Bumper superannuation returns: passive strategies outshine active

Passive index strategies are outperforming default super options this year — and at a fraction of the price for members.

Default balanced and growth options at some of the nation’s biggest super funds have returned 7 per cent-plus this year, but index strategies have fared even better.

Passive strategies at the nation’s biggest super funds are outshining the more popular balanced and growth options, heaping pressure on active managers who have staked their reputations on bulking up in-house investment teams.

Indexed offerings at mega funds AustralianSuper, Australian Retirement Trust, Aware Super, Hostplus, CBUS, HESTA and Rest are already well into double digit returns for the financial year to the end of May, as balanced strategies at the same funds struggle to get past single digits.

And members in these default balanced options are paying much higher fees, to the tune of hundreds of dollars extra a year, despite the lower relative performance.

Meanwhile, ethical strategies at these mainstream funds have, for the most part, fared even worse, with the greenest option in the market, UniSuper’s Global Environmental Opportunities Fund, languishing at a dismal -12.5 per cent for the year to the end of April (the latest returns data available).

The default balanced option at the nation’s biggest super fund, the $311bn AustralianSuper, is sitting on a return of 7.5 per cent for the year to the end of May, close to 3 per cent lower than its indexed option, at 10.2 per cent.

Even the fund’s high growth strategy can’t compare with its passive peer, with a 9.2 per cent return. Its socially aware strategy, meanwhile, is on a 7.2 per cent year to date.

It’s a similar story at the $265bn Australian Retirement Trust: the balanced option is on a return of 8.8 per cent compared to the balanced index strategy’s 10.7 per cent. Its growth option is not far behind with a return of 10.2 per cent, and its socially conscious strategy has a return of 8.4 per cent.

Aware Super’s balanced option is up 8.6 per cent return over the same period, compared with its balanced index at 11.5 per cent. Unlike a number of its peers whose ethical options have underperformed the defaults, Aware’s socially conscious balanced offering is up 9.8 per cent, more than 1 per cent higher than the mainstream strategy.

The fund’s high growth option is also up 9.8 per cent, but its high growth indexed option has powered even further ahead with a 13 per cent return over the first 11 months of the year.

Returns at a number of funds, including CBUS, HESTA, Hostplus and Rest are of a similar vein, with indexed options all outperforming the mainstream active strategies.

And it’s not just industry funds that have seen this outperformance in passive: retail super giant Colonial First State’s FirstChoice Employer Super balanced fund returned 10.8 per cent to the end of May, while its CFS Enhanced Index Balanced fund is up 11.3 per cent.

Not only are the indexed options delivering better returns, they are doing it at a fraction of the cost. At Aware Super, the indexed option fee is $187 a year on a balance of $50,000, while the fee for the default balanced option is just under $500.

At AustralianSuper, one of the lowest-fee funds in the market, the balanced option on an account of $50,000 comes with annual fees of $382 compared with $157 for its passive strategy.

The latest returns figures come after listed markets, particularly in the US, have seen exceptionally strong gains this year: the S&P 500 is up more than 20 per cent since early July, the Dow Jones has gained about 13 per cent and the Nasdaq is up nearly 30 per cent.

At home, the All Ordinaries Index is up about 6 per cent.

The gains are reflected in passive index funds because they can be much more exposed to equities than default balanced or growth options, which are typically better diversified, with investments in asset classes such as private markets, infrastructure and real estate.

The near-term outperformance of the passive indexed options over their active peers comes after a number of funds in the industry, including AustralianSuper, Aware, Rest and UniSuper, embarked on a deliberate effort to bring investment teams in-house, cancelling external mandates and promoting their own expertise, with the promise of higher returns and lower fees as a prime selling point.

Indeed, at least three of the biggest megafunds – AustralianSuper, Aware Super and Australian Retirement Trust – have gone as far as opening satellite offices in London (as well as New York in AustralianSuper’s case), in a bid to boost access to investment opportunities they say will benefit members on the returns front.

The internalisation drive has seen super funds whip billions away from external investment managers in the broader market. About 60 per cent of AustralianSuper’s assets are now managed internally and its headcount has ballooned to more than 300 across its three global offices.

Aware Super manages about 30 per cent in-house and has ambitions to get to as high as 50 per cent. Fellow industry funds HESTA and Rest are among those that have also internalised some investment capabilities, while Australian Retirement Trust and Hostplus have so far resisted the trend.