Australia’s superannuation fee debate should be reset and the focus shifted towards overall investment performance and net returns, according to the second round submission to the Financial System Inquiry by the Australian Private Equity & Venture Capital Association Limited (AVCAL).
"The interim report from the inquiry directed much of its attention to fee competition within the superannuation industry, but what was missing was a comprehensive analysis of how the policy and regulatory system could change to shift more of the focus towards enhanced competition on net returns to fund members,” says AVCAL’s chief executive Yasser El-Ansary. “Australia is perhaps the only developed market in the world that is still trapped in this policy and regulatory debate about fees and costs – other economies are focussed on net returns.
“In the end, superannuation has to be about ensuring that the retirement outcomes of Australians are optimised, which is necessary in order to reduce the dependency of retirees on the age pension. And while keeping superannuation fees down is important, research has consistently shown that an optimal diversified portfolio is framed around striking the right balance between a variety of asset classes – some of which might be low-fee, and others that offer high above-normal returns, such as private equity and venture capital.”
AVCAL noted in its submission that Australian private equity outperformed the S&P/ASX 300 Index by 185 basis points per annum over the 15 years ending 2013 on a net-of-fee basis.
In addition, private equity and venture capital funds – while constituting "active management" in the sense that they aim to outperform passively managed funds – do not buy and sell investments on a high-frequency basis. They employ ‘buy-and-grow’ strategies, which typically involve an average holding period of five years per investment. This can be contrasted with the 77 per cent of ASX investors who churn their shares within five years or less (of which 17 per cent churn their shares within a year or less).
In analysis undertaken by AVCAL, the amount of capital invested by Australian superannuation funds into the domestic private equity and venture capital industry has been identified as being relatively small: estimated at one per cent of the total current superannuation savings pool of AUD1.8 trillion. In other markets such as the US, the average allocation is close to 10 per cent.
“Allocating more investment into private equity and venture capital is a vitally important ingredient in helping to drive improvements in Australia’s economic productivity, as well as enhancing our innovation potential – which go hand in hand with one another,” says El-Ansary. “In its interim report, the inquiry confirmed that Australian businesses need better access to venture capital and private equity as a source of growth funding.
"Australia is transitioning from its reliance on the resources and commodities sectors, and into new high growth industry sectors where we can effectively compete in the globalised marketplace.
“But to achieve that, we have to unlock more access to private long-term capital. This is the reason why it’s critical for this inquiry to make a series of recommendations which improve the capacity of the financial system to back new investment into Australian businesses.”
In its submission to the Inquiry, AVCAL also called for the introduction of a new national innovation system which is focussed on removing barriers to the growth of the Australian venture capital industry. In addition, it called for a number of tax reforms to be considered as part of the Government’s Tax White Paper, to help to improve the capacity of private equity and venture capital to invest in Australian businesses.
