At first glance, investors in the top performing balanced superannuation funds of 2016 have every reason to pop the proverbial champagne corks and dream about all the holidays and flat whites they will be able to afford in retirement.
The 10 best ranked funds last year, according to research firm Chant West, included Catholic Super, Hostplus, Cbus and CareSuper, and recorded gains of between 8.7 per cent and 10.7 per cent, well above the typical long-term objective of 3 per cent-4 per cent above the rate of inflation. As an aside, the $4.7 billion Media Super scheme, which is not in the Chant West survey, posted an 8.7 per cent gain last year.
But before members get too carried away by images of themselves on sail boats off the Croatian coast or renting apartments in New York, it is worth looking at the consistency of returns of those top funds.
Analysis of the Chant West data shows that of the best 10 performing funds for the 12 months to December last year, only half of them, the main balanced products managed by Hostplus, Cbus, CareSuper, Sunsuper and Statewide Super, appeared in the same bracket the year before and only one, Statewide Super, was in the class of 2014 – albeit not of 2013.
Think long term
The point is that members should not be paying too much attention to one-year performance data. While it is comforting to know that your fund has had a good year, it is more comforting to know that it has had a good decade. One 10.7 per cent increase over a 12-month period isn't necessarily going to afford you an annual cruise.
Likewise, one poor year does not mean members will be eating baked beans when they eventually quit the workforce.
While super funds that recorded the strongest returns last year pointed to overweight positions in Australian and international equities and unlisted investments such as property and infrastructure, those at the bottom of the ladder, such as ANZ Banking Group's OnePath OptiMix, were dragged down by the underperformance of "liquid alternative" investments. These investments have a low correlation to traditional stocks and bonds and are accessible in broadly available investment vehicles such as exchange traded funds.
AMP's responsible investment leaders vehicle, which posted a 4.8 per cent rise in 2016, says it missed out on the strong performance of alcohol, gaming, gold and other mining stocks, which the fund did not invest in. The fund also had a "different exposure to alternative growth assets" and a lower exposure to value managers.
"In 2016, value investors performed strongly, in large part due to the rebound in commodity prices and the back-up in bond yields. Conversely, quality and growth investors significantly lagged the benchmark albeit generating a positive return over the year," AMP says.
"Members should focus on longer-term returns. The 10-year numbers are far more important," says Mano Mohankumar, research manager at Chant West.
"Twelve months is nothing more than a record of what happened last year," says Media Super chief Graeme Russell.
"We have been at pains to convey the message that whilst it is fabulous to be on top in the short term, what is more important is the long-term performance of the fund," says David Elia, chief executive of Hostplus, which oversees $22 billion of assets and which posted a 10.1 per cent gain last year.
"My advice is that while long-term performance is not an indicator of future performance, it is certainly a good proxy in terms of what members can expect to receive over the longer term," Elia says.
Consistency counts
Analysis of the Chant West data shows that over 10 years, there is a reasonable level of consistency among the top performing funds. Since 2014, a group of schemes has ranked in the top 15 over 10 years. The funds are: REST, CareSuper, Cbus, BUSS (Q), Catholic Super, QSuper, Hostplus, Unisuper, Commonwealth Bank Group Super, AustralianSuper, Equip, Telstra Super, HESTA and JANA.
In the 10 years to December 2016, all have added an average of between 5.4 per cent and 6.4 per cent a year. For the record, the best performing vehicles over the past decade are REST, Caresuper, Cbus, BUSS(Q), Catholic Super, QSuper, Hostplus, UniSuper, Commonwealth Bank Group Super and AustralianSuper.
The returns are considerably above those achieved by funds at the bottom end of the universe. According to the Chant West data – which does not cover the entire universe of super funds – five balanced funds have posted annual gains of less than 4 per cent a year over the 10 years to December: MTAA, BT, OnePath OptiMix, Australian Catholic and Retirement and EISS. The average annual gain for balanced funds, which have between 61 per cent and 80 per cent of their portfolios invested in growth assets, over the past decade is 5.3 per cent. The average gain for 2016 was 7.7 per cent.
No room for complacency
Patrick Canion, chief executive of advice firm ipac Western Australia, says the gap between the high performers and those at the bottom of the ladder is "material". The difference is not 1 per cent or 2 per cent, but 50 per cent or more.
"This is not something that you want to put your head in the sand about," says Canion, recommending that members try to understand the reason for the lower returns.
The performance gap could have a particularly significant impact on savers in the current low return environment. The hit to a member's pocket from a fund that earns 4 per cent a year rather than 5 per cent is far greater than from a fund that returns 11 per cent rather than 12 per cent. It might be worth asking if the fund's assumptions about the global economy and global markets are correct.
Elia notes that luck can't explain consistent outperformance over the long term.
"These funds must be doing something that is fundamentally different," he says.
One strategy that Hostplus employs is a preparedness to take bets on markets. Last year it had overweight positions in Australian and international equities, infrastructure, private equity, unlisted property and corporate bonds, reflecting the scheme's view that the hunt for yield will persist given the prevailing low interest rates.
Other super funds have taken a more defensive position, Elia notes.
Brendan Casey, general manager of investments at REST, attributes the fund's strong returns to staying the course and being more conservative during volatile markets, investing in illiquid assets such as infrastructure and property, careful execution when it comes to deploying cash and changing fund managers and identifying and seeding upcoming fund management businesses.
Canion says that members thinking of switching super schemes should take into account fees. The Chant West performance data includes investment management fees but not administration fees. They might also consider moving from a balanced to a more aggressive option.
