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Myth busting industry super fund 'outperformance'

Friday, 03 November 2017

When we released our research, ‘Guarding your nest egg: restoring independence to industry retirement funds’, earlier this year, we predicted that industry super funds would claim that they outperform retail funds as a standard defense to sensible reforms such as adding independent directors to superannuation trustee boards.

So, we took the time to consider whether they really had a point and made the effort to explain away this myth, and point out that average industry fund returns hide a tail of underperformance, and that when making adjustments for risk and the illiquidity premium their outperformance could be explained away.

This week, we went further responding in the Australian to former Federal Treasurer and current Future Fund Chairman Peter Costello’s observation that the future fund was outperforming funds like Australian super on a 10 year basis, and suggesting that that competition in the super system would be another way to improve returns for all members before jumping on the Future Fund bandwagon.

But, it’s also important to note that others are starting to seriously question the myth of industry fund performance.

Here is a sample of what they are saying since the release of our report.

A Treasury official at the Senate Economics Legislation Committee this year said:

“If you look at it on a crude-average basis across the entire sector, you're not really comparing like with like… It's very hard to generalise. You're talking about an average. Within that average, there are going to be funds that have done well and, at particular times, funds that have done less well, and that's in all sectors.”

An APRA official at the Senate Economics Legislation Committee this year said:

“So comparing at fund level, and particularly comparing averages by sector, is just not meaningful.”

Christopher Joye, from a portfolio manager from Coolabah Capital Investments and Smarter Money Investments, in today’s Australian Financial Review on how you can up your risk to achieve outperformance, another point made by the MRC:

“Even more astonishingly, while the Australian Prudential Regulation Authority happily publishes rankings of super funds based on their one, five and 10 year returns, there is absolutely no accompanying time-series information on these funds' risks. That is to say, no data on the volatility of their returns, their worst months, or deepest peak-to-trough draw-downs.

Private sector super fund rankings likewise assume savers live in a world in which only returns count with zero consideration of the accompanying downside, which is a disgrace.

If as a super fund trustee your performance relative to peers is always judged exclusively in return terms, and you suffer no costs for the risk you assume to generate these pay offs, what do you think you will do? Max out your risk limits, of course.”

Chris Brycki from investment firm stockspot, goes even further:

“What’s noticeable is the huge difference in the performance between industry funds over time… Clearly you need to be selective even if you’re in an industry fund as the differences in returns can be huge, 50% or more over 10 years.” (see tables reproduced below).

Best performing industry super funds
Fund Size ($b) 10 year cumulative rate of return
UniSuper 57 88.1%
MyLifeMyMoney Superannuation Fund 9 81.0%
Building Unions Superannuation Scheme (Queensland) 4 78.9%
CareSuper 14 77.5%
Construction & Building Unions Superannuation (CBUS) 34 77.3%

 

Worst performing industry super funds
Fund Size ($b) 10 year cumulative rate of return
Nationwide Superannuation Fund <1 30.5%
The Transport Industry Superannuation Fund <1 33.1%
MTAA Superannuation Fund 9 36.3%
Prime Super 4 42.2%
Statewide Superannuation Trust 7 42.4%

Source: stockspot

Mr Brycki, from stockspot, also notes the egregious spending of members money in a system where you have guaranteed flows from default status due to the industrial relations system:

“AustralianSuper spent $11 million on advertising over the last 2 years and yet their investment performance barely gets them into the top 10 industry funds. Meanwhile their admin costs have been rising not falling. The idea that TV ads and sports sponsorship leads to more members, lower costs and better benefits just doesn’t stack up. I joined AustralianSuper 5 years ago expecting that scale would reduce their costs… over that time my annual admin fee has increased. I’d like to know how increasing my administration fees and sponsoring ‘The Voice’ has helped my retirement?”

It’s clear that Treasury and APRA, and segments of the investment community are waking up to the oversimplifications of the “compare the two” campaign industry funds have been peddling.

The only question is, when will the Australian and Securities Investment Commission act on what could be misleading and deceptive conduct in advertising. - Spiro Premetis

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