Drenched as we are in sleek advertising and investment tips from media and myriad money managers, it is not too often that we see frank and fearless research about our savings and super.
We depart from all that gumph today to bring you some useful stuff about the superannuation gravy train, information that might save you a lot of money.
It hails from the inaugural Fat Cat Fund Report, a document put together by Chris Brycki. Formerly at UBS, Brycki struck out on his own to take on the $2 trillion superannuation juggernaut by exposing the fees that can literally eat up half the return on your savings.
With a view to disrupting the funds management industry in much the same way Aussie John Symond locked horns with the banks, he set up Stockspot, an online investment adviser and fund manager that aims simply to cut out the middle-people. And there are hordes of them. By the time your financial planner, your fund manager and the big bank wrap platform have taken their clip, your returns are likely to lag even the sharemarket benchmark; the average that is if you had just plonked your money on the index.
In 2013, we reported on Brycki’s study of 496 of Australia’s largest managed funds, which found that no less than 45 per cent of returns were frittered away in fees in five years. The sharemarket is up since then, so returns have improved, yet the fees rampage on.
The 2014 Fat Cat Report analyses superannuation funds too, and it names names. This is ugly for the big banks, which with AMP control four-fifths of the market. Take, for instance, ANZ and its wealth management arm OnePath, which had the most Fat Cat Funds (20) including a Vanguard Australian Shares Index fund that managed to under-perform the index by 11.98 per cent over five years, thanks largely to a 2.32 per cent fee each year.
ANZ is by no means alone. Some 90 per cent of the Fat Cat Funds – those with the most excessive fees and most paltry returns, are sitting on platforms owned by the big four banks, Perpetual or AMP. Fees are the overwhelming driver of investment performance.
Brycki nominated ANZ/One Path as this year’s fattest cat, followed by National Australia Bank’s MLC and Commonwealth Bank’s Colonial (which tied for second with 13 fat cat funds apiece. Then came Westpac’s BT, with nine fat cat funds, then AMP (8) and Perpetual (6).
Readers can go online to check out how their fund performed against the pack. By way of disclaimer, it should be said that Brycki is, as they say in the trade “talking his own book”. He is competing with the big wrap platforms. So for those about to complain about this article, bring it on, but please attack the research itself.
Let’s get to best and worse. In the S&P/ASX 200 sphere, best was Suncorp Fidelity Aust Equities, which delivered a five-year return of 7.18 per cent after annual fees of 0.85 per cent. Rack that up against the worst, BT PPS Super BlackRock Wholesale Australian Shares, with a return of just 3.05 per cent after fees of 2.35 per cent. A shocker.
“Only the Suncorp Fidelity fund was able to beat the index over one, three and five years and by over 10 per cent over five years,” says the report. “While Colonial First State, BT, MLC, ANZ and Perpetual also offered a Fidelity Australian Equity fund on their platforms, none made the list because of the drag their higher fees had on returns.
“The ANZ/OnePath OneAnswer Fidelity Australian Equity fund with its fee of 2.85 per cent (exactly 2 per cent more than the Suncorp fund) underperformed the Suncorp Fidelity fund by 13.5 per cent over the five years and only just scraped in ahead of benchmark return. This shows the large impact fees can have on even the best-performing funds.”
That lush fees are usually the culprit for poor performance does not reflect well on our superannuation system. The performance of ANZ is so pathetic that the bank appears to be counting on its clients not taking any notice. Else they would not be there. It does not even seem to be competing. Perhaps it takes the view it should just sting anybody silly enough to be there.
“All of the big four bank platforms made the Fat Cat list where the average annual fee came in at 2.21 per cent, representing 30.8 per cent of the total benchmark return. This means that for every $1 of returns generated by the market, 30¢ was paid to these fund managers. This average fee is also 46 per cent higher than the average fund in this category.”
In the ASX 200, only 35 per cent of funds (34 funds) beat the market after fees whereas 65 per cent lagged the market (63 funds).
Brycki found that the funds that charged 1.25 per cent in fees over five years had a 54 per cent chance of beating the market, those above it just 16 per cent. Overall then, fees should be reduced by 32 per cent in order for half the funds to beat the market. Most were “index huggers” anyway. That is, they took their magnificent fees and just chucked you in a representative basket of stocks anyway. Money for jam.