KPMG’s Adam Gee looks at the new superannuation fund players to enter the market but questions whether their emergence represents the start of a new era.
There has been much conjecture over the launch of a number of new superannuation products to the market in the last six-months, with many industry commentators labelling them significantly over-priced and offering little value in comparison to many of the
long-term established superannuation funds on the market.
One such product that has borne the brunt of most of the media attention is Spaceship, with an annual fee of $78 plus 1.6 per cent of assets (recently reduced to a headline fee to 0.99 per cent), a very high allocation to growth assets of 93 per cent, but with a conservative investment objective of CPI+2.5 per cent, which does seem very low in comparison to its higher risk “technology-focused’ exchange traded fund (ETF)-driven investment philosophy.
In spite of what appears to be a poor value product in its current form, it is hard to say that it has not been successful, reaching a reported $100 million in funds under management in less than six months of operation.
Another such product is GrowSuper, which uses, what we believe to be some of the industry’s best technology and online engagement tools (coupled with a strong funds management capability through Dimensional Fund Advisors) and has attracted more than $50 million in funds under management in less than three months.
In addition to these, the industry is also hearing about new products such as Zuper, Human Super, Mobi as well as a raft of others that are looking to enter what appears to be an already saturated marketplace, however, all have beliefs of strong growth appealing to specific market segments.
So are these ‘new kids’ all bad or can they teach mainstream funds something?
As with all start-ups, the proof will be which of these will continue to exist in 10 years’ time, however, there is no doubt that some of the larger funds are standing up and listening to what these ‘kids’ have done successfully in order to drive so much hype.
Without doubt, the challenges of scale are most evident in the early days of these funds and, I do recall when I started in this industry some 20-years ago, there were a number of funds charging close to two per cent per annum, with many charging contribution fees (I recall at my first job at a very large superannuation fund provider, their flagship product charged close to 4.5 per cent commission on each contribution!).
As these products increase in scale, I have no doubt that we will see some of the hefty fees reduce down to close to the industry median of approximately one per cent over time.
Perhaps a larger challenge will be the investment outcomes generated by some of these products in the early days, with the majority using (or looking to use) passive ETF-style products in order to achieve their investment returns.
This will, in effect, result in an index return, less a fee of in excess of 1.5 per cent to 2.0 per cent for some providers, which will be challenging to lift the overall net investment return outcomes out of the bottom quartile for almost all using these strategies.
On a positive note, however, these funds have generated a lot of interest within their target membership bases, with Spaceship reportedly generating in excess of 35,000 sign-ups based on slick marketing campaigns appealing to what many within the industry always thought of as the “impossible to engage” younger demographic.
GrowSuper has also received substantial interest in what has been less than three months in the market, suggesting strong marketing appeal to members.
Whilst many would wonder how this is possible given the potential challenges in relation member outcomes and in particular, net investment returns, this incorrectly assumes that all investors only consider financial outcomes in relation to their product selection.
On this basis, we believe that mainstream funds can learn a lot from the new ‘kids’ given their success in engaging members and there remains a huge opportunity for many large funds to do something similar, with the
advantage of scale, competitively priced, well-performing products that will deliver excellent net investment outcomes to members over the longer term.
Is the future bright for the ‘new kids’?
As with any new offering, particularly within the financial services sector, ongoing future distribution is likely to be the most challenging aspect for these funds.
Direct to consumer marketing remains expensive and the need for efficient, technology-driven interactions to support the simple transfer of funds between products is not easy to achieve, albeit GrowSuper appears to be heading in the right direction in this regard.
As with all funds, the proof will be evident in five to 10 years’ time, based upon how many of the kids have delivered on their business objectives and remain viable.
As an industry, however, it is in nobody’s best interest to see any super fund fail, as this will only impact on consumer trust across the entire super industry, of which we are all participants.
As a supporter of innovation within our industry, we would love to see as many of these funds as possible maintaining a successful future, with a strong service offering and good investment outcomes for their members.
And whilst many are writing them off, I believe there is something to learn from these newbies.
Adam Gee is partner, superannuation advisory, at KPMG.