Industry funds dominated this year's super awards, thanks to superior investment returns and commitment to their members, reports John Collett.

Not-for-profit industry superannuation funds continue to outpace their commercial rivals in the "value-for-money" stakes. In this year's SuperRatings Fund of the Year Awards, like last year's inaugural award, all five finalists were not-for-profit industry funds.

A combination of better long-term earnings rates and lower member costs were the main reasons industry funds occupied the finalist spots.

The best value fund and overall winner was the 600,000-member ARF (Australian Retirement Fund), which also took out the top award last year.
"ARF won once again because of its sound overall structure," says SuperRatings' managing director, Jeff Bresnahan.

"It offers exceptional value for money to its members. In almost [all] criteria we analysed, it ranked well above the average fund," he says.

The award followed a review by SuperRatings of 70 large multi-employer super funds. Almost half of the award criteria are made up of investment performance and costs, with governance, service, delivery, insurance and financial advice making up the rest.

Many of the 70 funds have dozens of investment options, but it is the funds' "default" option - usually a balanced fund, which spreads the money across asset classes and investment managers - that is the basis of the awards.

HostPlus, the hospitality industry fund, and the commercial Aon Master Trust Corporate were joint winners of the Rising Star Award. Bresnahan says it recognises the enhancements made to these funds over the past year to the benefit of their members.

Industry funds have had "significant" pricing and earnings advantages over commercial funds for the past six years at least, says Bresnahan. "Those things [costs and earnings] combined give them a big head start over commercial funds."

Several factors drive up the costs of commercial funds:

• Large commercial master trusts tend to offer a wider range of investment options, which is more costly to provide.
• Industry funds are run like mutuals, whereas the commercial funds must generate returns on their shareholders' equity.
• The commercial funds pay sales commissions to financial planners.

As well as a wider selection of investment options, many commercial master trusts have other features which may appeal to those with higher account balances, such as the ability to invest in shares.

In response, late last year the ARF industry fund introduced a facility where members with account balances of more than $10,000 can invest in any of the shares of the largest 100 Australian listed companies, with minimal brokerage.

Bresnahan says fees of some commercial funds are starting to come down as they position themselves ahead of the start of super choice on July 1 next year.

Interestingly, the fees of some of the industry funds are going up.

Bresnahan suspects they are raising their fees as they increase their spending on marketing. The costs of complying with the tougher rules and regulations (with their better consumer protections) are higher than ever.

Commercial funds, being "for-profit", can, if they choose, cut their profit margin and lower costs to members to expand their market share. Not-for-profit funds must pass on costs to members.

Bresnahan says despite the trend on fund fees, industry funds are still significantly cheaper than their commercial rivals, although he expects the gap to continue to narrow over time.

He says one of the biggest factors in the superior investment returns of many industry funds has been higher exposures to alternative asset classes such and infrastructure and venture capital investments.

That has meant the returns of the funds have been insulated from the stockmarket downturns of recent years. If those alternative asset classes do not perform to expectation, then the returns of commercial funds could quickly catch up to industry funds.

Many of the asset consultants employed by the industry funds are prepared to be active in their asset allocation, which has also worked in the favour of industry funds.

Another factor likely to be contributing to the superior returns of industry funds, says Bresnahan, is that, "by and large", they do not to have the same degree of conflicts of interest as commercial funds.

Commercial providers may have considerations other than investment merits in deciding who gets to manage their super clients' money.

For example, a commercial provider that owns a fund manager may include that "house" manager in the underlying line-up of investment managers, even if the house manager is poorly rated by researchers.

Though the annual fund of the year awards tends to grab the headlines, SuperRatings rates all the funds on its database. There are five grades of ratings - from the highest "platinum" rating to its lowest "blue" rating.

SuperRatings differs from many of the other researchers in that it allocates its ratings on the basis of a bell-shaped normal distribution curve. That means only a limited number of funds can get the top rating and a certain percentage of funds must get the bottom rating.

Some researchers have a habit of giving almost all funds a "pass" mark at least. Allocating ratings according to the normal distribution ensures the researcher does not sit on the fence when rating funds.

SuperRatings will release its annual ratings review of all of the funds on its database in the next two weeks.

Three times net benefit
Research by SuperRatings and Rainmaker Information commissioned by the Industry Fund Network confirms that a "net benefit" gap has opened up between industry funds and their retail rivals (also known as master trusts). It found that over the past five years to September 30, the average master trust provided $2.46 earnings for every dollar of fees, while the average industry fund provided $8.59 - more than three times the net benefit.