Master Funds: Service Can Come At A Cost
Sydney Morning Herald
Tuesday April 9, 1996
The recent shortcomings of the Excelsior fund have focused the spotlight on master funds. DAVID TRIBE reports on a fast growing sector of the investment market.
MASTER funds are a booming sector of the investment market - particularly in the superannuation arena. At present, Rice-Kachor Research estimates there is about $18 billion in these funds but expects this to grow to $120 billion by 2000.
But, as with any new area of business, there must be caution. Warning signals were sounded last year when the Excelsior master fund ran into administrative problems. Investors in this fund will decide later this month whether the fund is to continue or be wound up.
While they are designed to offer flexibility, master funds carry increasingly large systems demands that can only be met by solid management companies.
But what is a master fund and why are they becoming so popular?
Essentially, master funds are a symptom of the growing complexity of investments and financial services. As the range of investment products has proliferated, these trusts have emerged to give investors access to a range of fund managers through the one vehicle.
Master trusts are often advised by wholesale researchers and invest in a mix of funds according to their recent and anticipated future performance. Fund managers can be changed without involving you in agonising choices and paperwork. Master trusts also claim as benefits unified reports, financial and tax statements. But, as with anything, these benefits have to be paid for.
The financial services industry claims the cost is worthwhile because of the fine-tuning of investment decisions, the reduction of investment worries and the simplification of record-keeping. It also claims economies of scale are produced and percentage charges can be cut all round.
Ms Sarah Brennan, a director of Deutsche Funds Management, which began as Bain Investment Management Service and operates the IMS master trust, says there are two main types of master trusts.
The first allows individual investors to choose which investment managers and funds they will invest in while the master manager provides the administration. With the second type of trust, investors choose a broad strategy or investment sector and the master manager determines the investment managers to look after these sub-funds.
In the second case, the master manager may invest in wholesale pools run by investment managers at their discretion or give these managers a mandate as to how they should manage the money.
Mr Peeyush Gutpa, a director of IPAC Asset Management which operates the Strategic Investment Trust, says discretionary master trusts, which allow you to choose your own investments, are "generally more expensive" than funds where the manager makes the investment decisions.
He says funds that give managers a mandate generally hold the assets discretely which means "the manager can be terminated much more quickly and cost-effectively" than with funds that invest in other funds. The SIT operates on the former basis and IMS is also moving towards this style of management.
One of the best-known discretionary master trusts is the Asgard Independent Plan. Its general manager, product development, Mr Terry Williams, denies this type of trust is more expensive than the pooled varieties, and quotes management expense ratios (MERs) of 1.168 to 1.945 per cent, plus investment managers' charges.
He says, with two exceptions, all the 50 super and 30 non-super "available products" are wholesale funds, which means they have significantly lower management fees than retail investment products.
Mr Mark Thomas, a director of Purvis van Eyk, says: "In my experience, master trusts' MERs (including underlying managers' fees) vary between 1.5 and 2.5 per cent while Burkitt's benchmark range of eight diversified retail unit trusts is 1.8 to 2.31 per cent. Master trusts can cost an extra 0.5 per cent but they give better diversification and consolidated reporting."
This view is shared by Mr Mark Kachor, a principal of Rice-Kachor Research. "Master trusts have higher MERs on average than unit trusts but provide more services," he says.
As with other trusts, prospectuses and brochures often state maximum permitted fees. They also cite entry fees that include an adviser's commission but have a provision where no commission is claimed for the manager simply to deduct its 0.5 or 1 per cent and invest the rest rather than sending cheques to advisers who remit to clients, with taxes along the way.
Asgard's choice of investments is much smaller than was offered by a vanguard in the discretionary trust area - the troubled Excelsior super fund. Excelsior was set up in 1989 by accountancy firm Bird Cameron to be managed by its subsidiary, Chartered Pacific Superannuation. Not only could its 20,000 participants initially choose almost any fund, but art collections, Pitt Street (or St Georges Terrace) farms and the like were also allowable investments.
Its main problem was a failure of the computer to keep track of the surging investments and their returns.
CPS's managing director and the deputy managing director of AM Corporation, Mr Barry Evans, says: "From my knowledge, it would not be possible to run a fund as complex as Excelsior without a first-rate computer system. Bird Cameron was a chartered accountancy practice. To manage a superannuation fund requires a different set of skills."
AM took over CPS in January 1995, after the administrative problems facing the fund became seemingly insurmountable.
Another concern expressed by some about master trusts regards their safety. When you buy a company's shares, you're the legal as well as beneficial owner and you receive scrip or a CHESS holding statement in your name.
An independent securities dealer, Mr Laurie Ebert, says: "People do not understand that (with a master fund) they are parting with their money to a third party which owns the investment."
This technically applies to all trusts. But with master trusts it can be more difficult to establish beneficial ownership since bank records stay with the master manager's trustee, not those of the underlying funds.
IFA's executive director, Mr Peter Hutley, says that with master trusts, the assets are not in the name of the trustee of the underlying fund(s), but in the name of the trustee of the pooled master fund. He adds: "I don't know of any situation where the underlying securities are at risk unless the manager of the master manager has lied in stating where the investment has been placed." Investors in master trusts are also afforded some level of protection by the legislation covering superannuation and investment products.
MASTER TRUSTS - POINTS TO WATCH
* The manager/trustee/responsible entity is approved by the ASC or ISC.
* You have read the fine print in the prospectus or client information brochure.
* The MER table includes the fees of the investment managers. If not, ask about fees for the strategy or sector fund(s) you're proposing to enter.
* If the fund is unitised, does the buy-sell spread reflect the stated entry fee and initial transaction costs?
* If your adviser claims to be solely fee-for-service, is he remitting his commission to you directly, by cheque from the manager, or by investment in the fund?
* Is there a switch fee?
* Is your fee-for-service adviser remitting the trailing commission?
* What charges are permitted by the trust deed?
* Does the manager/trustee have adequate assets and indemnity insurance?
* How has the manager performed and is this likely to continue?
© 1996 Sydney Morning Herald