Asset mix does the trick for industry super funds

INDUSTRY superannuation funds have outperformed retail funds over the past 10 years and they have largely done so by being more active in their asset allocations. They are more prepared to change their asset allocation as market conditions change, which has paid off for their members over the long term.

By InvestSMART · 24 Apr 2012

By InvestSMART ·
24 Apr 2012

Comments

"The numbers say the not-for-profit funds have got it right over the past decade," Jeff Bresnahan, the founder of SuperRatings, said. Data from SuperRatings shows non-profit industry funds achieved an average annual return to March 31 this year of 5.86 per cent over the past 10 years, compared with a return of 3.56 per cent by retail funds over the same period, a difference of 2.3 percentage points.

The figures are based on a "balanced" investment option, where most people have their super.

Mr Bresnahan said the main reason for the difference in returns was asset allocation. Industry super funds are more aggressive in their asset allocation with bigger exposure to "alternative" assets, which include unlisted investments such as infrastructure, private equity and hedge funds.

The data shows industry funds have a 17 per cent exposure to alternative investments whereas retail funds have just 5 per cent. Retail funds have an exposure of 8 per cent to property, mostly to listed property trusts, while for industry funds this is 11 per cent, mostly through direct investments.

The returns are reported by SuperRatings net of fees. After asset allocation, the second factor for the better performance of industry funds was their lower administration fees, Mr Bresnahan said.

Low-cost retail funds are making their way into the market but their market share is still fairly small. "We see the gap [in administration fees] closing but it's still significant at about 40 to 50 basis points," Mr Bresnahan said.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

How have industry super funds performed compared with retail funds over the past 10 years?

According to SuperRatings, non-profit industry super funds returned an average 5.86% per year over the past 10 years (to March 31), compared with 3.56% per year for retail funds — a difference of about 2.3 percentage points on a balanced investment option.

Why have industry super funds outperformed retail funds in superannuation returns?

SuperRatings founder Jeff Bresnahan says the main reasons are different asset allocation and lower administration fees. Industry funds have been more active and aggressive in shifting asset mixes and have larger allocations to alternative and direct investments, which has boosted long‑term returns.

What does ‘asset allocation’ mean and how did it help industry super funds?

Asset allocation is how a fund divides money across shares, bonds, property, alternatives and other assets. Industry funds have been more prepared to change allocations as markets change and have higher exposure to alternatives and direct property, which helped lift returns over the past decade.

What are ‘alternative investments’ in super funds and how much do industry and retail funds hold?

The article describes alternatives as unlisted investments such as infrastructure, private equity and hedge funds. SuperRatings’ data shows industry funds have about 17% exposure to alternatives, while retail funds hold around 5%.

How do industry and retail funds differ in property exposure?

Retail funds have roughly 8% exposure to property, mostly through listed property trusts. Industry funds have about 11% exposure, with a larger share invested via direct property investments.

Are the performance figures reported with fees included?

Yes. The returns reported by SuperRatings in the article are net of fees, so they reflect performance after management and administration costs are taken into account.

Are low‑cost retail super funds closing the gap with industry funds on fees and returns?

Low‑cost retail funds are entering the market, but their market share remains fairly small. SuperRatings notes the administration fee gap is still significant at around 40 to 50 basis points, so the difference hasn’t closed yet.

What should everyday investors look at when choosing a super fund based on this article?

The article suggests paying attention to a fund’s asset allocation (especially exposure to alternatives and direct assets) and administration fees. For many people in a balanced investment option, those two factors helped explain why industry funds outperformed retail funds over the past decade.