Vanguard’s fees ‘uncompetitive for index-based super’

High hopes the giant US mutual would spark a price war among super funds has not materialised … but the competition will be wary.

US investment giant Vanguard has stepped into the hyper-competitive $3.3 trillion super sector, launching its own product into the market. But its offering is already raising eyebrows.

The $10 trillion funds management giant – run locally by MD Daniel Shrimski – has kicked off its Australian super journey with a default lifecycle option that boasts a fee of 0.58 per cent.

This annual fee, according to Vanguard, is the lowest in the market for member balances under $50,000 and for members aged 47 years and under.

At 0.58 per cent that works out at $290 a year for a $50,000 account, so you’ll pay less than if you hold the balanced option at the nation’s biggest super funds, including AustralianSuper, Aware Super and Hostplus.

But the fee is not competitive for an index-based product, critics argue.

There are a number of index-based options that are much cheaper, including AustralianSuper’s indexed diversified option at $172 a year, and Hostplus’s indexed balanced option at $143.50.

This is the main gripe financial advisers have with the new product: that for an index-focused product it’s just not cheap enough, when you can get a similar indexed option at one of the established funds – where they likely use Vanguard managed funds and exchange traded funds anyway — for less.

Anyone considering a shift to Vanguard should also keep in mind that returns in index-only products tend to be lower than balanced or growth options, partly due to the lack of access to unlisted investments in these products.

The return objective in Vanguard’s flagship super product is a pretty average 2.5 per cent above CPI for anyone younger than 51. The return objective then diminishes over time to account for lower risk strategies.

In comparison, some of the major super fund balanced options, including AustralianSuper’s, aim to beat inflation plus 4 per cent per annum over the medium to long term. (AustralianSuper’s indexed option also aims to beat inflation plus 3 per cent.)

What’s more, the established super funds are increasingly devoting more resources to unlisted investments in a bid to generate better returns than can be found on listed markets.

Listed markets are, of course, Vanguard’s bread and butter.

Still, the investment giant is confident it can thrive in the local market and become one of the big mega funds in the coming years, according to its head of super, Michael Lovett.

Cost was just one factor in the launch of the product, Mr Lovett told The Weekend Australian.

“Our stated objective is to absolutely lower costs and Vanguard has got a history of doing that in all markets around the world. So when we scale we reduce prices and we absolutely want to do that here,” he said. The lifecycle approach and member experience on offer are other drawcards, he added.

“It’s a really sophisticated approach and also the member experience we’re offering we think is close to being best in the marketplace. So it’s all those things combined. And we’ve absolutely got an intention to lower costs in the next few years as we develop scale.”

Vanguard’s lifecycle approach, where asset allocation adjusts to a more defensive position over time to reduce risk, sees a mix of 90 per cent growth and 10 per cent defensive for anyone under 48. In the growth segment are Australian shares, international shares, hedged and unhedged, and emerging markets, among others, while fixed interest makes up the defensive component.

Over time the mix gradually adjusts down the growth segment and increases defensives so that by age 64, assets are allocated 50 per cent to growth and 50 per cent to defensives. From then on defensives form a greater proportion of a member’s portfolio.

From age 82 onwards, the asset allocation is designed to have a greater emphasis on reduced risk to shield retirement savings from the impacts of volatility.

The lifecycle approach has its benefits, in that it adjusts over time without any need for additional input by members. But it does assume that everyone has the same investment needs at the same time, which is not the case.

On listed versus unlisted returns, Mr Lovatt said Vanguard had proven its worth in public markets.

“Vanguard has a very strong history, both in Australia and the US, at having index strategies that consistently outperform most of its competitors,” he said.

“If we look at our diversified funds in the non-super sector in Australia, they’ve been very high performers over their whole time history. So we’re confident.”

The investment manager also hasn’t ruled out adding other active or unlisted strategies in the future, once it has scale and liquidity.

“But we are starting with an all-index strategy that we are very confident will be a very strong performer relative to most of the peers,” Mr Lovatt said.

Finally, stapling reforms brought in under the Coalition in 2021 could prove another headwind for Vanguard in attracting new members.

This shift, which sees employees stapled to a super fund for life, means worker accounts are now a lot stickier, benefiting funds like Hostplus, which tend to attract younger members in their first job.

But if it can win members, they’re just as likely to stick with Vanguard for the long haul.

Entering the market at a time when super returns at the best-performing funds are struggling could also work in Vanguard’s favour. If it can outperform from the outset, it will certainly go a way to attracting new members.

Originally published as Vanguard’s fees ‘uncompetitive for index-based super’