

Size of circle indicates size of each fund's assets under management. PC Draft Report, page 11.

Unfortunately, it's not possible to backdate an investment into the top quartile fund, and guess what ... 25% of funds will always be in the bottom quartile! However, the vision to drive default super into low fees and high performance should at least lead to consolidation and greater competition. 

On the Productivity Commission, Amber Moncrieff implores women in particular to sort out their super, and Michelle Grattan explains why young people will have important choices to make.

Royal Commission: Be careful what you wish for

Banks are big and ugly and fair game, but like the Westminster political system, it looks bad until you consider the alternatives. From Round 1, do we really want to close the choices offered by mortgage brokers? From Round 2, do we really want banks to stop offering financial advice to their customers, and instead send them around the corner to an 'independent' adviser? From Round 3, do we really want the banks to stop or reduce lending to small businesses?

Go too far with bank regulation and a shadow industry will blossom, much of it not subject to proper scrutiny. Sure, there are plans to have non-banks report to APRA, but they will not carry the capital base or disclosure requirements of banks. These non-banks have less reliable sources of funding than the majors, and as Jonathan Rochford shows, financial markets are at a vulnerable time in the credit cycle after high yield debt has benefitted from many years of complacent liquidity. This at a time when more investors are using private debt for their interest exposure, and Mike Davis describes the development of this sector.

Don't sell your home to downsize yet

Last weekend, I went to sticky beak a house auction in a neighbouring street, only to be told by the agent that the auction would be delayed until the new financial year. The owners intend placing some of the proceeds into super under the new downsizer rules, but found out from their accountant the night before that the contract for sale must be exchanged after 1 July 2018.  

Managing portfolios and SMSF membership 

Noel Whittaker takes a swipe at Labor's franking proposals, failure to address super shortfalls for women and taxes on the rich. Our interview with global multi-sector manager, Pilar Gomez-Bravo, was a wide-ranging exploration of how she follows a vast range of markets in creating portfolios. Graeme Forster demonstrates that it's sometimes necessary for a fund manager to stand against even their own colleagues when convinced a company is a good buy. 

Raewyn Williams reports on her research into a little known subject, the extra costs that different types of fund managers incur. These expenses are passed on to end investors making the job of outperforming the index even more challenging. And Graeme Colley looks at the change in SMSF member limit from four to six and who benefits.
   
This week's White Paper from Folkestone's Adrian Harrington is his slide presentation from the Australian Shareholders' Association conference on the current real estate opportunities. 

Graham Hand, Managing Editor

 

Edition 256 | 1 Jun 2018 | Editorial | Newsletter

 


 

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