Secrets of super funds’ shame file worth the wait

Like falling dominoes, each time a fund fails someone must shift – and there are an estimated 800,000 members who have needed to move funds in recent years.

It’s been a long time coming, but the wait for the super performance tests has been worth it. With little fanfare this week, the government released the first time ­results for 800 Choice super funds, and the results were nothing short of stunning.

Until very recently most people had no idea how their super fund was performing against the market.

Even until this year we only knew the facts about a few dozen default MySuper funds. But this week we got a reading on the sector where most active investors have their money. And it turns out the “shame file” is significant: nearly one in 10 failed the test.

What does it take to fail? It means the fund did not match an average performance benchmark set by the regulator – the Australian Prudential Regulation Authority. Keep in mind it is a minor miracle that this very public test exists. And of course it has flaws, but they are greatly outweighed by the broader benefits.

Will Hamilton from Hamilton Wealth Partners. Picture: Aaron Francis

Super is much too important to be left in a fund that does not make the grade – it is inexcusable of any fund to leave you in a dud fund. After all, a child could place their savings in an exchange-traded fund and would be guaranteed to match market benchmarks.

As Will Hamilton of Hamilton Wealth Managers puts it in the latest Money Puzzle podcast: “We have transparency and super managers will now make sure they do not get named and shamed. There is nothing more important than running other people’s money – the funds have to get it right.”

Surprise arrivals

The surprise factor within the ­results was not just the scale of mediocrity but the appearance of dud funds well beyond the list of usual suspects.

Moreover, failure came in all shapes and sizes – and there was little evidence that investing style made a difference.

For example, two of the funds that failed would seem to be the opposite side of the coin: Cruelty Free Super, which rails against animal foods and live meat exports, did not make the grade. But neither did the Australian Meat Industry Superannuation high growth super option.

History suggests that some of the worst numbers will come from the retail funds, and they did flunk again – especially funds relating to AMP and Insignia (which now houses brands such as IOOF and MLC).

All up, 26 funds linked with AMP did not make the grade. At Insignia, 5000 investors were in underperforming funds.

Even some of the biggest names in the industry fund sector have been caught here. Australian Retirement Trust, a top 10 fund (a merger for the former SunSuper and QSuper) tripped up with its QSuper Socially Responsible Fund.

ART instantly issued a statement explaining the fund, which fell 0.41 per cent last year, will close down on July 1 and 8500 unfortunate members of the fund will be pointed towards better funds.

The screamer in the process is the first-time glimpse into the performance of funds that are on platforms – if you are in a super fund option that is on a platform, you have roughly a one in five chance that the fund is not performing according to the APRA test.

Most investors who have this sort of platform exposure would have got it through a financial adviser, and the average fee for an adviser is $3500 a year!

Brutally efficient

Funds that failed have been talking about how investors exposed to these failures are a “small cohort”, but that is little consolation if you are in that cohort. There are an estimated 800,000 members who have needed to move funds in recent years due to poor performance results.

Moreover, there is nothing worse than having to switch super funds because the fund has let you down, especially if you are older because you simply do not have the time to make up for the years stuck in a dud fund.

But there is some good news here – it is beyond dispute that the shame file process is working and is brutally efficient.

APRA deputy chair Margaret Cole makes the point that investors in Choice funds “make active decisions about their investment options and some might select products for reasons beyond performance”. In other words, they have invested with their heart rather than the mind of an economic rationalist – and there will regularly be a price to be paid doing that, especially when commodities are running hot.

Funds that fail the annual test – by underperforming the government benchmark by 0.5 percentage points – must notify their members by September 28. And if they get that result for two straight years, the fund’s product must stop accepting new members. However, by that stage a larger fund will probably have rescued them through a “merger”.

But the big takeaway is that things are getting better. The public performance tests have been running since 2021 for the My­Super products. The first year APRA did the exercise, 13 failed, the next year five failed, and this year only t one failed – the AMG super fund, which has failed three years in a row and is now in the miserable business of trying to rescue members in a deep hole.

APRA deputy chair Margaret Cole. Picture: John Feder

There is already a useful consolidation going on among super funds where at its worst there were dozens of piddly little funds with boards made up of people who often had little clue as to what was happening.

So, it’s good to know that the majority of funds that failed in phase one of these tests – the MySuper tests – are no longer with us.

Mapping the tests onto the Choice sector should have a similar effect. It also means the big funds are going to get bigger still. Don’t be surprised if super is more like the banking system or the sharemarket in 10 years time, where the vast bulk of the money resides inside 10 funds.

For the active investor, the main thing is to at least once a year take a look at how your fund is performing … and make sure it is not failing to make the grade.

There is still a lot of work to be done here – retirement products are not included in the tests just yet. To get a full picture of the MySuper fund sector, go to the ato.gov.au site. To see a limited picture of the Choice funds, try the apra.gov.au site.