Omar´s Outlook - Jul 2017
Super Fund Returns – How Good Are They Really?
There have been numerous articles in the media recently regarding the “strong returns” achieved over the last financial year by the “majority” of public super funds. Apparently the last year has been very good for investors, who are now benefiting from double digit returns almost across the board.
I have written previously about how the recent changes to superannuation have had the effect of eroding the trust members of the public have in the system. So I guess it is not a surprise that we now need some “happy” news to get people excited about super again – especially so considering they have no choice as to whether they want to participate or not.
Nevertheless, the least we can do is to examine some of these claims to see if they actually check out.
Before we look at the actual results, it is important to define what we are actually comparing, because “majority of super funds” is such a loose terms that it really can mean almost anything.
To give a pertinent example, an unfunded defined benefit public sector fund, like the one to which many of our Federal politicians belong, will have had its “return” - at least from the members’ point of view – boosted nicely in line with the 5% pay rise the MPs were recently given!
It’s only a pity the same does not extend to the rest of us; we just get to pay for it!
Anyway, as things stand, the superannuation environment broadly splits into several sections, as follows:
- Industry funds: These are typically operated by trade unions and cover workers in specific industries, often under an industrial agreement or an award.
- Retail funds: Run by major financial institutions.
- Corporate funds: Operated by larger private sector employers specifically for their employees.
- Public sector funds: Cover State and Federal public servants and can vary widely in structures and benefit conditions. In Queensland, a well-known example of such a fund is Qsuper.
- Self Managed Superannuation Funds: Operated directly by individual taxpayers, they can only have up to 4 members.
A more detailed overview of the various types of superannuation funds can be found for example on the ASIC Money Smart website.
Leaving aside the public sector and corporate funds, which typically are only accessible to specific employees and can differ quite significantly from the “average” fund, useful comparisons can be made between retail and self managed funds, and to some extent also with industry funds.
It is worth pointing out however that industry funds do also have some distinguishing characteristics that can at times significantly influence their reported returns, but are not usually highlighted in media comparisons. To name just a few:
- They often cover workplaces with an industrial agreement or under a specific award, and therefore no choice of fund is available to workers in that industry. This then has the effect of the fund having to satisfy fewer redemption requests and therefore results in less need for liquidity (i.e. the fund can be more fully invested at all times).
- The membership tends to be younger, and therefore less likely to be drawing pensions. This again translates to lower liquidity requirements.
- They often have access to large infrastructure projects, typically with some government involvement (i.e. Victoria & Queensland water desalination plants or major road projects). Such investment assets are by definition illiquid and hence very hard to value, so even if they get mothballed and never produce any water – as has been the case in both QLD/VIC - the taxpayers are still obliged to pay, so on paper the returns always look great!
- They tend to have many unlisted holdings – for example ownership in direct property. Unlike listed assets (like shares, for example), there is no “live” market price determined at any time through a number of market participants, so valuing these investments is more or less open to the interpretation of the owners. In other words, the “true” value can only be determined once the asset is actually sold – which may not happen for decades, if ever.
With the above in mind, by far the most meaningful performance comparisons therefore need to come from large retail funds, because those are the only ones that anyone can access, plus they compete in an open market place, so their clients are free to join or leave as they see fit.
On that note, let’s select a suitable representative and check out its performance against the media articles.
One of the major funds that will do nicely for the purposes of our illustration is Sunsuper. It is the largest fund in Queensland, with a long history, having been established in 1987 as a multi-industry super fund. It incorporates the best features of retail funds (lots of investment options) with those of industry funds (low management fees).
By now, Sunsuper has $42 billion under management and over one million members. It is one of the best managed in the country; it has won multiple awards over the years, with the most recent one (Super Fund of the Year) being awarded in 2017.
Their “Balanced” investment option has been consistently amongst the top performers in the industry.
The data points covering investment performance are easily accessible on their site.
So here are some examples of returns achieved by the various Sunsuper asset allocations-based strategies over the last 10 years.
Australian Shares Active Strategy (i.e. fund managers who actively pick stocks for their portfolios):
Despite a drop of some 45% during the GFC, this strategy is up by about 56% since July 2007, resulting in an average return of 5.6% p.a. (including dividends).
This result looks much better if taken from the market bottom in March 2009 - but that's cold comfort to anyone who was not lucky enough to pick that particular date. It also again illustrates the point made in my last month’s blog post regarding the importance of market timing.
Australian Shares (passive/index-tracking strategy):
This strategy experienced a drop by around 55% in the GFC and is up at an average return of 4.5% p.a. for the 10-year period.
It is worth noting that for anyone who entered at around November 2007, rather than in July of that year, the initial drop in portfolio value would have been closer to 60% and their overall average return since has only been 3.2% p.a. Yet again, it is the timing that makes or breaks an investment!
Balanced (index):
I need to comment here that with respect to this asset allocation, unlike in Europe or USA, where “balanced” typically means 50/50 split between defensive (fixed income & cash) and aggressive (shares & property) asset classes, the average such fund here in Australia is almost never really “balanced”.
They typically have asset allocations ranging from between 60-65% (in other words up to two thirds of total) invested in "growth" assets. This provides for higher average returns when the stock market is strong, but also for more pronounced losses when that happy environment inevitably reverses.
Sunsuper’s performance in this investment option has been one of the best around, and at a little over 5.6% p.a. it is in fact slightly better even than that of their active share strategy, but with less volatility.
I know I’m repeating myself, but can’t stress enough that this once again shows that the simplistic claim of “over a long enough term, aggressive strategies will always outperform everything else” is a fallacy!
Those long term comparison with the actively managed share investment option also illustrates that active fund management often is not worth the extra fees!
Despite the decent average returns, investors in this asset allocation did however also see the value of their portfolio drop by some 30% between July 2007 and March 2009:
Balanced Active Strategy:
This is Sunsuper’s most widely used investment option; probably because, just like with the majority of industry funds, it has been the “default” one and most members don’t bother to switch.
It has also been the best performer, having returned about 6.9% p.a. over the past 10 years, even though the active fund managers did not manage to improve much on the comparative index strategy’s 30% drop experienced between 2007 and 2009.
It is worth noting though that the steep rise in unit values over the last 2 or so years is now well overdue for a substantial correction. In fact, the flattening of returns in 2015-2016 did have the potential to turn into one; as it was, that particular hiccup ultimately just ended up producing effectively zero returns for those 18 or so months.
However if one looks at only the most recent 18 or so months, it is possible to make the claim that double digit returns have been attained.
Having said that, it is usually accepted that at least 7 years should be used as a meaningful time period for such reporting & comparisons, and here you can see that the average rate of return has at best been around 7% over that time. It took more than 4 years to recover from the losses accrued in the GFC, despite the so-called "skill" of the active managers.
Conservative:
This strategy provides for investments mostly in the defensive/conservative asset categories, for example cash and bonds.
Interestingly enough – and again contrary to popular wisdom – the conservative approach has done almost as well as the actively managed "Balanced" option, with an average annual return of about 6.5%, but with much less intermediate volatility.
In fact, I would be prepared to guess that the investors in this option slept a lot better during the GFC, when the value of their investments had gone down at the most by 5%, than their “Balanced” fellow members, who had to suffer through drops about 6 times greater!
Of course, if you look at the active "Balanced" strategy above, you'll see that over the last 2-3 years they have outperformed the conservative strategy. This however will be of little comfort to investors using the more aggressive asset allocation, once we get the next significant stock market crash – especially so if they are now too old to perhaps have to wait another 5-7 years for a recovery!
So in summary, I think it is safe to say that the average fund has indeed managed to get close to double digit performance for the last financial year. After all, the broad All Ordinaries Index has clocked up around 8.32% plus dividends:
However, as outlined above, the longer term performance has been nowhere near as stellar. Furthermore, the vast majority of the strong return would have been attained in the first half of the financial year; the performance of the domestic stock market so far in 2017 has been rather less good at 1.6%:
And of course, what will happen going forward is anyone’s guess, but given the flat domestic wages growth, record levels of debt, increased taxes as far as the eye can see plus pressures on both household and business budgets thanks to 20% plus electricity price increases this year alone would indicate that over the near future double digit returns will not be all that likely.
Our
customers
are spread throughout
Queensland
investment
group DO YOU
FALL INTO?
CONTACT AAS TO FIND OUT