Time to call out super fund underperformance

Published on
January 4, 2021
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Time to call out super fund underperformance

While the 2020 Commonwealth Budget announcements of a superfund performance test and new legislation to increase scrutiny on super fund trustees has been criticised by some superannuation industry advocates, research by Rainmaker Information shows that there  is an underperformance challenge that needs to beconfronted.

Rainmaker's 2020 Superannuation Benchmarking Reportrevealed that across several major asset classes, super fundscontinue to struggle to match asset class indexes.

This has led to calls by some market commentators andinfluential politicians for more super funds to increase their useof low-cost indexing, rationalise their investment choices andlower fees.

"Australian super funds as a group are good managers ofAustralian shares, property and cash. Their performance in managinginternational shares and bonds is less impressive," saidAlex Dunnin, executive director of research and compliance atRainmaker Information

"Trouble is, the asset classes where the superannuationsector is struggling to add value over the capital market indexesrepresents almost half of all superannuation assets," saidDunnin.

Rainmaker's2020 Benchmarking Report revealed that one-third of defaultMySuper products are tracking below their investmentobjectives.

Rainmaker's super fund asset class performancebenchmarking review, which was part of the broader report, had twoelements:

  1. Compare the super fund asset class sector average returns,across more than 900 investment options, to the respective capitalmarket indexes.
  2. Assess how many investment options in each asset class matchedor beat the index.

The review considered workplace super funds, being thelowest-cost and more important superannuation segment. Performanceagainst each index was not adjusted for fees or taxes..

"A super fund's active investment managementstrategy should be purpose-built to earn back the fees and taxmargins. If not, super funds should use indexed strategies,"said Dunnin.

Super fund performance in eachasset class, percent p.a. over 5-years to June 2020

Asset Class Benchmark Benchmark five-year performance Average Superannuation five-year performance Underperformance gap
Australian shares S&P ASX 200

6.0%

5.7%

-0.3%

International shares MSCI All countries ex AU in AUD

10.0%

6.8%

-3.2%

Property Rainmaker Composite Property Index

4.3%

4.2%

-0.1%

Australian fixed income Bloomberg Barclays Australia Breakeven

5.4%

3.4%

-2.0%

International fixed income Bloomberg Barclays Global Agg Hedged

4.8%

3.1%

-1.7%

Cash 90 Day Bank Accepted Bills

1.7%

1.4%

-0.3%

The International shares asset class was found to be the worstperforming asset class relative to the capital market indexes. Itunderperformed by 4.8%, 4.7% p.a. and 3.2% p.a. over one, three andfive years respectively.

The relative performance of the international shares asset classover one-year was the worst across the whole study of all assetclasses and time periods relative to the benchmark.

Difference of superannuation asset class returns relative to the index

"The irony is that while international shares was theworst asset class for super funds, it was also the best because itachieved the highest index return. If super funds could be moreefficient in managing this complex asset class, their overallreturns could be much higher," said Dunnin.

Eight in 10 Australian shares investment options meanwhileoutperformed the benchmark over one year, the highest strike ratein the review. This, however, fell to a three-in-10 strike rateover five years.

Cash had the next best strike rate, with six-in-ten optionsoutperforming the benchmark over one year. International shares andfixed income both had less than 5% of their investment optionsoutperforming the benchmark over three and five years.

These asset class performance results matter because 21% ofsuperannuation assets are invested into Australian shares, 24% intointernational shares, 8% into property, 12% into Australian fixedincome, 8% into international fixed income and 14% into cash. Theremaining 13% is invested into other assets such as hedge funds,infrastructure and private equity.

"Despite the asset class underperformance, two-thirds ofMySuper products are still tracking above their investmentobjectives over three years, notwithstanding investment objectivesare formally set over rolling 10-year periods," saidDunnin.

"These results should remind super fund members to checktheir super fund's performance at least every year. Whilethey should be checking how their fund is performing relative toits peers, if they are investing into asset class investmentoptions, they should check the performance against the marketindex."

Given the difficulty super funds have achieving thesemilestones, fund members should be assured that if their fund canmatch the capital market benchmarks, it's a great signthey've chosen a smartly run super fund that uses topinvestment managers.

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