With local equity returns offering investors uninspiring returns over the last financial year, it was
inevitable that the media would tee off about the lack of growth in "Super". Scribbler for The Age
and Sydney Morning Herald, Elizabeth Knight was one who took aim. In doing so she did neither herself, nor
her readers, any favours, specifically saying "good active managers will more regularly outperform
index players" among other things we've quoted below.
The most telling of the performance data is how Super funds have invested on a sector basis. In total
41.6% of the average manager's allocation was invested in financials – which means the big
four Australian banks – in the nine months to March this year. The financial sector's return over the
year to June 2016 was negative 3.5 per cent. The next biggest sector allocation was materials (11.7%) – this is basically BHP Billiton and Rio Tinto and this category's value fell 2.8% over
On the flip side, 2016 saw utilities stocks rise an impressive 24.4%. But the average allocation
of funds to this sector was a miserly 2.2% to March 2016.
In other words Super managers are still putting well over half of the billions of dollars they invest into
the very big Australian corporates – regardless of the fact that the shares have been declining.
Why would they employ such a counter-intuitive investment manner?
Because a large portion of
funds management are index players – meaning they invest in line with any company's
weighting in the index. And because companies like the banks, the big miners and Telstra make up a
large part of the stock exchange index, most of the Super money will be invested in these stocks.
This strategy works sometimes – particularly when markets are stable. But over the past year
markets have been particularly volatile and active funds managers have performed far better.
Last year the Australian index huggers were significantly trumped by funds that invested offshore –
because of better returns from international share markets and a very strong currency tailwind.
Knight might want to get to the bottom of how investors can get better returns, but her
approach feeds into the same short term frustrations that lead investors to make knee jerk decisions
and chase returns based on a previous year's success.
Firstly, complaints about 1 year returns because of allocations to an index are ridiculous and only
result in that short term thinking. How long is the average Superannuation investor's timeframe? No
one knows ahead of time which sector or asset class will be the best performer – if they did why
would they waste their time working for a fund manager?
What Knight failed to tell her readers was over the 5-year period to December 2015, 67.18% of
the active fund managers she talked up failed to outperform their benchmark (ASX 200). Which
means unless you know ahead of time who those best performing active managers will be, you're
better off taking the lower cost index option referenced.
Secondly, the point about Australian index huggers being trumped by funds investing offshore is an
apples and oranges comparison between two different asset classes. Any investor with a growth
tilted portfolio properly allocated to their risk profile will have both local and international exposure.
Knight unfortunately gives the impression investors should be chopping and changing, which has
historically proven to provide lower returns.
And when it comes to active managers and their international performance, Knight's claim that
"good active managers will more regularly outperform index players" doesn't stand scrutiny. Over
2015, 72.87% of active international managers failed to outperform their benchmark and over the 5
years until December 2015 that number increased to 88.24% of active managers.
Again it's a small
pool that will forever be changing, so ahead of time no one knows who the best active managers will
This isn't to defend the local Superannuation industry because their default offerings will never be a
substitute for a portfolio geared towards an investor's specifics. However, the focus on poor returns
in one asset class in one year (poor years happen), gives a futile comparison between asset classes
when they both form part of a balanced portfolio. The insistence an investor will find better returns
with an active manager, when troves of data suggest otherwise, does investors no favours.
*With thanks to DFA Australia.
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