The investment management industry is so concentrated in the hands of companies like Perpetual Limited (ASX: PPT) and Commonwealth Bank of Australia (ASX: CBA) that I'm usually the first to cheer for new and novel products.
The Spaceship GrowthX super fund would ordinarily fall into that category. I've seen a number of people discussing it on Facebook and other social media websites like LinkedIn, which is the company's preferred method of reaching its target customers – millennials and young professionals, seemingly with an emphasis on workers in the tech industry.
Unfortunately, on taking a closer look at the fund, I'm not convinced it's a good opportunity.
These are my concerns:
Fees are high
With regards to Spaceship's GrowthX fund, I feel that fees are high at 1.6% of assets under management, plus an additional $78 of administration fees per annum. This works out to be $878 in fees per year for every $50,000 under investment.
Not-for-profit AustralianSuper's High Growth option charged members 0.73% per annum (including outperformance fees) on their assets last financial year, equivalent to $365 for every $50,000 invested.
Perpetual's Select Super charges 2.64% per annum for their high growth option, or $1,320 per $50,000 invested. AMP Limited's (ASX: AMP) MySuper Lifestyle Active 1990s, a high growth option, charges 1.04% per annum, plus $83 administration fees, for costs of $603 per $50,000.
From this quick example we can see that not-for-profit fund in AustralianSuper smashes its for-profit competition in terms of fees. The same is true for most industry super funds.
As a rule of thumb, every 1% extra in fees costs you 20% of the end balance of your super. For example, if you would have $500,000 at retirement, an extra 1% in fees would mean you'll only have approximately $400,000. Over the lifespan of millennials, who have 40 years or more until retirement, GrowthX's costs will add up.
(You can run your own calculations at the ASIC MoneySmart website.)
There's no track record of performance
The second concern I have with GrowthX is its performance. First, it has no track record. Second, its performance benchmark is fairly low at Consumer Price Index ('CPI') + 2.5% after fees and taxes.
By comparison, for the funds mentioned above, AustralianSuper has a benchmark of CPI + 4.5%, Perpetual uses CPI + 2.5%, and AMP uses CPI + 5%. These benchmarks are before fees and tax, however. Spaceship does not specify if it charges performance fees. No performance fees would be a positive, although they are also an important incentive for the investment manager to outperform the market.
Spaceship also has a concentrated investment mandate:
I'm all for young people investing heavily in shares. I also think that there's a disconnect between the kind of products offered to the previous generation, and the needs and interests of young professionals. However, I think that Spaceship's GrowthX is not the Holy Grail that young investors have been waiting for.
Vague investment strategy
My final and largest concern is about GrowthX's investment strategy. The PDS is vague and does not disclose who the investment manager is (Spaceship appears to be outsourcing its investments to others), and the bulk of the investments will be in index and exchange-traded funds. I could not find a break-down of the assets that are expected to be allocated to passive vs active funds.
A big issue would be if Spaceship primarily used passive Exchange-Traded Funds (ETFs), which are low-cost, and then 'packaged' them in its high-fee GrowthX super platform. In this situation, investors could eschew GrowthX entirely and simply own the low-cost ETFs directly. Some U.S. ETFs have fees as low as 0.04%.
There are also other issues around ETFs such as the fact that you don't get much of a choice in the underlying assets – you own them all, and you own them in proportion to their weighting in the index. It's hard to, for example, buy more Alphabet (Google) because you think it is a better bet than Apple – if Apple is a larger part of the index, you'll own more Apple.
ETFs are also prone to other risks, like when large fund influxes to ETFs (as we've seen in recent years) can elevate the value of the underlying assets beyond what the market would normally pay. Ordinary investors and fund managers can choose not to purchase certain securities – ETF investors do not have that choice, and pay whatever the going rate is at the time they invest.
A related issue is the fact that Spaceship's blog, in my opinion, doesn't accurately reflect the type of investing services that GrowthX members will receive. This post (actually the only post so far) looks at U.S. business TripAdvisor in depth, and talks about its moat ('defensibility') and scalability ('the flywheel'). It's a good discussion of the company's business and its culture. Yet as far as I could tell, Spaceship won't be doing any direct shareholding. If investors do own TripAdvisor, it'll be as part of an ETF or an index fund, and it will be just one of a diverse mix of holdings.
Depending on its weighting within those funds, investors may not benefit much from the success or failure of TripAdvisor, as (with a $7 billion market cap) it may be too small to 'move the dial' on GrowthX's performance.
Foolish takeaway
I am excited by some of the new products coming to market in the wealth management space, and I think the idea of investing heavily in technology for superannuation is a good one.
Companies like Alphabet, Intel, Facebook and similar have strong moats and should be able to reinvest in themselves to generate growth for years to come. They're light years ahead of our big banks and miners, and in fact, GrowthX (which eschews miners and banks) appears better than a whole lot of Aussie super funds for just that reason. There are concerns about its pricing and investment strategy however, and I would not invest without careful thought and more information.
