Retail super funds are finally beating their industry fund rivals

A surging stockmarket is putting industry funds on the back foot.

Is the empire striking back?

Superannuation funds run by Australia’s biggest banks and life insurers — the so-called retail funds — are beating their union-linked industry fund rivals for the first time in a long time.

And the momentum may well be swinging, with bullish prospects for local and global sharemarkets.

Over the last quarter, retail funds beat industry funds and over the most recent reporting period for April they also had the upper hand, says independent research agency Chant West.

Now there is a very simple reason why the retail funds have been winning — it’s the strong upswing in the Australian sharemarket.

Put simply, the retail funds are highly dependent on the fortunes of the Australian sharemarket and the ASX has been surging — in fact if we closed off the returns for the ASX for FY2017 this weekend investors would be sitting on total returns (i.e. with dividends) of about 14 per cent — a terrific return running at twice what you might reasonably expect in an average year.

The rivalry between retail funds and industry funds is intense and often useful — Australian investors have a two-way choice when it comes to their super: they can choose a retail fund or an industry fund.

In reality, if they don’t actively choose, they end up in an industry fund. Many people — especially lower-paid workers — don’t choose.

For the past decade or so industry funds have been winning — the key reason for this is that industry funds have lessened their exposure to the sharemarket and pumped money into private equity and infrastructure investments.

Under this scenario it is the retail funds that have been pushing water uphill in the public relations battle — largely because the ASX has not performed in line with world markets — in fact it has been left behind, especially by Wall Street.

Separately, unlisted infrastructure — the asset of choice for industry funds — has been the big winner in many markets and retail funds have just not had a seat at the table.

The tipping point

Now that the tide may be turning, it is disappointing to see the industry funds instantly resort to a public-relations campaign that at its worst is a decoy.

Since our local sharemarket has been powering ahead now for two years solid — the industry funds know full well this week’s figures were going to flatter the retail funds.

And rather than getting ready to explain themselves industry funds resorted to diversionary tactics — Industry Super Australia released a report suggesting retail fund returns in recent years have not even matched term deposits, a pretty arresting proposition since term deposit rates have been running at record lows for some time.

According to Industry Super Australia, over the past decade APRA-based returns indicate that retail funds returned an average of 3.3 per cent a year, compared with industry super’s 5.1 per cent.

But this is simplistic and industry fund managers know that. As Sally Loane from the Financial Services Council told The Weekend Australian: “The fund-level data provided by APRA must be approached with caution as it includes all the investment options offered by retail platforms — including low-yielding cash and bonds — which are designed to protect capital rather than post stellar returns.”

In other words, the industry funds were not comparing apples with apples. Think of it this way, if I opt for a conservative fund that will conserve my savings I am not going to do as well as someone who opts for a growth option in a super fund — and that goes for whether I am in an industry fund or a retail fund.

Industry funds have performed better across the board then retail funds for a decade: most of the best performing funds have been industry funds, most of the worst performing funds have been retail funds. Until very recently industry funds as a class had the score on the board.

It’s a pity then industry funds had to duck for cover the very moment their returns finally dropped below their rivals.

You have to go back to at least 2003 — 14 years ago — before the industry funds were in the back seat.

A Roy Morgan research report — released earlier this week — which tracks satisfaction levels among superannuation fund customers — reported industry funds had a satisfaction rate of 57.3 per cent and retail funds had a satisfaction rate of 60 per cent.

As the research note explained this is actually a historic milestone: “It was the first time the retail funds had trumped industry funds since 2003 ... when the survey was first conducted.”

Retail funds have suddenly got some results they can trumpet and it’s no fluke — it’s clearly linked to market action and if the market keeps motoring at these levels for a few more months we will have a real battle on our hands.