Record gap emerges between default super funds and indexed counterparts

Off the back of a turbulent year for markets, online investment adviser Stockspot has highlighted a significant difference in funds’ ‘active bets’ against indexed options.

Primarily, it found most default super funds have lagged diversified index funds that simply track the market as a whole, underperforming by an average of 4-5 per cent.

Looking at balanced options, containing 41 to 60 per cent in growth assets, the average return stood at 7-8 per cent over the financial year, while index balanced options returned 12-13 per cent over the same time period.

Similarly, growth options, with 61-80 per cent in growth assets, returned 9-10 per cent, compared to index growth options which returned 12-13 per cent.

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According to Stockspot, while funds still expect to post positive returns against the backdrop of geopolitical instability, high inflation, and high interest rates, financial year 2024 “represents the biggest gap we’ve ever seen between the average default super fund and an indexed super fund of similar risk.”

"If your balanced or growth fund returned less than 10 per cent this year, it's important to question your super fund about it,” said Chris Brycki, chief executive of Stockspot.

“Are the fees too high? Are they paying fund managers for unsuccessful stock picks? Are they invested in illiquid unlisted assets that are facing devaluations?”

For Brycki, this year’s varied returns underscore the effectiveness of APRA’s superannuation performance test that benchmarks funds against the index. 

“Extensive research shows that 80-95 per cent of actively managed funds across all asset classes underperform the index over time,” he pointed out.

“If super funds are going to take active bets, it's important they are held accountable for the additional risks they impose on member money. The best way to ensure this accountability is through comparisons to simple indexed portfolios.”

Stockspot’s research attributed the divergence in investment performance to a number of factors, including super funds doubling down on private assets.

It noted poor performance from active stock picking, with the majority of fund managers, particularly in global shares, “failing to keep pace due to their underweight positions in large-cap technology shares.”

Earlier this year, S&P Dow Jones Indices’ SPIVA Australia Scorecard report noted the majority (81 per cent) of international general equity funds failed to outperform their benchmark. The number ticked up to around 94 per cent of funds over a 10-year and 15-year horizon.

Additionally, Stockspot observed active funds have been “heavily invested” in private assets, notably unlisted property.

“Although some super funds have discontinued these as separate investment options, they remain a substantial part of their default funds,” it explained.

Meanwhile, in terms of the most successful assets this year, Stockspot pinpointed indexed global shares, which increased by 29 per cent, and gold, which rose by 23 per cent.

“Funds with higher allocations to these assets generally fared better,” it added.

In light of the underperformance of super funds’ ‘active bets’, Brycki said he was “surprised” that funds have been expanding their investment teams and opening overseas offices “when it's clear that such moves do not add value for members.”

“Large super funds would be better served by reducing their investment teams and focusing on indexed investments, thereby passing the cost benefits on to their members,” he argued.