Industry super funds about to meet their toughest challenge

Industry super funds Vanguard ETF Exchange Traded Fund
If Vanguard’s Australian superannuation product is similar to its overseas offerings, it will aim to keep it product simple, transparent and low cost.

For a long time now, industry superannuation funds have dominated the Australian landscape, boasting lower costs, better investment performance and benefits of scale.

It has been an incredible success story, with not-for-profit industry funds pushing traditional retail super funds almost entirely out of the short and long-term performance tables.

However, that commanding performance is about to get the biggest test it has ever had with giant US passive investment company Vanguard set to enter the field with the release of its first Australian superannuation product in coming months.

Vanguard set to keep costs low

Founded by legendary investor and exchange traded fund pioneer Jack Bogle, Vanguard already has a big presence in Australia as the biggest provider of Exchange Traded Funds (ETFs) and manages more than $8.7 trillion globally, so it comes to the table with a big head start.

It also has a long history of shaving investment fees as low as possible, overcoming one of the problems with particularly many of the older retail funds which start the race with one hand tied behind their backs because of a hefty fee structure.

Unlike traditional retail superannuation providers, Vanguard is geared towards retaining profits within the fund, so it operates on a basis not that dissimilar to the industry funds.

Platform of ETFs likely on the investment side

While we haven’t seen the details of what Vanguard will offer yet, it will almost certainly have very low investment fees. Though, it will need to charge fees for administration and compliance that will probably be similar to other funds.

On the investment side, it is fairly obvious that Vanguard will be offering a suite of its ETF products on its super platform, with most likely some pre-mixed options and also the ability for customers to choose their own local and international ETFs to suit their investment objectives and risk tolerance.

Keeping things simple, low cost and easy to understand

If the product is similar to overseas Vanguard offerings, the overall aims will be to keep things simple, transparent and as low cost as possible so that member returns have a better chance to compound and grow over the longer term.

Vanguard is also well known for having good, easy to understand communications with investors, so a strong online portal with lots of educational tools is likely.

That owes a lot to Jack Bogle’s initial eight simple rules for investment which are:

  • Select low-cost funds
  • Consider carefully the added costs of advice
  • Do not overrate past fund performance
  • Use past performance to determine consistency and risk
  • Beware of stars (such as star fund managers)
  • Beware of asset size
  • Don’t own too many funds
  • Buy your fund portfolio – and hold it.

Giant fund could have small beginnings

The biggest difficulty Vanguard might face is breaking into the entrenched super industry structure which sees many employees starting out with a fund that their employer or industry usually uses.

However, even Jack Bogle’s original First Index Investment Trust (now the Vanguard 500 Index Fund) only raised a disappointing $11 million for its float, with the original brokers suggesting he close the fund straight away.

Bogle refused and the rest is history, with Vanguard’s growing stable of ETFs attracting trillions of dollars in investment since those early days.

Once Bogle’s initial fund started outperforming many established fund managers, that outperformance and the low ongoing fees and simplicity of following an index attracted legions of devoted followers and copycats.

There is every chance Vanguard’s approach to Australian superannuation will follow a similar path.

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