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Do super fund managers - who have been called 'index huggers' - really deserve to be copping such flak? Let's take a closer look.

Are super fund managers overpaid duds?

Peter Switzer
19 July 2016

By Peter Switzer

Just how bad are our super fund managers? A business journo has bagged our super managers for not doing very well over the past financial year and she slipped the boot in by pointing out that we pay hefty fees for these ordinary results.

So the question is: are our super fund managers really overpaid duds?

I won’t name the critic because she’s generally on the money but in this case she might be a little harsh and could be looking for a sensational story for media relevance.

She rightly points out the following about our super fund managers over the past year:

  • 41.6% of average managers’ allocations were in financials.
  • The return for the sector was 3.5% for the year.
  • Materials — the likes of BHP and Rio — were the second most supported sector at 11.7% and they lost 2.8% for the year.
  • Energy got 4.7% of our super money and it was down 21.8% for the year.
  • Utilities were up a great 24.4% but these safe plays only attracted 2.2% support for the year.

As a consequence, the journo asks: why would half of our billions of super money be put into the dud-performing big companies in the S&P/ASX 200 index? What were these people/experts thinking?

The critic calls them index huggers, who missed out because they didn’t have more international exposure, especially the US. Index hugging might have given your fund a negative return but, with dividends and franking credits, they should have crept into positive territory. However (as the journo points out), you would have been better in a bank deposit for the year.

But hang on, how fair is it to look at super fund managers’ performances for a year?

Even the harsh super fund basher points out that there were “heady” share market returns of 2013 and 2014, when stocks grew by 22% and 17% for the year. And to be fair, it’s a bit rich (or more correctly, poor) to bag super fund managers on a one-year basis.

When clients or friends ask me about picking a good fund, I say that history can’t be a 100% reliable guide but it could say something about the consistency and performance, the investment strategy and the fees you pay. I always say not to look at the annual scoreboard but the longer run showing.

One guy who looks at all super funds with a little more fairness and with a longer run perspective is Warren Chant of Chant West, which monitors super funds.

This is what he has concluded about the financial year’s showing by super funds:

  • We’re expecting this year’s top funds to report returns as high as 6%, while the bottom end of the range is likely to be just in the red at about -0.5%. 
  • Generally speaking, the better performing funds will be those that had higher allocations to unlisted assets and Australian listed property and a lower exposure to shares. Those with substantial exposure to foreign currency would also have benefited, as would those that had a higher proportion of their defensive assets in bonds rather than cash. 
  • Over the seven financial years since the ending of the GFC, the median growth fund has delivered a cumulative return of about 78%, or an average of 8.6% per annum. That’s over 6% above the rate of inflation over the period, so it’s comfortably ahead of the typical longer-term return objective for these funds, which is to beat inflation by between 3% and 4% annually.

The bottom line is that super fund managers, even if they are index huggers, still deliver much better returns than term deposits. And if you can't find a good super fund, with an impressive long-term performance and fees under 1%, then you haven’t tried very hard to find one.

If you pay 1% and still average 8.6%, then what are you complaining about? And if you can consistently do better, then go for it, champ! Have a look at what safe old term deposits have delivered over 10 years.

You can’t even see a 5% return and over the two years since 2014, the returns have been closer to 2%.

If making money was so easy for everyone, everyone would be doing it. If you pay 1% for someone to do the work for you, then that’s not too bad. Once upon a time, super fund managers were overpaid but now, given their overall showing, 1% or even less doesn’t represent overpayment.

Sure, exchange traded funds (ETFs) could be an option but it would mean that the average Aussie would have to run their own self-managed super funds, which for many people would mean costs for accountants, auditors, etc. And there is important work to do, which is time consuming or might require payment for outside help.

I have always joked that anything worth doing is worth doing for money and a 1% slug for giving you an average return of 8.6% is pretty good value compared to the alternatives.

Our super fund managers are better investors than most of us and last year was a tough year but history has shown that supporting Australia’s best companies — the banks, the big miners and the other top 20 outfits — has been a winning strategy for longer than a year.

Yeah, you can do better, but it comes with more risk and the great performers of this year could be duds next year. Most of us want consistent performance over the long-term and the top super fund managers can do that.

In case you’re interested, this is what Chant West told us about the performance of the top super funds 2005-2015:

  1. REST Industry Super – 7.7%.
  2. Telstra Super – 7.6%.
  3. Commonwealth Bank Group Super – 7.4%.
  4. CareSuper – 7.4%.
  5. AustralianSuper – 7.3%.
  6. Catholic Super – 7.2%.
  7. Cbus – 7.2%.
  8. QSuper – 7.2%.
  9. UniSuper – 7.2%.
  10. HOSTPLUS – 7.1%.

The returns are less than the 8.6% but these 10-year numbers include the GFC-effect, where the stock market dived 50%! Those 7% plus returns are pretty damn good for those accused of being one-year duds.

Beware of journos who need to write a story!

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