As the financial year draws to a close, millions of Australians will learn how their super funds have performed over the past year.
The news might look good, as the share market has experienced another strong year of returns, despite concerns about interest rate hikes, inflation and geopolitical instability, but dig a little deeper and a major weakness in the Australian super industry is revealed.
That’s because most default super funds, despite spending billions on fund manager fees, actually underperformed by an average of 4-5% when compared to diversified index funds, which simply track the market as a whole.
Stockspot has analysed the data and found the following results for typical default super options:
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Balanced super funds, containing 41-60% growth assets, returned an average of 7-8% over the financial year when indexed balanced super funds returned 12-13%, a difference of 4-5%.
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Growth super funds, with 61-80% growth assets, have seen returns ranging from 9-10% over the financial year when indexed growth super funds returned 14-15%, a difference of 4-5%.
Stockspot has tracked this for over a decade and this year represents the biggest gap we’ve ever seen between the average default super fund and an indexed super fund of similar risk.
This significant difference stems mainly from two factors:
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Active stock picking has performed poorly, with the majority of fund managers, particularly in global shares, failing to keep pace due to their underweight positions in large-cap technology shares. The latest research by S&P SPIVA shows that 81% of global fund managers underperformed the market index over 1 year and 94% over 15 years.
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Active funds have been heavily invested in underperforming private assets, notably unlisted property. Although some super funds have discontinued these as separate investment options, they remain a substantial part of their default funds.
The most successful assets this year were indexed global shares, which increased by 29%, and gold, which rose by 23%. Funds with higher allocations to these assets generally fared better.
CEO of Stockspot, Chris Brycki comments:
"If your balanced or growth fund returned less than 10% this year, it's important to question your super fund about it. Are the fees too high? Are they paying fund managers for unsuccessful stock picks? Are they invested in illiquid unlisted assets that are facing devaluations?
"The trend of indexed super funds outperforming active ones is likely to persist as scrutiny increases over the valuation processes of unlisted assets by regulators like APRA, and as trustees adopt more realistic valuations of these assets."
"We anticipate that more super funds will replace government bonds with strategic allocations to gold in the coming years, given the diminishing diversification benefits of bonds amidst persistent inflation.
"This year's varied returns underscore the effectiveness of the APRA performance test that benchmarks funds against the index.
“Extensive research shows that 80-95% of actively managed funds across all asset classes underperform the index over time.
“If super funds are going to take active bets, it's important they are held accountable for the additional risks they impose on member money. The best way to ensure this accountability is through comparisons to simple indexed portfolios.
"I am surprised to see super funds expanding their investment teams and opening overseas offices this year when it's clear that such moves do not add value for members.
“Large super funds would be better served by reducing their investment teams and focusing on indexed investments, thereby passing the cost benefits on to their members.”
Chris Brycki, CEO & Founder of Stockspot, is available for further comments.
Key Facts:
What are ETFs?
Exchange traded funds (ETFs) can be traded on the ASX in the same way as shares in a company. Rather than owning individual shares, an ETF provides direct exposure to a wide range of investments within that asset class.
About us:
About Stockspot
Stockspot is Australia’s leading digital investment adviser and wealth management platform (robo advisor). Stockspot builds and manages professional portfolios tailored to an individual’s personal goals, cash-flow needs and risk profile. Stockspot is helping more Australians manage their money smarter with its transparent, low-fee online investment service.
Contact details:
Komal Shahzeb
0426 558 538
