Don't Let Super Returns Reporting Undermine Your Long Term Objectives

by Dominique Schuh

With local equity returns offering investors uninspiring returns over the last financial year, it was inevitable that the media would tee off about the lack of growth in "Super". Scribbler for The Age and Sydney Morning Herald, Elizabeth Knight was one who took aim. In doing so she did neither herself, nor her readers, any favours, specifically saying "good active managers will more regularly outperform index players" among other things we've quoted below. 

The most telling of the performance data is how Super funds have invested on a sector basis. In total 41.6% of the average manager's allocation was invested in financials – which means the big four Australian banks – in the nine months to March this year. The financial sector's return over the year to June 2016 was negative 3.5 per cent. The next biggest sector allocation was materials (11.7%) – this is basically BHP Billiton and Rio Tinto and this category's value fell 2.8% over the year. 

On the flip side, 2016 saw utilities stocks rise an impressive 24.4%. But the average allocation of funds to this sector was a miserly 2.2% to March 2016. In other words Super managers are still putting well over half of the billions of dollars they invest into the very big Australian corporates – regardless of the fact that the shares have been declining. Why would they employ such a counter-intuitive investment manner? 

Because a large portion of funds management are index players – meaning they invest in line with any company's weighting in the index. And because companies like the banks, the big miners and Telstra make up a large part of the stock exchange index, most of the Super money will be invested in these stocks. This strategy works sometimes – particularly when markets are stable. But over the past year markets have been particularly volatile and active funds managers have performed far better. Last year the Australian index huggers were significantly trumped by funds that invested offshore – because of better returns from international share markets and a very strong currency tailwind. 

Knight might want to get to the bottom of how investors can get better returns, but her approach feeds into the same short term frustrations that lead investors to make knee jerk decisions and chase returns based on a previous year's success. Firstly, complaints about 1 year returns because of allocations to an index are ridiculous and only result in that short term thinking. How long is the average Superannuation investor's timeframe? No one knows ahead of time which sector or asset class will be the best performer – if they did why would they waste their time working for a fund manager? 

What Knight failed to tell her readers was over the 5-year period to December 2015, 67.18% of the active fund managers she talked up failed to outperform their benchmark (ASX 200). Which means unless you know ahead of time who those best performing active managers will be, you're better off taking the lower cost index option referenced. Secondly, the point about Australian index huggers being trumped by funds investing offshore is an apples and oranges comparison between two different asset classes. Any investor with a growth tilted portfolio properly allocated to their risk profile will have both local and international exposure. 

Knight unfortunately gives the impression investors should be chopping and changing, which has historically proven to provide lower returns. And when it comes to active managers and their international performance, Knight's claim that "good active managers will more regularly outperform index players" doesn't stand scrutiny. Over 2015, 72.87% of active international managers failed to outperform their benchmark and over the 5 years until December 2015 that number increased to 88.24% of active managers. 

Again it's a small pool that will forever be changing, so ahead of time no one knows who the best active managers will be. This isn't to defend the local Superannuation industry because their default offerings will never be a substitute for a portfolio geared towards an investor's specifics. However, the focus on poor returns in one asset class in one year (poor years happen), gives a futile comparison between asset classes when they both form part of a balanced portfolio. The insistence an investor will find better returns with an active manager, when troves of data suggest otherwise, does investors no favours. 

*With thanks to DFA Australia. This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor's objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.