Retail funds lag industry

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 than retail funds. Industry funds are more prepared to change their asset allocation as market conditions change, which has paid off for industry fund members over the long term.

By InvestSMART · 24 Apr 2012

By InvestSMART ·
24 Apr 2012

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"The numbers say the not-for-profit funds have got it right over the past decade," said Jeff Bresnahan, the founder of SuperRatings. Data from SuperRatings shows not-for-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 superannuation.

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 exposures 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. Industry funds have an 11 per cent exposure, mostly through direct property investments.

The data shows the only time frame going out to 10 years over which retail funds outperformed is three years. That reflects the partial recovery in listed markets since the worst of the GFC.

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

Low-cost retail funds are making their way onto 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," he said.

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Frequently Asked Questions about this Article…

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

SuperRatings data shows not-for-profit industry super funds returned an average 5.86% per year to March 31 over the past 10 years, while retail funds returned 3.56% per year — a gap of about 2.3 percentage points on a 'balanced' option.

Why have industry super funds outperformed retail funds in long‑term superannuation returns?

According to SuperRatings and Jeff Bresnahan, industry funds have been more active in asset allocation and more willing to change allocations as market conditions shift. That, plus lower administration fees, has helped industry funds deliver stronger long‑term returns.

What role does asset allocation play in the performance difference between industry and retail super funds?

Asset allocation is a key driver: industry funds tend to be more aggressive with bigger exposures to alternative and direct assets, while many retail funds have higher weightings to listed assets. Those allocation differences have materially affected returns.

What are 'alternative investments' and how much do industry and retail funds allocate to them?

The article defines alternative investments as unlisted assets such as infrastructure, private equity and hedge funds. Industry super funds have about 17% exposure to alternatives versus around 5% for retail funds.

How do property exposures differ between industry and retail super funds?

Retail funds have roughly 8% exposure to property, mostly via listed property trusts, whereas industry funds have about 11% exposure, largely through direct property investments.

Are the reported superannuation returns net of fees, and how do fees affect performance?

Yes — the SuperRatings returns are reported net of fees. After asset allocation, lower administration fees are the second major factor in industry funds' stronger performance. SuperRatings notes the fee gap is still significant at about 40–50 basis points.

Have retail super funds ever outperformed industry funds in recent timeframes?

The data shows retail funds outperformed industry funds only over a three‑year timeframe within the 10‑year window, which reflects the partial recovery in listed markets since the worst of the GFC.

Are low‑cost retail super funds closing the performance gap with industry funds?

Low‑cost retail funds are entering the market but currently have a fairly small market share. While the administration fee gap is narrowing, SuperRatings says it remains material at about 40–50 basis points today.