Time to call out super fund underperformance

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Superannuation industry underperforming

While the 2020 Commonwealth Budget announcements of a super fund 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 be confronted.

Rainmaker's 2020 Superannuation Benchmarking Report revealed that across several major asset classes, super funds continue to struggle to match asset class indexes.

This has led to calls by some market commentators and influential politicians for more super funds to increase their use of low-cost indexing, rationalise their investment choices and lower fees.

"Australian super funds as a group are good managers of Australian shares, property and cash. Their performance in managing international shares and bonds is less impressive," said Alex Dunnin, executive director of research and compliance at Rainmaker Information

"Trouble is, the asset classes where the superannuation sector is struggling to add value over the capital market indexes represents almost half of all superannuation assets," said Dunnin.

Rainmaker's 2020 Benchmarking Report revealed that one-third of default MySuper products are tracking below their investment objectives.

Rainmaker's super fund asset class performance benchmarking review, which was part of the broader report, had two elements:

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

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

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

Super fund performance in each asset 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 worst performing asset class relative to the capital market indexes. It underperformed by 4.8%, 4.7% p.a. and 3.2% p.a. over one, three and five years respectively.

The relative performance of the international shares asset class over one-year was the worst across the whole study of all asset classes 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 the worst asset class for super funds, it was also the best because it achieved the highest index return. If super funds could be more efficient in managing this complex asset class, their overall returns could be much higher," said Dunnin.

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

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

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

"Despite the asset class underperformance, two-thirds of MySuper products are still tracking above their investment objectives over three years, notwithstanding investment objectives are formally set over rolling 10-year periods," said Dunnin.

"These results should remind super fund members to check their super fund's performance at least every year. While they should be checking how their fund is performing relative to its peers, if they are investing into asset class investment options, they should check the performance against the market index."

Given the difficulty super funds have achieving these milestones, fund members should be assured that if their fund can match the capital market benchmarks, it's a great sign they've chosen a smartly run super fund that uses top investment managers.