The Superannuation Story, part 1

By Martin North. Cross Posted from Digital Finance Analytics Blog

In our first post for the new year, we begin a multi-part examination of superannuation, using the recently released data from APRA on industry and fund level performance to June 2013, together with DFA’s own research. Superannuation has become big business, with total assets now worth over $1.62 trillion (compare this with the $5 trillion in residential property in Australia). Last year it grew by 15,7%, or $219.8 billion. So it is important to understand the industry, how funds are performing, and to discover if there are important segmented differences. Note that this excludes the self-managed superannuation sector, which is controlled by the ATO, and runs on a different reporting cycle; and very small funds. These funds rose by 15.5% to be worth $506 billion, representing. SMSFs constitute 31% of the total. We will come back to these later, but today we look at the bigger funds.

To start the analysis, lets look at overall returns across the funds. The average performance to June 2013 was 13.7% in the last 12 months. This is the best result since the GFC in 2007, and ahead of the long term average of around 6%. But this average masks important differences, as shown on the chart below, which is a simple plot of returns ranked from lowest, to highest. This is data from nearly 300 funds, so not all the individual funds are labelled, it is the range of performance, from negative performance, through to over 20% which is interesting. It does make a difference as to which funds your money is in!

Super-2013-1

We did more detailed analysis of the top 200 funds. Here we show the 1-year data, and the smoother 5-year data by fund, stack ranked from lowest to highest. Again, not all funds are labelled. We see some funds performing much better than others, and some loosing over the 5-year view.

Super-2013-2

If we take the top 50 funds by size, and plot the performance, we see that size does not seem to matter when it comes to performance. We have included 10-year performance data, though there are some gaps as not all funds are that old. Performance is quite often not sustained across the three time horizons as some funds appear to find it hard to maintain enduring good performance.

Super-2013-7

Funds are categorised by APRA into Industry Funds, Retail Funds, Public Sector Funds and Corporate Funds. The largest by value are Retail Funds (44%), then Industry Funds (34%).

Super-2013-4

Membership is also spread across the fund types, with 49% in Retail Funds, and 41% in Industry funds.

Super-2013-5

The average member balance varies by fund type. The average member in an Industry fund has the lowest balance ($27,173) compared with Retail ($30,161), Corporate ($120,273) and the Public Sector ($63,889).

 Super-2013-6

The final picture today, is the relative performance by fund type. Retail funds, whether you look at 1 year, 5 years or 10 years, are under performing. Reasons will include the need for the entity to make returns to shareholders, commissions paid to advisors, different fee structures, and innate process inefficiency.

Super-2013-3

One last piece of data, there are over 28 million fund members, which means that many people will hold more than one superannuation account. We will come back to the significance of this later.

So, to conclude, we see that Industry funds perform better, that the size of the fund is not correlated to performance in the short or long term, and that there are wider variations in performance across funds, and funds types. All this leads to considerable complexity when individuals are thinking about their superannuation, and later we will use data from our surveys to compare and contrast. But its clear that not all Superannuation Funds are the same, caveat emptor (let the Buyer beware)!

Comments

  1. Thanks for the post, this is an area that doesn’t get enough attention.

    I’m confused by how you performed the comparison between funds, though.

    Each fund is made up of multiple asset classes (equity, fixed income, etc) so a simple comparison at fund level wouldn’t seem to be very meaningful.

    Were you only comparing the return on the Balanced options within each fund?

    Having said that, your overall conclusions are consistent with everything else that I’ve read.

  2. And even “Balanced” does not mean the same thing between funds.

    Then there are things like Sharpe ratio, risk adjusted returns.

    The only big picture takeaway is that perhaps low fees make industry funds a better choice at the macro level.

    Maybe the Corporate funds are the best choice but in some cases corporate funds may have a narrower range of investments, or maybe they are just whitelabelled wholesale funds with lower fees.

    The analysis is a nice start, but much deeper analysis seems required to do anything other than perhaps conclude that the expected return net of fees and costs is better in industry funds.

    Retail funds might include what Colonial first State calls Wholesale which have lower fees and higher account balances.

  3. Sorry but this comparison doesn’t work. You are comparing administrators/product providers based on the performance of their underlying fund managers.

    This is what the MSM does for headlines aimed at the level of understanding of their readers. Industry v retail etc.

    If you are invested in fund ‘abc’ with in an industry fund then it will return the same figure if it is offered in a retail fund etc.

    • I use Colonial First State’s First Choice product and of the 112 fund options I use 4.

      My super returned 16% for the year ending 30 June 2013. YTD so far is 11.84%. Not that great considering.

      Point being an average return has no relevance to me as I don’t invest like the average… what does the average represent?

      • thomickersMEMBER

        +1

        a ‘balanced fund’ comparison doesn’t work as the growth allocation varies between fund. industry standard is about 70%

        i’d argue that for the last 10 years Australian Super’s default ‘balanced’ was 85%-95% growth assets (now compare the returns lol).

        Then there is MTAA super which looked defensive as a balanced fund but 30% of its private infrastructure assets suffered a 50% permanent loss after the GFC (and still down to this day).

        And then there is CBUS super. They help build ghost dog box apartments and dog box offices around Melbourne docklands/southbank etc… Construction bubble = uhoh

  4. It’s funny, according to the high-priests of free market economics, the retail superfunds should be getting the best return on investment for their customers due to the profit motive.

    However, non-profit industry superfunds consistently outperform them.

    • Mining BoganMEMBER

      Our Tony wants to get rid of industry funds. Pesky unions only get in the way of making money.

      Oh, wait…

      • Our Tony wants to get rid of industry funds. Pesky unions only get in the way of making money.
        It’s not that they get in the way of making money, it’s that they make money for the wrong people. 🙂

    • BT Wrap has hundreds of managers to choose from so who cares what the average performance of those funds is, unless of cause you are invested in them all.!?!

      An industry fund may have 8 options with no choice of manager.

      Again the comparisons do not work.

      • “Again the comparisons do not work.”

        …. Yes, they do. Your straw grasping doesn’t change the reality that, on average, an industry superfund’s return is better than retail superfund.

        The numbers do not lie.

        “BT Wrap has hundreds of managers to choose from so who cares what the average performance of those funds is, unless of cause you are invested in them all.!?!”

        Nope. I interested in the overall performance of different players within the super industry.

        “An industry fund may have 8 options with no choice of manager.”

        This is the same with retail. Regardless, client’s money still has to be invested and returns have to be made.

    • Retail and industry funds both have the same motive of positive returns for stakeholders.

      The deliberately misleading propaganda that has been waged against retail funds in favour of industry funds is that because the former have lower fees, they outperform. This is only partly true, and not always true, and so inconsistently true that to imply it as a rule (as the TV ads do) is simply false and misleading.

      But its a moot point nonetheless. This is because the performance of ones investments should be ‘benchmarked’ not against the stockmarket or fund peers but against the achievement of one’s own objectives. Who cares if your fund returned 8% pa over the long term if to achieve your aspirations in retirement, you needed 10%. You’ve failed.

      The only performance benchmark investors need to know about is their own benchmark. Sadly, 99% of financial planners are clueless as to how to idenitify individual benchmarks and/or how to track to them.

      My final point is this, both retail AND industry superfunds are negative net value-adding investment propositions for most retail investors. Actuarial firm RiceWarner undertook a 10-year study that confirms this and my colleagues and I have extended the study since 2006 in real time, including the entire period of pre- and post-GFC , such that we now have a +16-year data set that continues to confirm the RiceWarner conclusion. Both will ALWAYS subtract value after fees and costs. There’s a very good reason for this that hardly anyone appreciates, but that’s a story for another day. If you’re interested to know contact me via LinkedIn http://www.linkedin.com/in/barlowscott

  5. Hm is this net of charges? If so, just proves the point that retail funds are featherbedding their managers

  6. Thanks for the analysis.

    Some of the comments here are focused on the issues with comparing different providers. Fair enough. You’ve got various definitions, fund managers, asset class mixes, etc. It’s very hard to work it out. No wonder money is flowing in to SMSFs. Looking to minimise fees is just about the only thing your average punter can do.

    I think that this is a very risky investment type for younger people. The rules (taxation allowances) will change frequently before they retire. And if the system were changed to give everyday Aussies the chance to put their Super wherever they please, it will go straight to residential property. That would be quite a bubble.

    I personally invest with an industry provider to keep the fees low and use their direct investment option so I can pick specific stocks. Will move to SMSF when I have enough cash / get organised. I am in my 30s and reckon there is a good chance I will never be able to access the money in my super account due to regulatory / political changes.

  7. the fact that the super rules will change in the future is such a dumb ass reason not to invest in super. Sure, that will happen. What is you basis for the amazing conclusion that you will never be able to access you super other than hyperbolic hysteria ??

    The tax benefits of investing in super are compelling. Sure they may tax it more in the future, but the government could introduce a land tax, financial tax, share transaction tax, take all your assets if they are really hard up for cash and put your a bullet in your head. Also, a meteor could fall out of the sky, turn into a huge brown booger and squash you tomorrow.

    Which is the bigger risk, pay an extra 30% tax today or avoid that and have the amount compounded at a flat 15% tax for the next 30 years ? I know which one I would take.

    I too am in my 30’s and to me putting in a deductible contribution to the max is low risk. I have 400k in super and have been putting in the max deductible for the last 10 years. It is not even 5% of my assets. If I could I would put in 100k/annum if this were deductible. If I was close to 60 I would make max undeductible contributions.

    There are people in their 60’s with 5+ million balances in super, can access it tomorrow and it is taxed at ZERO. Now that is a good deal. I don’t think it will be as generous when I retire, but so what! I’ve saved a bucket in tax in the meantime and will have enough for a comfortable retirement (by average standards) by contributing 5% of my income per year. And if the government collapses, well you have assets outside super for that and I think any asset class in this country, other than physical gold, would be at as much risk in such an extreme situation. Gold however relies on the fact that somewhere in the world civilization still exists. If for instance a meteor wiped out life on earth, gold too would be worthless. But then, we would all be dead anyway wouldn’t we, so why worry about that