Charles Woodhouse, Deputy Chief Investment Officer
For those of you that know us well, you’ll know that we pride ourselves on getting excellent value for money and that we have a longstanding record of being a top performing fund with some of the lowest fees in the industry.1 But fees and performance can be a bit of a trade-off. You will have read Brad’s recent post explaining our choice to replace some of the shares we hold with other diversifying assets to lower the volatility of returns. But some of those valuable diversifying assets (such as infrastructure and real estate) are also expensive in terms of acquisition fees and ongoing management.
Our Ready Made options fees dipped between 2011 and 2013 but have risen over the last two years. The chart below shows the pattern over the last five years for the Balanced option.
So given our focus on low fees, what gives? Well a major reason is how we negotiate fees with our managers – we can get a lower ‘base’ rate if we agree to pay for a proportion of the strong performance above our benchmark objective. So the higher fees actually reflect payments to managers who have contributed to the Fund’s strong returns over the last two years.
But importantly does this fee increase represent value for money? Well, the return objective for the Balanced option (CPI+3.5%) at 31 March 2015 is 6.8 per cent per annum. But as the table below shows the investment return over the two years to 31 March 2015 was 13.22 per cent per annum - almost double the objective - and attracted an average fee over the same period of 0.70 per cent.
Balanced option (Accumulation account)
(Investment return and fee for the two years to 31 March 2015)
Balanced option return
Without additional performance
If we took out the elements of outperformance from the investment return (i.e. performance which was above the relevant managers’ benchmark) which attracted the performance fee, the return for the Balanced option over the period would likely have been 11.07 per cent. This is still a good outcome against the objective, but significantly less than what was achieved. In this case the average fee would have been 0.54 per cent, which represents a continuation of the lower fee trend I spoke about earlier.
What that effectively means is that the additional 0.16 per cent paid in fees meant returns of 2.15 per cent higher in the performance of the option, even taking into account the higher fees.
Industry research tells us that 0.79 per cent is still a very competitive fee level and the Balanced option fee remains low compared to the broader industry1. But the point here is that the performance fees have been negotiated so that they are only payable when our members receive those strong investment returns.
1. All fee and performance information in this post applies to the QSuper Balanced option for the Accumulation account only. The fees for other investment options will differ. Past performance is not a reliable indicator of future performance. SuperRatings Fundamentals report as at March 2015. This finding is based on the industry average measures for $50,000 invested in the Balanced investment option using the actual net returns and administration and investment management fees from the current product disclosure statement when we printed the report. It doesn’t include the cost of insurance. SuperRatings does not issue, sell, guarantee or underwrite this product. When making decisions about the product you should consider things like fees, the services and benefits offered and long-term performance.
2. Fees relate to the actual annual administration and investment cost at the dates shown.
3. The compound annualised investment return and average administration and investment fee for the QSuper Balanced option Accumulation account for the two years to 31 March 2015.
The views of the author and those included in the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
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Deputy Chief Investment Officer
As Deputy Chief Investment Officer Charles implements the investment policy of the Fund. In leading the Investments team this extends to developing investment strategy, leading QSuper’s research into investment philosophy and industry developments, and contributing to the design of new products.