Which super fund produced the best returns in 2019/20?

industry super funds

Despite the share market volatility as a result of Covid-19, many industry super funds produced positive investment returns last financial year. Whilst that might seem entirely good news, there are some concerns for which industry super fund members should be aware of.

Let’s start with the good news first

I have compared the largest 8 Australian industry super funds. According to data collated by our research provider, Lonsec (SuperRatings), Cbus produced the best returns in the 2019/20 financial year. However, AustralianSuper produced the best long term (10 years) return, although there not a big difference between the top 3 funds (Hostplus, UniSuper and AustralianSuper). I have compared the investment options with similar levels of growth assets – but more on this below.

Industry super fund 1 Year 3 Years 5 Years 7 Years 10 Years
Cbus – Conservative Growth 1.93% 5.43%
First State Super – Balanced Growth 1.12% 5.47% 5.77% 6.75% 6.96%
UniSuper – Balanced 0.87% 6.97% 7.28% 8.73% 8.71%
AustralianSuper – Balanced 0.52% 6.65% 7.35% 8.76% 8.77%
HESTA Pers – Core Pool 0.00% 5.84% 6.27% 7.77% 8.01%
Rest – Core Strategy -1.05% 4.48% 5.22% 6.94% 7.66%
Sunsuper – Balanced -1.69% 5.71% 6.47% 7.94% 7.97%
Hostplus – Balanced -1.74% 5.69% 7.01% 8.49% 8.63%

Click here for a comparison of growth/high growth investment options.

Of course, longer term returns are what is most important. It is not always possible or even desirable to produce the best returns each and every year. Sometimes a fund has to take too much risk to do so.

Investment returns are important for marketing

There is no better marketing than achieving the highest investment return as it attracts a lot of new superannuation members.

I was very interested to read this article in the Australian Financial Review about Hostplus’ balanced option. For the financial year up until May 2020, it had lost 3.5%. However, as timing would have it, on 29 June 2020, the Fund decided to revalue its unlisted property 6.8% higher. This resulted in halving its its Balance options loss to -1.74% for the financial year. How convenient. I discuss my concerns with respect to transparency and accountability below.

There are a number of ways a super fund can window-dress its returns including revaluing unlisted assets and changing the asset allocation i.e. being more or less aggressive than the desired allocation of the investment option.

Fees vary substantially between funds

If your super balance is relatively low, fees (and contributions) matter more than investment returns. However, as your balance grows (and certainly if your balance is above $250,000), investment returns become the most important factor.

Out of the selected funds, First State Super (FSS) charges the highest fees for its balanced option at 0.95%, whereas UniSuper is much cheaper at 0.53%. That is, UniSuper’s fees are nearly half as much as FSS, and that is likely to have a substantial impact on your balance over time.

Importantly, you do not have to pay higher fees in order to generate higher investment returns. You will note that UniSuper is the most inexpensive fund with close to the highest returns while for FSS, the reverse is true. The less you pay, the more you receive.

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Concern 1: Some funds invest more aggressively it appears

Pre-mixed investment options allow you to invest your super in a way that is commensurate with your risk appetite. If you are conservative, then you must select a conservative investment option. However, if you are aggressive, then a ‘growth’ or ‘high growth’ investment option might suit you. And if you are in between, like most people, a ‘balanced’ investment option is the way to go.

However, most ‘balanced’ options are not really that balanced. Instead, their asset allocation is closer to growth. The reason for this is they are chasing higher investment returns, to make their fund appear more attractive.

You might be surprised to learn that the assets super funds invest in can vary dramatically. For example, Cbus only invests 31.5% of his ‘balanced’ option in shares compared to 60% for UniSuper – this is what has helped them achive the best returns last financial year. Therefore, don’t be fooled by the investment option’s name – you must review its actual asset allocation. The chart below illustrates these variations.

Perhaps the most concerning allocation is what is called “alternatives” because this asset class is very opaque. Alternative investments typically include infrastructure, private equity and credit (i.e. corporate bonds), but can include anything really including derivatives, currencies, commodities and so forth.  

This lack of disclosure and consistency makes it impossible for investors and their advisors to accurately understand how their money is invested and the associated risk. Furthermore, because most of these ‘alternative’ investments are unlisted, their pricing (valuations) are not transparent. More on this below.

Concern # 2: in-house investment management

In the endeavour to reduce investment fees, most of the industry super funds are increasing the amount of investments that are internally managed by their staff, as opposed to using external investment managers. For example, AustralianSuper currently manages 39% of its ‘balanced’ investments but aims to increase that to 50% by 2021.

Whilst this might sound like a good idea, its impact on future investment returns is uncertain. It creates some potential challenges. Firstly, it is more difficult to sack an under-performing staff member compared to a fund manager. Conversely, retaining a team member that produces above average investment returns is equally difficult – as other super funds and money managers will try to poach them. Finally, staff turnover can also adversely impact investment performance. In short, it’s all about attracting and retaining the right people which is an added challenge for these funds.

Concern # 3: Almost no transparency leads to very little accountability

The only way to create a strong level of accountability, is to ensure complete transparency. That way, it’s impossible to hide. Everything is out in the open for people to see; including risk, performance and fees. This is true for any and all investments, not just super.

There is almost no transparency with respect to industry super fund investments, individual investment performance, risks and so on. It is near on impossible to ascertain what your fund invests in. This was the concern that research provider, Lonsec cited when it downgraded AustralainSuper’s rating recently.

The existence of unlisted investments can be a cause for concern as prices/values are not set in an open market. Of course, the funds are subject to financial statement audits and the like, but this still gives rise to a large amount of subjectivity. An unlisted investment’s value is inherently more uncertain compared to an asset that trades on the open market.

A recent example of this is Hostplus’ property revaluations on 29 June 2020 which I referred to above. Whilst these revaluations may well be prudent and accurate, the timing together with an overall lack of transparency, invites scepticism. 

By comparison, listed companies have continuous disclosure obligations by law. This mean companies must report to the ASX any information that “a reasonable person would expect to have a material effect on the price or value of the entity’s securities”. This created a very transparent market and provides information for investors to base decisions upon. It is my belief that super funds should be subject to similar reporting requirements. That is, the requirement to disclose any information that a reasonable person would expect to have a material impact on the value or performance of their super balance. This would allow members and their advisors to make more informed decisions. Of course, most organisations rarely want to invite such transparency and accountability for obvious reasons.

Industry fund index options

Many industry super funds offer 100% index investment options e.g. a balanced fund that is only invested in index funds. Whilst these investment options do provide significantly more transparency, as I wrote about last week, I do have concerns with the underlying risk in these portfolios. In addition, their asset allocation is different to their actively managed options which has meant the investment returns have been circa 1% p.a. lower over the past 5 years. It is for these reasons that I’m not a fan of these index options, even though I’m a staunch believer in indexing investing.

Our super portfolios under-performed last financial year

As I wrote in this blog last week, some company and sector valuations in the share market appear irrational and very risky. I always construct investment portfolios with the aim of maximising investment returns over the medium to long term. Short term results are largely irrelevant. This is evident by the fact that after a return of 19.48% in the 2019 calendar year, the weighted average return across my clients’ super portfolios for the 2019/20 financial year was a loss of 3.81%.

Stockbrokers and fund managers typically only advertise returns when the news is good, for obviously reasons. But I’m happy to be held accountable for the returns we produce. I know that it is not always possible to achieve the best returns each and every year, particularly if that is not your aim. For the 10 years ended December 2019 our returns were identical to AustralianSuper’s – which means we beat every other industry super fund.

I am very clear on the reasons why we have generated lower returns over the past 12 months. It’s because we have had materially lower exposures to over-valued companies, sectors and markets. I see no reason to invest my clients’ monies in asset price bubbles. Not only is that high risk, but it’s also likely to impair longer-term investment returns.

Most importantly, my clients and I have full transparency – we know how and where their monies are invested and how each investment has performed compared to its index. This invites a high level of accountability.

Past returns are not a reliable indicator of future returns

The most important predictors of medium-term investment returns are (1) how your money is invested i.e. asset allocation and methodology and (2) the investment fees you pay. Past returns can sometimes be a guide but are not always a reliable predictor. Super investors would be well served to consider some of the risks I’ve outlined above.