2022 super returns: Superannuation returns for the 2021/22 financial year were mostly negative. However, we shouldn’t forget that the previous 18-month period (i.e., mid-2020 to the end of calendar year 2021) was stellar, so we must keep a longer-term perspective.
And the winner is…
The table below sets out investment returns for the largest 8 industry funds based on a Balanced investment option (data provided by research house, Lonsec). The table is sorted by 1-year returns, highest to lowest for the financial year ended June 2022. Hostplus achieved the highest return – more about this below.
I have selected the relevant pre-mixed investment options that have 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 the option 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.
Click here to view a similar comparison for a Growth investment option.
Beware of unlisted assets valuations (or lack thereof)
One of the concerns I have with some of these industry super funds is their lack of transparency, particularly with unlisted investments, as I discussed here last year. Transparency invites more accountability, which is a positive attribute, especially when investing is concerned. That is why I’m so attracted to rules-based and evidence-based investment methodologies – they are completely transparent.
Transparency allows stakeholders to make better assessments as to an investment portfolios inherent risks and therefore likely future returns. Transparency reduces risk too because there’s nowhere to hide fees, risk or underperformance.
I read with great interest this article in the AFR on 20 July 2022 (and this one in The Australian on 2 August 2022). The article suggested that two super funds held an interest in Australian technology company, Canva. These super funds (Hostplus and Aware) adopted two different valuation approaches for their shareholdings as at 30 June 2022. Aware reduced its valuation, as technology company valuations have fallen substantially through the first half of 2022. However, Hostplus didn’t amend its valuation.
Stripe is a large unlisted US technology company (like Canva) and it reported a 28% lower valuation in July, so it seems unreasonable (unethical) that Hostplus hasn’t adjusted its valuation. Coincidentally, Hostplus was the only fund to report a positive return last financial year. Read into that what you will.
Members may eventually pay
In July, the super fund regulator, APRA indicated that it would crack down on valuations of unlisted investments, but it could be too late for some members.
Most super funds are unitised investments which means that the fund calculates the value of members units each day. If a fund has overvalued an investment (which means unit prices are overvalued too) and a member leaves the fund, it will mean they will receive a higher payout (rollover) than what they would otherwise be entitled to if the investment was valued correctly. In this case, the remaining super fund members are left holding the bag i.e., they will wear the full impact of the eventual devaluation of the investment in time.
If you are concerned that your super fund has overvalued assets, then it could be wise to take your money and run i.e., rollover to a fund that offers greater transparency.
Less reliance on professional investment managers
To reduce investment costs for members, many super funds are now insourcing investment management. This means they employ a team of analysts and portfolio managers to manage and invest monies on behalf of a funds’ members (for example, AustralianSuper’s investment team is approaching 250 people in size). Previously, super funds would outsource investment management to professional managers.
Whilst it may be less costly to manage some of their monies internally, whether it has an impact on performance is yet to be seen. It can be very challenging to attract and retain portfolio managers, especially in this tight labor market. And managing underperformance can be difficult too – as you can sack staff as easily (quickly) as you can a service provider.
Finally, if portfolio managers fear underperforming, they will tend to avoid taking positions that are substantially different to the index. In that case, what investors end up with is expensive index hugging.
Of course, if they can do it successfully, it may end up benefiting members i.e., achieving the same performance for a lower cost. Time will tell.
Which industry fund provides the greatest amount of transparency?
Shares, bonds, cash and property investments are relatively easy to value, as most of these investments are traded in an open market regularly. This open market trading is important for price discovery and ensures that an investments value fully reflects all available information.
Conversely, alternative assets tend to predominantly be unlisted assets and are more difficult to revalue, especially on a regular basis. Therefore, super funds that have more listed assets and therefore fewer unlisted assets. UniSuper wins this competition by a big margin. It only invests 4% of its Balanced investment option in unlisted assets – all other funds listed above invest between 16% and 32% in unlisted assets, which is a significant amount!
Super funds will argue that unlisted investments offer super investors opportunities for better returns. But I would argue that super funds are attracted to these assets because they have too much money to invest and are forced to explore these other investments. But that’s their problem, not yours.
Index options continue to underperform
Last year, I advised superannuation investors to steer clear of the indexed invested options that some funds offer. The table below provides an updated comparison between the index option and the standard actively managed option. As you can see, the indexed option has underperformed over every time period. That’s because they only use one type of investment methodology i.e., market-cap indexing. It is for that reason that these ‘index’ options are not attractive options.
Conclusion: UniSuper is the best industry super fund
Whilst UniSuper produced the lowest return last financial year (out of the 8 industry super funds listed above), its longer-term returns are very attractive. In addition, it charges the lowest investment fees and offers the most transparency within its asset allocation. In my view, it’s the best industry super fund.
