New research released by financial services industry researcher Rainmaker Information has revealed that the investment style followed by super funds in their Australian and international equities portfolios can have huge consequences for their relative returns.
Investment style is the philosophy followed by super fund portfolio managers when they choose the specific stocks into which they invest many billions of dollars of superannuation money.
While there are many investment styles, most can be grouped into either growth styles or value styles.
Growth styles are when portfolio managers invest to follow the market momentum towards companies with fast rising share prices in an upbeat expanding economy.
Value investment styles are when portfolio managers prefer to carefully pick and choose the stocks into which they invest based on detailed company specific analysis.
In the bull-run conditions experienced during the last few years, which ended abruptly last year, conditions favoured growth style investors. But since then, fears of an outbreak of global inflation due to bottlenecks in the global supply chain, the financial reaction to Russia's war against Ukraine and concerns regarding the impact of rising interest rates have reset the market towards value investment styles.
Rainmaker has found that these factors have significantly impacted how we should assess Australia's super funds, particularly regarding the performance of their equities investment options.
To conduct its analysis, Rainmaker studied the effect of investment style on the returns achieved by international equities super options in the months of January and February 2022.
These months were important because together they had one of the largest historical outperformances of the value style over the growth style, as measured by the MSCI World style indexes.
According to the John Dyall, CFA, head of investment research at Rainmaker Information and author or the report, for years the growth style has outperformed the value style in a world of economic growth, low inflation and falling interest rates.
"At its peak the growth style outperformed the value style by nearly 30 percentage points in the 12 months to September 2020," Dyall said.
Since then, the 12-month premium of growth has been rapidly whittled away.
In the 12 months to February the value style outperformed the growth style by 7.7 percentage points. In January and February alone it outperformed by nearly 10 percentage points.
"We wanted to see how the growth or value style bias in super funds effected the results earned by international equities options in super funds," Dyall said.
"While these are options available to members, they are predominantly feeder funds for the diversified options, such as MySuper and balanced, that most people have a significant portion of their wealth invested in."
"By analysing these standalone returns, we are studying one of the building blocks of the wealth of nearly all working and retired Australians."
"What we found was that international equities options with a value style bias performed much better in those two months than those with a growth bias."
"Remember this occurred during two months that had significant negative returns. The world has changed since the depths of the COVID-19 recession, when the growth style and tech stocks were ascendant."
"The lesson learned from this exercise is that investment strategies, such as leaning into one investment style over another, have real world consequences for super fund members, particularly when market investment styles change direction," Dyall said.
He added: "Super funds that persevere with the wrong investment style, or that are too slow to adapt to changing investment style market conditions, could be costing the superannuation funds, and their fund members many millions of dollars in foregone investment returns.
"In a regulatory environment where super funds are soon to face the 2022 investment performance test, this exposes the fund to existential risks."
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