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Apples to apples comparison

Beware ‘apples with apples’ super comparisons

If superannuation funds’ investment performance is to be compared on an “apples with apples” basis there are several key points to consider, according to researcher Rainmaker Information.

This week Australian Prudential Regulation Authority (APRA) member Helen Rowell told an Australian Institute of Superannuation Trustees (AIST) Governance Ideas Exchange Forum that on a number of occasions in the last few years she has “noted that comparisons of investment performance at fund level is not comparing apples with apples.”

Super funds’ investment performance has been a key issue in the debate on proposed changes to super board governance, particularly between retail and industry funds.

Rowell said a more meaningful “apples with apples” comparison is provided if the investment performance for only default assets, or specific similar choice investment options, is considered. She added it is most meaningful to focus on performance against objectives over the long term.

But Rainmaker Information said APRA and other people critical of performance comparisons need to remind themselves what choosing a default MySuper product actually means.

Rainmaker said some critics of performance comparisons use commentary about risk-adjusted returns to explain post-hoc why they underperformed other default funds in the market rather than to explain why they have deliberately chosen very conservative strategies.

For example, the top performing MySuper products in 2014-15 earned 12% but the lowest performing MySuper products earned half that, or 6%.

Rainmaker said that these performance gaps are many times the fee differentials forces the question of whether members are fully aware they are selecting such conservative investment strategies.

This focus on MySuper default products is crucial because the segment accounts for about 33% of the assets held by APRA regulated funds.

In her presentation, Rowell pointed out the proportion of assets in default products versus choice products differs significantly by fund type. She said default assets represent 65% of all assets for industry funds, compared to 17% of all assets for retail funds.

“That means the investment strategy for 83% of the assets of retail funds is chosen by the members, and the asset allocation – and hence investment performance – at fund level substantially reflects the aggregate of the individual decisions made by the choice members,” Rowell said.

Rainmaker Information is part of the Rainmaker Group which owns Financial Standard.

[via Financial Standard]

CANSTAR Account Based Pensions 2015

OneAnswer Frontier caps off an award winning year

OneAnswer Frontier kicked off 2015 by taking out the SelectingSuper Personal Super Product of the Year — Premium Choice Award, and the Innovation — Product Development Award.

OneAnswer Frontier was specifically chosen for its market-leading product functionality, simplicity and range of investment and insurance solutions, at fees well below many of its peers.

And the accolades continued, with OneAnswer Frontier Pension winning the CANSTAR ‘Outstanding Value’ award for Account-based pensions and a SuperRatings Pension of the Year 2016 Finalist award.

Bill Shorten

Super to fund Aussie infrastructure: Shorten

Bill ShortenFederal opposition leader Bill Shorten has made it no secret he will look to Australia’s superannuation industry to unlock billions in capital investment for key infrastructure projects.

Unveiling Labor’s infrastructure plans at a Queensland Media Club event last night, Shorten said the predicted $4 trillion in super savings by 2025 should be put to “work on nation-building.”

The plan is to have Infrastructure Australia backed by a $10 billion funding facility that deploys equity to jumpstart new projects. In turn Infrastructure Australia “would transfer its equity or debt interests to long term investors such as super funds to maximise the return to the Commonwealth and so that capital can be recommitted to new projects.”

It is a plan that federal treasurer Scott Morrison said “has some merit.” In an interview on Melbourne radio yesterday, Morrison said productive infrastructure was one of the key things needed to grow the economy.

“Now, these are interesting ideas, any idea though is only ever going to be as good as its implementation. So, while I think there is some merit in what he [Shorten] is putting forward at the end of the day what has to happen is you have got to find projects that actually can pay a return. I mean it’s not grandfathering, they’re not just going to hand it out and give it to the states to build infrastructure,” Morrison said.

“So, the projects he has talked about aren’t made possible by this, they would have to satisfy a test to see whether they will make money and that means someone is going to have to pay a toll, someone is going to have to pay a fare.”

Shorten said in his speech that Labor will elevate Infrastructure Australia to an active participant in the infrastructure market, “mobilising private sector finance, Australia’s superannuation industry and international investors to bring a national pipeline of investment online.”

“We have a deep pool of domestic capital in superannuation as well as significant global investors that are searching for stable and reliable assets to invest funds over extended periods,” Shorten said.

Infrastructure Australia has estimated that the economic cost of underinvestment is projected to reach $53 billion a year by 2031.

[via Financial Standard]

MySuper by AMP

MySuper fees force super fund to exit high return strategy

MySuper by AMP

The requirement to charge low fees under MySuper has forced one superannuation fund to exit a Principal Global Investments (PGI) strategy that had returned 13% over five years.

PGI chief executive in Australia Grant Foster said that the super fund pulled some of the money out of a real assets capability despite being “very happy investors.”

“They have said that because of the MySuper fee pressure they have to reduce their exposure to this real asset class, which for me is nonsense,” Foster said.

“The focus on fees here continues to press on,” he said, and added that “from our perspective it will be very interesting to see how these products perform, particularly if markets get really difficult the next couple of years. MySuper will find it a bit difficult [to deliver good performance].”

Foster said: “There’s one direct example we can point to where we know this is the cause. But we are also talking to many super funds about being in the real asset space, in the property or emerging market space.

“I don’t want to suggest that this is ramping. But as MySuper products evolve and get ready for 2017 they’re moving to passive -they’re doing it right now- and moving out of these more active options, and that’s going to continue.”

Also speaking to the media, Create Research chief executive Professor Amin Rajan warned that “there is the idea that index funds are cheap and less risky. But they are not less risky. You don’t really know what’s really moving prices there other than the psychological sentiment of investors.

“There is a health warning associated with index funds,” he said.

[via Financial Standard]

SMSF direct property investment

SMSF direct property investment jumps 60%

The value of self-managed super fund (SMSF) investment in residential real estate has jumped 60% in the last four years, according to figures from the Australian Securities and Investments Commission (ASIC).

In its submission to the Parliamentary Inquiry into Home Ownership, the primary financial markets regulator revealed that as of March 2015, the value of residential real property investments through SMSFs was $21.78 billion, or 3.7% of total Australian and overseas assets.

This is up from $19.49 billion, or 3.6% of total Australian and overseas assets, in March 2014.

Albeit from a relatively low base, there has been an increase in the value of investment in residential real property through SMSFs of 11.78% in the 12 months to March 2015, and an increase of 58.69% since March 2011.

While it is feared that SMSFs ability to borrow money to buy residential property via limited recourse borrowing arrangements (LRBAs) is helping to fuel the housing bubble, SMSF Association technical and professional standards director Graeme Colley said it is misleading to use these figures to conclude that SMSF investment in residential property is rapidly expanding.

“I’d be interested to see the whether there’s been much of an increase in the actual numbers of properties that have been bought. The rise in market value of residential property is likely to account for most of the increase,” Mr Colley said.

Colley also accused ASIC of stepping outside of its remit in drawing attention to the numbers.

“ASIC’s responsibility is to look at the provision of advice for SMSFs rather than these sorts of figures. I’m surprised to see them commenting”

The Financial System Inquiry (FSI) has recommended banning LRBAs, a move which was drawn criticism from industry quarters.

The Association of Financial Advisers dubbed a potential ban “draconian” at the SMSF Association Annual Conference back in February.

At the same conference, AMP SMSF head of policy Peter Burgess said: “So few funds use LRBAs, the effect is immaterial. Any problems should be addressed with legislation, and the effects measured before we scrap them off hand.”

[via Financial Standard]

Organised criminals

Organised criminals eye super

The Australian Crime Commission believes Stronger Super reforms implemented from 2013 have reduced illegal early release schemes run through self-managed super funds (SMSFs).

In the latest report, Organised Crime in Australia 2015, the commission explains SMSFs have traditionally been more attractive to exploitation than prudentially regulated funds. The report said because SMSFs generally hold the largest balance of superannuation assets it provides an opportunity for low-volume, high-impact fraud on individuals’ funds “that may be managed by financially inexperienced individuals.”

The commission said allowing the Australian Tax Office (ATO) to address wrongdoing and non-compliance by SMSF trustees; capturing rollovers to SMSFs as a designated service under the Anti-Money Laundering and Counter Terrorism Financing Act 2006; and established a register of SMSF auditors have all helped to reduce organised crime in the space.

Australian Crime Commission chief executive, Chris Dawson, said organised crime affects everyone.

“Whether it’s the ripple effect of illicit drug use on families and the community, the significant financial loss from investment scams or having your identity stolen by cyber-criminals — everyone is at risk,” Dawson said.

“But the fight against organised crime, we must recognise and build on the critical role the private sector, industry and the public play in this matter.”

As Australia’s superannuation pool is in excess of $2 trillion and expanding exponentially, the commission said infiltration of the system by organised crime — and associated losses through fraud — would result in more people relying on the social security system in their retirement.

[via Financial Standard]

Future of Financial Advice

FoFA among top 20 global regulatory nightmares

The Future of Financial Advice (FoFA) reform is one of the 20 most challenging pieces of regulation globally, according to a survey of 600 compliance professionals across the world.

The ‘Cost of compliance 2015’ report by Thomson Reuters asked compliance professionals from financial services firms all over the world to name the regulation that poses the greatest challenge for the coming year.

FoFA was listed along major regulatory changes such as the Basel III rules that will require banks to hold more capital, or the Volcker Rule in the United States that limits the bank’s relationships with hedge funds and private equity funds to prevent them from making speculative investments.

The US Dodd-Frank Act, a major regulatory reform following the GFC that has been compared to FoFA, is also listed among the most difficult regulatory challenges.

However, the UK’s equivalent piece of legislation, the Retail Distribution Review (RDR) was not part of the list.

The research also found that compliance officers are experiencing “regulatory fatigue and overload in the face of snowballing regulations.”

As many as 70% of the firms are expecting regulators to publish “more” regulatory information in the next year and 28% expect that the increase will be “significantly more.”

More than a third of the firms surveyed spend at least a whole day every week tracking and analysing regulatory change.

“Global regulatory change is creating the biggest challenge due to inconsistency, overlap and short time frames,” the report said.

“Understanding regulators’ expectations and requirements and being able to interpret and apply them is as great a challenge as keeping abreast of the changes.”

As a consequence, regulatory risk and costs are both expected to rise in 2015, with 68% expecting the compliance budget to be slightly or significantly higher than today in 12 months’ time.

[via Financial Standard]