Super funds where investment managers actively take bets on the future direction of markets are offering dramatically better returns than funds based on low-fee passive investing products.
Early signs from Australia’s leading super funds show that among players such as AustralianSuper, index-based investing has been a costly choice for investors inside the fund over the last year.
At AustralianSuper the balanced fund may have declined by 2.7 per cent but it did a lot better than its “index diversified” fund, which fell 5.7 per cent.
Australian Retirement Trust – the merged QSuper and SunSuper – gave the first official notice of the trend over a week ago when its traditional actively managed balanced fund achieved a positive number of 0.97 per cent – but its indexed balanced fund returned minus 8 per cent.
Now Hostplus, a fund that has consistently topped the performance tables in recent years, has confirmed the trend as its balanced fund was up 1.6 per cent, but its balanced index fund recorded minus 5.67 per cent.
David Elia, the chief executive of Hostplus, says the money has been flowing into the group’s low-fee index fund products.
However, Elia says: “We are saying to investors, fees are not everything. Of course they should be as low as possible but the problem with index funds – where fees are nothing at all – is that you don’t have protection when things go wrong on the markets.”
Elia adds: “We say to investors it’s performance that matters to building your super returns – an index fund just cannot offer the diversification that an actively managed fund will present, especially through unlisted assets.”
While all active managers will do their own asset allocation and stock selection, Elia and his chief investment officer, Sam Sicilia, have build a reputation for going well beyond the usual parameters, buying big into infrastructure and debt markets while making a strategic call to largely stay away from bond markets. Over the last year, an aversion to government and corporate bond markets would have been useful – as they had their worst year since 1994.
Hostplus’s Sicilia said: “In 2015 Hostplus made an active decision to significantly reduce its exposure to bonds in the belief bond portfolios would not provide downside protection to market volatility, during the low interest rate period.
“Equity and bond markets have, independently, delivered negative returns at a level that we have not seen since the GFC.
“Together, they have performed at levels not seen for more than a generation.”
The significant underperformance of indexed super products comes at a bad time for Vanguard – the best known passive investor in the local market.
After building a huge business in exchange-traded funds across the local market, the US group has been planning to launch a major offering into the retail super sector based on indexing in the near future. The project is reportedly being held up by regulators, (which may turn out to be useful if results continue to show index funds underperforming active funds in the months ahead).
Vanguard’s high-profile Australian-listed funds have suffered downturns over the last year with its flagship Australian share fund dropping 15 per cent in the year.
Perhaps the single biggest promotion for passive-based investing – often carried out through exchange-traded funds – has been widespread evidence that the majority of fund managers fail to beat market average returns. The evidence creates a case against using active managers – and their much higher administrative costs – in all markets including Australia.
Elia does not dispute the figures but argues the much quoted numbers may be somewhat misleading to everyday investors. “There are bad fund managers – there are plenty of them – but we don’t have to use them all, we keep away from the bad ones, ” he says.
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