2021 super returns: The best industry funds & important considerations

2021 super returns

It is not unrealistic to expect your super returns to be over 20% for the financial year ended June 2021. Of course, this is a great outcome in what has been a tumultuous year. However, I would like to highlight some important observations and considerations.

And the 2021 winner is…

The table below sets out investment returns for the largest 8 industry funds based on a Balanced investment option (data from Lonsec). The table is sorted by 1-year returns, highest to lowest for the financial year ended June 2021. Hostplus achieved the highest return. However, AustralianSuper is the best performing fund over 3, 5, 7 and 10 years as highlighted.

I have selected the relevant pre-mixed investment option that has between 60% and 76% of assets invested in growth assets e.g. shares. This is defined as a Balanced asset allocation. You will note however that some super funds don’t use the Balanced description – some call it Growth or Core and so on. This highlights that it is important to not rely solely on an investment option’s name. Instead it is important to examine the actual asset allocation of the option you are considering.

This list of top 10 super funds includes all industry and retail funds (my list above only compared the 8 largest industry funds).

Click here to view a similar comparison for a Growth investment option.

Often, it’s impossible to understand how your money is invested

Of course, it is basic common sense to make sure that you always understand how your money is invested. However, that can be challenging with some industry funds. Most people assume their money is invested in share and bond markets. However, some industry super funds invest a large amount of your balance in “alternative” investments.

Alternative investments can include almost any type of investment that cannot be classified as shares, bonds, property or cash. Alternative investments include things such as infrastructure, construction and private credit, hedge funds, private equity, currency, commodities and so on. Industry super funds do not have to disclose any detail regarding these investments. In fact, any information is often value vague so it’s impossible to assess the underlying risk.

The chart below (data from Lonsec) highlights that the amount each industry funds allocates to alternative assets. This ranges from 5% (UniSuper) to 33% (Hostplus).

Risks with alternative assets

The advantage of listed assets, such as shares, is that price discovery occurs on a daily basis. That is, market participants (investors) often buy and sell stocks. As such, the current price of an investment reflects all publicly available information and the market’s views. It is a very transparent process. This gives investors comfort about what their investments are worth and consequently, how they are performing.

However, many alternative assets are not listed assets e.g. shares in an unlisted company (i.e. private equity) or a large infrastructure project. As such industry super funds must periodically engage valuers to revalue these assets.

Prior to starting ProSolution, I used to work for a Big 4 accounting firm preparing business valuations. I know all too well that valuations can be highly subjective. The fact is that you never really know what an asset is truly worth until you attempt to sell it. Some commentators have accused industry super funds of using the subjectivity of unlisted asset valuations to their advantage to manipulate investment returns.

I note that the government is seeking to improve unlisted asset disclosure requirements but of course the industry funds are opposing the proposed obligations.

My other concern with unlisted investments is the lack of transparency and accountability. Investment risk hides in the dark. This is why listed companies have clearly defined reporting obligations – to help investors make informed decisions. However, industry super funds have no such disclosure obligations.

Why do super funds invest in unlisted assets?

The problem that large super funds face is that they have too much money to invest. For example, in the 2019/20 financial year, AustralianSuper received over $15.5 billion of new money to invest. Super funds therefore must look for alternative investment options.

However, this is a super funds problem, not yours. You have substantially less money to invest so it is entirely possible for you to invest it in a ways that is completely transparent and evidence-based.

The best industry funds are…

Taking into account past investment returns, fee levels and the desire to minimise exposure to alternative assets, it is my view that UniSuper and AustralianSuper are the two most attractive industry super funds.

AustralianSuper is Australia’s largest super fund. Its allocation to alternative investments, which consist of only infrastructure and direct property, is not unacceptable at 17.5%. Its investment fee for the Balanced investment option is 0.63% and it’s the best-performing fund over long period of time.

UniSuper was only available to people employed by Australian universities. However, from 1 July, it is now open to the public. It only invests 5% in alternative assets which consists of infrastructure and private equity. Its investment fee for the Balanced investment option is very low at 0.46% and its long-term investment performance has been excellent.  

Of course, this information is general in nature, and you must not switch to one of these funds solely based on this blog. In fact, depending on your situation, there might be better alternatives. For example, my super has been invested using a wrap platform for almost 20 years and I use this for most of my clients also.

Avoid indexed options

If you have been reading this blog for a while, you will know that I’m a huge fan of low-cost, evidence-based and rules-based share investment methodologies (such as indexing). Therefore, it is probably reasonable for you to assume that I would prefer industry super fund index investment option. However, I don’t.  

The table below sets out the performance of the longest running index investment options provided by Hostplus and AustralianSuper.

You will note that these index options have underperformed over various periods of time (remember, these returns are after investment fees).

American novelist, Upton Sinclair wrote that “It is difficult to get a man to understand something, when his salary depends on his not understanding it”. If the index investment options were hugely successful, industry funds would not need anywhere near the number of investment staff.

Firstly, it is therefore not in the investment team’s interest to promote or improve the performance of the index option. Secondly, industry super funds have close ties with unions, and they are typically not in favour of redundancies. As such, it is my view that non-index options will probably continue to outperform.

What is the best investment option?

Many super funds provide members with two options. The first option is a pre-mixed investment option such as Balanced or Growth. The second option allows you to formulate your own asset allocation by determining how much you would like to invest in Australian shares, international shares, property, bonds and so on.

It is my view that you should outsource this important asset allocation decision to investment professionals. Not only do they have the requisite skill and experience to make better-informed decisions, but they will review it regularly and make changes, as necessary.

The right super fund will make a massive difference

It cannot be underestimated how important it is to ensure your super is invested astutely as well as ensuring you minimise investment and administration fees. The compounding impact of optimising this over many years (and decades) is substantial.