Board cloud hangs over industry funds

The future performance of industry funds could decline as a result of governance changes.

23-Jan-2017

By Leanne Abbas

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Industry super funds’ outperformance of their retail counterparts could be threatened by the government’s plans to retable legislation to change industry fund governance structure, according to Industry Super Australia (ISA).

New data compiled by SuperRatings revealed industry super funds outperformed retail funds by 2.74 per cent on average in 2016, which underlined the danger of any move to alter their board structure and by extension their asset allocation decisions, the group said.

The numbers showed the median balanced option fund to have consistently outperformed retail super funds over the last 10 years – by 2.07 per cent over three years, 2.16 per cent over five years, 2.17 per cent over 7 years, and 2.18 per cent over 10 years.

Industry Super chief executive David Whiteley told financialobserver the recent data reiterated the capacity of industry super funds to produce better returns for their members than their counterparts, as a result of highly diversified allocations.

“Over a period of time, industry super funds have invested in unlisted direct investments typically for a longer term and these have helped funds reduce the volatility of the investment portfolios and deliver better returns,” he said.

Whiteley noted industry funds’ deliberate investment in “nation-building” infrastructure assets such as roads, airports and utilities aimed to secure the best returns for their members.

Industry funds’ profitability was also helped by the fact they “have never paid sales commissions or other incentives and of course have typically over the long term had lower fees as well”, he noted.

Whiteley said the data undermined the government’s determination to push through legislation mandating one-third independent directors on industry fund boards.

“Asset allocation and portfolio construction are decisions made by trustee boards of industry super funds, so if you change the trustee boards and you force them to look like the retail super funds, there are very significant risks that over time industry super funds will replicate those of retail super funds and that means anywhere between 1.5 per cent to 2 per cent lower returns,” he warned.

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