Understanding Superannuation Fund Returns


I’m sorry, that was just sooooo funny that i almost choked even as i was typing it.

‘Understanding’ is not a word usually associated with superannuation funds, never mind understanding anything about the investment returns achieved by those funds.

APRA (the government body charged with supervision of a lot of these areas) has just released its public listing of the returns achieved by the 200 largest superannuation funds. It is a very important step in helping to make this information more generally available. Actually, that isn’t a very correctly worded thought on my part. More correctly, APRA is taking the important step of putting its name behind the publication of this data.

“Why is this an important distinction?”, i hear you ask. Well, thanks for showing interest… It is important because everyone (and i really do mean everyone) has an opinion on this, and there is every chance that the opinion held will reflect in any discussion, comparison or publishing of this data.

Here is a bit of an example. You’d recall the online newsletter ‘Crikey.com.au’, mentioned in previous musings. There is an item in the subscriber issue (you can’t see it on the website so i won’t refer to it by a link), which notes the release of the APRA figures and then goes on to highlight the apparent outperformance of ‘Industry Funds’ over retail funds. This is ideology at work, as this initial report is based on returns to 30th June 2008. Yes, you read that correctly, these returns are those prior to the meltdown in global markets.

At the other end of the spectrum, you have super fund industry comment that the publication is misleading, for any number of reasons.

After a couple of decades spent considering such issues, it seemed appropriate that i at least look at the report and make comment.

Result : Let’s just say that if you are currently in the dark about super fund returns then you are unlikely to see any lifesaving points of light at the end of the tunnel.

However, the key point here is that this is the FIRST publication. There will be all sorts of public comment by vested interests and eventually we will see a reporting system that achieves something close to clarity. That is the way that a healthy democratic system works. So it would be a good idea to see any such results as a very good “version 1” type of new software or the release of a brand new, developed from the ground up car model. In both cases, a prudent person would wait on some of the ensuing updates and improved models, noting any user feedback that can be found in the interim.

You see, what we have here is a vibrant example of just how hard it is even for those in the industry to come up with an easy-to-use method of comparing super fund returns.

Here is a Musings version for comparing super fund returns :

 (DISCLAIMER : of course, you should not consider this advice nor should you act on it and all of the usual disclaimers about this not being personal advice and it failing to account for your personal circumstances and if you do anything on the basis of this note then you’re on your own ’cause we said don’t do it… and all that)

  • In any listing of accumulation funds (ie, big buckets where money goes in, fees come out and whatever is still in it at the end of the day is your account balance) look for the returns for Vanguard’s Index fund equivalents (Unfortunately, this is the APRA listings first big issue – it won’t let you do this but you can just go to Vanguard’s website and see their performance figures).
  • Have a very, very close look to make sure you are measuring your alternatives over EXACTLY the same time period. Even one day can make a material difference to your results.
  • Look at the return of any funds you are considering.
  • Compare and contrast.
  • If the difference in returns is bigger than 2% over a period of 3 years or more then your next point of research is to look at just where the funds are investing their money because the chances are that you are not comparing like with like.

All very short and sweet and inappropriate but likely to be as accurate as most methods that are publicly available.

You see, you can’t compare alternative anythings until you have some sort of reference. Comparing two funds with each other will only give you one version of the world. What if those two funds are not remotely representative of the broader market? What if the broader market is not representative of what you are trying to measure?

In this case, we are looking for returns in the period up to 30th June 2008.

Vanguard’s wegsite tells us that their “Balanced” fund (which holds 50% of its assets in “growth” areas such as shares and property, and 50% of its assets in “income” assets such as fixed interest and cash) returned -5.4%. The APRA website report shows -12.5%. Where is the difference? It is that the APRA site combines ALL of the 10 investment options offered by Vanguard to give their overall performance. To show just how ridiculous this is, you would have to invest $20,000 into each of those 10 funds if you were going to achieve the figures shown by APRA. To make the comparison even worse, the APRA figures note that only 22.2% of Vanguard’s investors are actually invested in the ‘default’ strategy…!

Back to the story.

If you know that Vanguard’s Balanced Fund returned -5.4% then you have something of a benchmark on which to guage other fund returns for that one year period. A little more investigation and you’ll find that the three year returns were +5.76% and 5 year returns were 7.73% (the APRA figures show +5% and +8.2% respectively).

If we compare that to the ‘Industry Fund’ MTAA (Motor Trades Association of Australia fund) then we can make a few quick notes:

  • The MTAA fund has 8 options and 87.3% of member moneys are in the default option. This tells us that the MTAA figures are more likely to be truly representative of a member’s return over the period of the report.
  • The MTAA 12 month return is shown as -3.0% and the three and five year returns as 10.1% and 12.8% respectively.
  • This means that MTAA outperformed the “average investor profile average return” (ie, if we assume the Vanguard Balanced fund represents “average”) by 2.4% over 12 months, 4.34% over 3 years and 5.07% over 5 years.

On the face of it, you’d have to assume that the MTAA trustees and investment committee know something that the broader market doesn’t (because all the Vanguard Balance Fund represents is the broad market on very broadbrush asset exposures). Alternatively, you could (should) look at that and ask, “am i comparing apples with apples?”. In fact, you are not.

For the period to the 30th June 2009 the Vanguard Balanced fund showed a return of -6.56%. What was the return of the MTAA fund? -24.98%. You see, there is no such thing as a free lunch.

Many super funds have been publishing and boasting of returns that are very much outside of what an informed spectator would expect. An informed observer would note that the mix of money in the MTAA super fund was extremely growth oriented in that it has only 3% of its funds in cash, and 1% each in local and global fixed interest. The bulk of the money is tied up in “Target Return” portfolios. That is, portfolios that are aimed at the long term, and which seek to avoid short term volatility through a higher exposure to directly held assets. This is actually a very valid and sound strategey for a fund with young members, a stable and high funds inflow expectation and could be expected to provide some peace of mind for fund members. However, in a credit constrained world, large holdings in direct assets can be difficult to sell and therefore there will eventually (as in, now) be a hit to the valuation that a trustee could reasonably use. This may be a short term issue or it may not. Regardless, it illustrates the very real and very large difficulties in using past performance as a sole measure for comparing super funds.

It is a very big issue, made more opaque by the vested interest groups competing for dominance in a market worth billions of dollars.

Tread warily.


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