Trump’s bombastic and provocative approach to the trade war has culminated in a tumultuous two years for capital markets. Sudden increases in tariffs have been followed by back downs, bravado has given way to overtures, and severe selloffs have been succeeded by relief rallies. However, it has been this ongoing uncertainty which Trump’s political success hinges on as his negotiating style has leveraged the following maxim: escalate and then negotiate.

While the negotiation of a ‘phase one’ deal represents a considerable win for Trump, the unavoidable reality is that the trade war has been costly, and the economic toll continues to mount. It’s unclear whether the proposals outlined in the phase one agreement will cover this cost, particularly given the difficulty involved in calculating the indirect effects of US tariffs and China’s retaliatory measures, which have contributed to waning business investment and consumption.

The remaining tariffs and commitments to purchase additional agricultural products should appease the China hawks, but the currency pledges are similar to those already agreed to under the G20 pact. Further, the commitments pertaining to intellectual property theft and forced technology transfers appear similar to China’s obligations under their foreign investment regime implemented last year.

As always, the devil is in the detail. Trump will be under mounting pressure to deliver more meaningful results in the subsequent phase two negotiations, due to take place after the presidential election in November 2020. For the last two years, global markets have delicately traversed thorny trade issues, and with markets now topping record highs, any negative news is likely to significantly depress global share indices.

Looking at recent drawdowns, which can be used as a barometer for the aggression demonstrated by each side, it’s clear that the pullback in early 2018 represents the initial flare-up between the two powers as the tariff regimes commence and the Twittersphere works itself into a frenzy.

While mild acts of hostility pervaded 2018, it wasn’t until the fourth quarter when both countries imposed a plethora of tariffs in concert with the US Fed’s attempts to normalise monetary policy and deploy quantitative tightening. This incited a severe wave of panic selling in conjunction with the aptly-named ‘bond-cano’. The final noteworthy drawdown is evident in mid-2019, when the ceasefire abruptly ended once again in response to China purportedly reneging on past trade commitments, launching global indices into freefall.

S&P 500 TR Index drawdowns, January 2018 to December 2019

Source: Financial Express, iRate

Trump has frequently cited the S&P 500 as a proxy for the success of his presidency, and notwithstanding the turbulence experienced in 2018, this has proved to be one of his defining accolades. Since the end of 2016, the market’s cumulative return has edged close to 60%, providing a boon to passive investment strategies.

“If the Dems (Crooked Hillary) got elected, your stocks would be down 50%” – @RealDonaldTrump

The cynics will argue that Trump opportunistically deployed tariffs to stymie economic growth and force the ‘Powell-Put’ in early 2019 in order to reignite a languishing stock market. Consequently, this about face from Powell to a more accommodative monetary policy stance precipitated a significant reversal for risk assets, powered global stock indices to new highs, and set Trump’s twitter feed ablaze.

S&P 500 TR Index cumulative returns, January 2017 to December 2019

Source: Financial Express, iRate

“My only question is, who is our bigger enemy, Jay Powel or Chairman Xi?” – @RealDonaldTrump

Trump’s detractors assert that his tariff regime was part of a cunning ploy to pressure the US Federal Reserve to aggressively ease monetary policy to counter flagging economic growth. Unfortunately for the bystanders, the trade war spurred a synchronised global slowdown and left the global economy on the precipice of a recession. Auspiciously for Trump, the Fed eventually embarked on an easing cycle, which aside from producing the ‘Trump bump’ in the stock market, sparked an insatiable thirst for fixed income securities.

US 10-yr Treasury Yield Rolling Returns (%) – Jan 2018 to Present

Source: Financial Express, iRate

“The Fake News Media barely mention the fact that the stock market just hit another new record” – @RealDonaldTrump

Trade is still the market’s biggest unknown

The genesis of the sino-yankee trade dispute lies with America’s historical trade deficit with China, the alleged theft of intellectual property, and manipulation of the Chinese Yuan. Despite how polarised American politics is, across the political divide there is widespread support for tariffs to reduce the domestic trade deficit and protect domestic industries. China’s admission into the World Trade Organisation (WTO) and ascent to a global trading powerhouse is seen to come at the cost of American manufacturing jobs and resulted in the hollowing out of the middle-class in the rustbelt of America, which is where much of Trump’s support comes from.

Moreover, the US ban on technology produced by the Chinese technology behemoth, Huawei, played into the theme of suppressing Chinese ingenuity. Importantly, a concerted effort has been made to insulate the American consumer from the brunt of the tariff regime as best as possible through primarily targeting industrial goods rather than consumer items. However, conflicting evidence suggests that US businesses and consumers have equally borne the financial brunt of the tariff regime through inflated end-prices.

“China has been ripping this country off for 25 years” – @RealDonaldTrump

China’s retaliatory measures have been predictable and were designed to inflict as much carnage as possible on the US agricultural, chemical and automobile sectors at the heart of Trump’s support base. These targeted measures intentionally weaken the economic interests of Trump’s forgotten class of export-dependent workers, whose grievances he leveraged in the 2016 election following decades of automation and globalisation.

The political objective is to compromise Trump’s re-election prospects in 2020 and force his arm into offering more amicable concessions. Reinforcing this effort is the fact that US exports to China are largely undifferentiated commodities that can be substituted elsewhere. However, Trump’s adversarial negotiating style led Chinese President Xi into a war of attrition, leaving both sides unrelenting in their demands up until the recent phase one agreement.

Unfortunately, this is not the end of the trade issue. While the US has achieved a substantial narrowing of the trade deficit from US$419 billion in 2018 to US $320 billion in 2019, the efficacy of weaponising tariffs to enforce compliance from trading partners is murky. The uncertainty pervading the economy has largely dissipated for now, thereby strengthening Trump’s mantra on growth and prosperity for the ‘deplorables’, while the Democrats are distracted by likely meaningless impeachment proceedings.

The trade war remains a live issue even if Trump prefers to leave further negotiations until after the election. After that, a phase two negotiation will test the US administration and the markets unlike anything we saw in 2019, which spells further volatility for markets. Is Trump playing a dangerous game or does he have 2020 vision?

“Trade wars are good, and easy to win” – @RealDonaldTrump

For consumers, 2019 was a year best forgotten as negative economic news created an almost perpetual drag on sentiment and global uncertainty resulted in repeated bouts of volatility. But for investors, including Australia’s 15 million super fund members, it was a year that saw a sizeable accumulation of wealth, driven by share market gains as well as some savvy investment decisions by the top-ranking funds.

Even with the high expectations set during a year that saw share markets rally ever higher, several super funds were able to translate this favourable environment into exceptional gains for members.

Topping the leader board in 2019 was UniSuper, whose balanced option delivered a return of 18.4% over the year and is among the top performers over 10 years with a return of 8.9% per annum. Over one year, UniSuper was followed by AustralianSuper – Australia’s largest fund – which returned 17.0% in 2019 and 9.0% over 10 years. However, it’s Hostplus that remains in first place over 10 years with an annual return of 9.2%.

Top 10 balanced options (return over 1 year)

*Interim return
Source: SuperRatings

Top 25 balanced options (return over 10 years)

*Interim return
Source: SuperRatings

UniSuper came out on top in a crowded field, in which the top 10 funds delivered an average return of 16.3%. It was a tight race over longer time periods, and while markets have certainly provided a tailwind, there’s no doubt that skilful management plays a role in squeezing out additional returns.

While returns may appear narrowly spread at the top, this hides some significant differences in asset allocation and investment strategies pursued by different funds. What was interesting to see was the diversity of approaches that funds take, even at the top of the leader board. While most funds have benefited from strong equity markets, the nuances among the top performers are where there has been strong value added for members.

In the case of UniSuper, the fund continues to pursue an active management strategy with exposures predominantly to Australian and International Equities, as well as significant cash and fixed interest exposures. Allocations to illiquid assets such as infrastructure and private equity are not a key component of their strategy.

Meanwhile, Hostplus has significant allocations to illiquid assets, with these being a key driver of its performance outcomes for Property, Infrastructure and Private Equity assets. AustralianSuper has also benefited from material unlisted asset exposures, as well as fee savings generated from its in-house investment structure.

Top pension funds

One of the key challenges super funds face is the current low-yield environment, which is making it harder for funds to generate income for members. This challenge is likely to be felt more acutely by those in the post-retirement phase, who rely on the income generated by their pension product to fund living expenses.

In this environment, picking the right pension fund and option can be critical. The below chart shows how capital stable pension options (20–40% growth assets) stack up over 10 years, and while there is some dispersion in the results, every option in the top 25 by performance exceeded the typical CPI plus 3.0% target. AustralianSuper’s Stable option is the best performer, returning 7.6% p.a. over ten years, followed closely by TelstraSuper’s Conservative option and Hostplus’s Capital Stable option.

Top 25 capital stable pension options (return over 10 years)

Source: SuperRatings

Understanding risk is critical for consumers

Most consumers can’t define risk, but they know it when they experience it. For superannuation members, risk can mean the likelihood of running out of money in retirement, or not having enough cash to pay for holidays, car repairs, or an inheritance for their kids.

For young members starting out in the workforce, short-term market falls might not matter too much because their investment horizon is relatively long. But for members nearing retirement, the timing of market ups and downs can have a significant effect on the wealth they have available in the drawdown phase.

For a young worker with a relatively low super balance, being exposed to riskier assets is less of a problem – in fact, it can help them accumulate wealth over their working life. However, for members approaching retirement (aged 50 and over), an unexpected pullback in the market can mean the difference between living comfortably and having to cut back in order to get by.

For this reason, it’s important to consider not only the return that a fund delivers but also the level of risk it takes on to achieve that return. In this context, risk means the degree of variability in returns over time. Growth assets like shares may return more on average than traditionally defensive assets like fixed income, but the range of return outcomes in a given period is greater.

The table below shows the top 25 funds ranked according to their risk-adjusted return, which measures how much members are being rewarded for taking on the ups and downs.

Top 25 balanced options based on risk and return

Fund option name 7 year return (% p.a.) Rank
QSuper – Balanced 9.1 1
CareSuper – Balanced 9.8 2
Cbus – Growth (Cbus MySuper) 10.3 3
Hostplus – Balanced 10.5 4
BUSSQ Premium Choice – Balanced Growth 9.6 5
Sunsuper for Life – Balanced 10.0 6
Catholic Super – Balanced (MySuper) 9.4 7
HESTA – Core Pool 9.6 8
CSC PSSap – MySuper Balanced 9.0 9
MTAA Super – My AutoSuper 9.5 10
Media Super – Balanced 9.4 11
Intrust Core Super – MySuper 9.8 12
AustralianSuper – Balanced 10.5 13
Mercy Super – MySuper Balanced 10.0 14
Rest – Core Strategy 9.0 15
First State Super – Growth 9.7 16
QANTAS Super Gateway – Growth 8.3 17
TWUSUPER – Balanced 8.8 18
Energy Super – Balanced 9.3 19
Local Government Super Accum – Balanced Growth 9.0 20
AMIST Super – Balanced 8.9 21
VicSuper FutureSaver – Growth (MySuper) Option 9.8 22
Club Plus Super – MySuper 8.9 23
NGS Super – Diversified (MySuper) 8.9 24
LGIAsuper Accum – Diversified Growth* 8.9 25

Risk/return ranking determined by Sharpe Ratio
*Interim return
Source: SuperRatings

QSuper’s return of 9.1% p.a. over the past seven years is slightly below the average of 9.7% across the top 10 ranking funds, but it has the best return to risk ratio of its peers, meaning it delivered the best return given the level of risk involved. Funds such as CareSuper, Cbus and Hostplus were able to deliver higher returns, but for a slightly higher level of risk.

Real estate offers potential diversification away from traditional stocks and bonds, stable income, the possibility of capital appreciation and has historically offered inflation protection. The average Australian retiree is likely to have exposure to domestic residential real estate – through the family home, an investment property or holiday home – but these assets are likely concentrated in geography and in the residential sector. Commercial real estate can present geographic diversification to the US, Asia and Europe, and sector diversification into offices, shopping centres and industrial parks. The following article explores the investment choices for the commercial real estate asset class across the risk/return spectrum.

  • Real estate may provide investors with the potential to generate attractive long-term returns through possible asset appreciation and current income
  • Real estate also may serve as a hedge against inflation and offer diversification versus traditional stocks and bonds

Anyone who has purchased a home is a real estate investor — but there’s a big difference between taking on a mortgage and investing in office buildings, malls or industrial parks. In this blog, we explain the basics of real estate investing, the potential benefits, and the ways that individuals can add real estate exposure to their portfolio.

To find out more about this article, please contact:

Sam Sorace

Director, Wholesale Sales

Invesco Australia

Direct   +61 3 9611 3744

Mobile  +61 413 050 909

Super Fund Research now available in Portfolio Construction & new portfolio reports

Lonsec has released further major enhancements to the portfolio construction and quantitative analysis tools for iRate subscribers, with additional new features also now available across the portal, including a new all product search page.

Super Fund Research in Portfolio Construction and Quantitative Analysis

Super Fund research covering over 6,200 Super Fund options, as researched by SuperRatings, is now available alongside the Lonsec Super Option research in the Tools area.

For the first time you are now able to include not for profit superannuation products in portfolios and run analysis and comparisons of these super options alongside other investments. The Super Fund research also includes retail master trust products with these products also now available in the Tools for those who subscribe to the Super Fund Research library.

With the addition of these Superannuation products into Tools, you can build a portfolio containing all investment products a client may hold: from their super fund, to managed funds through to listed investments such as stocks and hybrids, and managed accounts. Detailed portfolio comparisons for up to five portfolios can be run in portfolio construction, allowing you to clearly illustrate why a portfolio is more suitable for your client, demonstrating your best interest’s duty.

Further analysis and overlays can be carried out on different products and/ or your portfolios within the Quantitative Analysis tool with 17 performance and risk calculations available.

Don’t have access to these Super Fund products in the Tools? Log in to iRate and go to the Super Fund Research library to activate your 2-week trial or contact the Client Services team to find out more.

Find out more about using these tools in the Help Library


New portfolio performance report

A new portfolio performance style report has been added to the existing suite of portfolio reports. This report would be ideal for illustrating how your notional or model portfolios have performed and can be produced on a monthly, quarterly or annual basis.

You can now also schedule to receive the portfolio reports direct to your mailbox on a frequency selected by you – saving you time logging in to run a regular portfolio report you require.

Plus don’t forget, the portfolio reports can be customised by you – select the charts to include in each report; add your own commentary; and have your company logo displayed on the reports.


What’s Changed?

Add Product – we have updated these menu tabs and where the different investment vehicles sit to align with the iRate Product Research Libraries. All super products (covered by both Lonsec and SuperRatings) are now located under the Superannuation menu tab.

Portfolio Comparison – you can now compare a portfolio which solely contains funds, superannuation, equities or a combination of superannuation, equities and other products within this tool.


Searching the Product Research libraries

A new All Product search page has been added to iRate. Located at the top of the Product Research Library menu or via the search icon on the top of the screen, this page allows you to search across all investment products from one simple page. Simply add the product codes (APIR, ASX codes) or product name to the search box, or use the filters to find the products you require.

We have made some changes to where products sit within the Managed Funds and Super Option Research Library’s to better align with the type of product they are. All pension options and accumulation options have been moved from the Managed Fund research library to the Superannuation research library > Super Option Research.

No changes have been made to your access, you will now find all superannuation products in the Superannuation library or use the new all product search page to locate all your investment products at once.

Find out more about using the new search page in the Help Library


Super Funds in the Workbench and Product Groups

The Super Fund research library is now integrated into Product Groups and Workbench.

Be alerted for any rating changes to a Super Fund option included in your clients’ portfolios, or on your APL/ Watchlists by adding it to your Product Groups. Or use the Product Group to quickly filter your searches for products you want to access information for quickly.

The Workbench automatically stores any products you select in the three research libraries so you can quickly add the products when using the tools, or bulk download the research reports for all selected products in one file.


We hope you find these new functionalities of benefit and welcome any feedback you may have. As always, the Client Services team is on hand to assist and answer any questions you may have, or register for one of our weekly webinars to learn more about these new features and how to maximise your iRate subscription.




T: 1300 826 395


Super funds are on track to finish 2019 with the strongest returns in years, defying fears of a market fade in the final quarter. While market conditions have been challenging, investors have not yet succumbed to the negative economic headlines, which has been good news for super funds.

If momentum holds up through the rest of the year, members in the median balanced option will be looking at an annual return of around 15.0% for 2019 – a result not seen since 2013.

According to leading research house SuperRatings, funds have done a good job of managing uncertainty, which has only been exacerbated by global risks and challenging economic conditions at home. But while consumers are feeling the pinch, their super is holding up well.

A rebounding share market saw the ASX 200 Index return 3.3% in November, putting Australian shares on track to deliver a return of around 26.0% for 2019, which would be the highest investors have seen since 2009. This is despite weakness from the major Financials sector, which slipped 2.0% over the month as the major banks were marked down due to the lower interest rate outlook, while Westpac (-13.1%) was the latest to be hit with negative headlines.

Looking at November’s results, the median balanced option returned an estimated 2.0% over the month, with Australian shares contributing 0.6% and international shares 1.0%, bringing the year-to-date return to 14.8%. The median growth option delivered an estimated 2.3% over the month, bringing the year-to-date return to 17.2%.

Over the past five years, the median balanced option has returned an estimated 7.9% p.a., compared to 8.7% p.a. for growth and 4.9% p.a. for capital stable (see table below).

Estimated accumulation returns (% p.a. to end of November 2019)

YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SR50 Growth (77-90) Index 17.2% 15.2% 10.5% 8.7% 10.4% 8.6%
SR50 Balanced (60-76) Index 14.8% 13.4% 9.3% 7.9% 9.3% 8.0%
SR50 Capital Stable (20-40) Index 8.3% 8.5% 5.5% 4.9% 5.4% 5.6%

Source: SuperRatings

Pensions products have similarly performed well over the course of 2019, with the median balanced pension option returning an estimated 16.3% year-to-date to the end of November, compared to 19.6% for growth and 9.6% for capital stable.

Estimated pension returns (% p.a. to end of November 2019)

YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SRP50 Growth (77-90) Index 19.6% 17.1% 11.5% 9.9% 11.7% 9.6%
SRP50 Balanced (60-76) Index 16.3% 14.9% 10.0% 8.5% 10.2% 8.8%
SRP50 Capital Stable (20-40) Index 9.6% 9.4% 6.3% 5.7% 6.2% 6.4%

Source: SuperRatings

“We may not have seen the ramp up in shares before Christmas that some were hoping for, but it’s still safe to say that 2019 has been a highly successful year for super funds and their members,” said SuperRatings Executive Director Kirby Rappell.

“It’s been a nervous year for investors, so it’s great to see that super can deliver some much-needed stability and solid returns during this period. There might not be a lot of positive economic news at the moment, but at least super is one story we can all draw some hope from.”

“Since the Royal Commission’s final report at the start of the year, super funds have fought hard to restore members’ trust in the system. We’ve seen good funds responding proactively to the changing regulatory landscape, which has been pleasing. We expect to see an increase in fund mergers in 2020, but it’s important that regulatory responses don’t move us towards a one-size-fits-all approach, which could be detrimental to member outcomes.”

Members must look beyond raw returns

Everyone agrees that funds that aren’t delivering for members have no place in the super system. However, focusing purely on returns as a measure of a fund’s success ignores a range of factors, not least of which is the level of risk involved in generating that return.

As the chart below shows, there is a significant dispersion of risk and return outcomes among different funds. Looking at how balanced options compare over the past five years, there are some producing higher returns than the median option, but many are producing these higher returns by taking on a higher level of risk (measured as the standard deviation of returns).

Risk and return comparison – Balanced (5 years to 30 November 2019)

Risk and return quadrant - Balanced

Source: SuperRatings

When assessing investment performance over time, the top-left quadrant (higher return for lower risk) is what members should generally aim for. Similarly, the bottom-right quadrant (lower return for higher risk) represents the laggard funds. Over any given time period, there will always be funds that outperform and those that underperform.

Looking at past performance can be useful when picking the right fund, but it shouldn’t be the sole criteria. For one thing, past performance is no guarantee of future performance, but there are many factors members should take into account when assessing a super fund, including insurance, governance, member services, and of course fees.

On the back of the 2019 KiwiSaver product ratings, SuperRatings is pleased to provide a list of the top 10 providers on a Net Benefit basis across Conservative, Balanced and Growth funds. The Net Benefit figures have been calculated using investment returns minus fees and taxes for the 7 years to 31 March 2019. This represents the dollar amount credited to a member’s account and is the best approach to assessing the value that a scheme delivers to its members.

We note that the Financial Market Authority’s 2019 KiwiSaver Annual Report indicated a shift in their focus from pure fees towards value for money. SuperRatings welcomes this change and will continue to monitor progress in this area to emphasise the importance of this approach, drawing on our experiences across both the New Zealand and Australian markets.

“Despite a volatile financial year, the median performance for Conservative and Balanced funds improved over the 12 months to 31 March 2019,” said SuperRatings Executive Director Kirby Rappell. “Schemes had to navigate through increased volatility and geopolitical risks, particularly in the final quarter of the 2018 calendar year. Stronger equity markets in the following quarter helped recover losses, though the median 1 year return for Growth funds moderated slightly given the higher allocation to domestic and international shares”.

The median member fee remained at $30, while we observed a slight decrease in the total percentage-based fees for Balanced and Growth funds, though they continue to charge more than the median Conservative fund. “Net Benefit cuts through the issue of having to look at returns and fees separately. Our analysis shows that despite higher fees, Net Benefit outcomes for Growth funds continue to sit above Balanced and Conservative funds”.

Another insight is the relatively narrow range of outcomes being delivered for members investing in Conservative funds. Over 7 years, the difference between the best and worst Net Benefit provider was around $3,500, yet this represents almost 20% of the member’s starting balance. This compares to a difference of over $30,000 in the Australian market, driven by stronger investment earnings and higher contribution rates. “For KiwiSaver members, changing fund type rather than changing provider can have a bigger impact on their retirement savings,” said Rappell. “SuperRatings remains supportive of schemes providing education, advice as well as digital tools to empower members to make an active choice regarding their fund type. Whilst default funds may be appropriate for first home buyers and those nearing retirement, members using KiwiSaver as a long-term savings vehicle should be informed on the options available to them”.

SuperRatings’ Net Benefit methodology models investment returns achieved by each scheme over a seven-year period to 31 March 2019, as well as the fees charged over the period. The analysis uses a scenario of a member that has a salary of $50,000 and a starting balance of $20,000. It then assumes a contribution rate of 3.0% with a contribution tax of 17.5%.

*Net Benefit outcomes are calculated over seven years and assume a contribution rate of 3.00%, contribution tax of 17.50%, salary of $50,000 p.a. and a starting balance of $20,000.
**Russell LifePoints® Conservative Fund.
***Russell LifePoints® Balanced Fund.
****Russell LifePoints® Growth Fund.

Markets continued their upward trajectory in November. When you look at the returns across key asset classes over the last 12 months most asset classes have generated double digit returns. Growth assets such as equities and listed real assets generated over 20% for the year ending 30 November, while bonds generated high single digit to double digit returns. This has been a great outcome for investors and certainly well above Lonsec’s long-term expected returns for asset classes.

Part of what has fuelled these high returns, post markets getting the wobbles after the US yield curve inverted in August, can be attributed to markets pricing in the avoidance of a recession and the expectations of a potential recovery in growth. We have witnessed such ‘mini-cycles’ in the past, in 2013 and 2016, however what is different this time is that EPS growth is more muted and other factors which contributed to previous mini-cycles, such as the US or Chinese fiscal stimulus, are less likely to have an impact.

So what does this mean for markets? We think markets may experience a short-term upswing as the ‘mini-cycle’ plays out. We have therefore slightly adjusted our dynamic asset allocation tilts deploying some of the excess cash in our portfolios towards Australian equities. Our overall asset allocation continues to have a defensive skew with the objective of diversifying the portfolios by asset type and investment strategy. This positioning reflects our broader view that asset prices are stretched and that while some economic indicators have stabilised, we believe we are closer to the end of the cycle.

Lonsec has partnered with specialist data provider Sustainable Platform to enable its research users to assess the social and environmental sustainability of their clients’ investments.

Lonsec will continue to assess fund managers’ processes against the principles of Responsible Investing as part of its investment rating, however will also introduce a new rating to go beyond Environmental, Social and Governance (ESG) labels by analysing the underlying products and services provided by the companies in their portfolio and their compatibility with the United Nation’s 17 Sustainable Development Goals (SDGs).

Lonsec said this will help financial advisers select genuinely sustainable products that are aligned with their clients’ values.

“There’s a growing desire among advice clients for investment solutions that don’t just take ESG factors into account, but put their money where their mouth is and actively consider the broader social and environmental impacts of the holdings in their portfolios,” said Lonsec CEO Charlie Haynes.

“Part of the challenge is giving advisers and their clients access to the right information. At the moment there’s a real lack of transparency that makes it difficult for investors to understand exactly what they’re investing in.”

According to Lonsec, while ESG investing has entered the mainstream, it doesn’t always result in outcomes that clients expect. Traditional ESG incorporates these factors into the investment process, but it doesn’t necessarily exclude unsustainable activities – or favour sustainable ones. Most approaches allow the investment into ‘unsustainable’ companies if the ‘price is right’ or corporate engagement is deemed to be positive. This does not necessarily align with investor expectations.

“Lonsec is a strong advocate of incorporating ESG into the investment process, but given the broad range of ESG approaches used by managers, it’s important that investors are aware of what it means for their own portfolio,” said Tony Adams, Lonsec’s Head of Sustainable Investment Research.

“The risk of ESG investing is that it can result in a ‘greenwashing’ of portfolios. Investors might see an ESG label and assume that it’s only investing in sustainable activities, but this is almost certainly not the case. You have to dig deeper to understand how the investment manager defines ESG, how they use it in their investment process, and how it impacts the final portfolio outcomes.”

Lonsec’s new sustainability ratings and reports will be made available through its award-winning iRate platform, allowing advisers to understand how their investment decisions line up against the UN’s 17 SDGs, while demonstrating to their clients how their advice fits with their values and preferences.

“We’re excited to be able to offer this new capability in partnership with Sustainable Platform,” said Mr Haynes.

“Our iRate platform is more than just research. It gives users the tools to create tailored portfolios based on a range of qualitative criteria, that now includes the proper delineation between responsible investment managers and sustainable investments.”

Release ends

The question no-one wants to ask is – Why are APRA collecting, interpreting and then publishing information in the public domain? The answer is simple – They shouldn’t be!

Instead of regulating, APRA are now trying to play the shame game through their just released heatmaps. But there is a real risk that some of those shamed will be the wrong funds. As the founder of SuperRatings, Jeff Bresnahan says, “The problem is that no one in the industry wants to tell the regulator that they have got it wrong.”

Effectively, APRA is putting into circulation data which analyses just parts of a super fund, not the whole. By ignoring things like Governance, Advice, Insurance and Member servicing structures, consumers are not being provided with the whole picture.

As Bresnahan says, “While conflicts of interest were identified as a major issue in superannuation during the Royal Commission, it seems ironic that APRA has deliberately avoided reporting any measurement of a Fund’s Governance structure”.

In an industry which carries inherently conflicted Directors, it would appear that Governance is ignored in favour of more easily assessable information. Whether such omissions create any legal liabilities for APRA in the future remains debatable.

As a result, APRA continues its foray into unchartered territory. This is not the first time APRA have got it wrong. They have been producing performance tables for over a decade. Unfortunately, the performance tables were flawed from a usefulness perspective, in that they don’t reflect the performance of a super fund’s investment options. However, they continue to produce them and in doing so confuse and possibly mislead Australians.

And so it continues with the heatmaps. Having reviewed the heatmap methodology, SuperRatings is of the opinion that their release into the public domain may create more questions than they answer and that consumers could well be influenced into products that are inappropriate for them.

Aside from the bigger question of why APRA is publishing such data, there remain a number of problems with the methodology adopted. Critically, APRA appears to ignore implicit asset fees when measuring net investment performance.  As Bresnahan says, “This methodology can easily overstate the net benefit a member receives. Similarly, a low-cost investment option with high administration fees creates the very real possibility of consumers investing monies in cheap investment options that have no chance of outperforming the relevant index over any time period, whilst getting slugged high administration fees.”

Investment analysis since the onset of the Superannuation Guarantee in 1992 has shown that all implicit fees and performance must be analysed together on an actual net of fees basis. Many leading funds, in terms of balanced option performance, have had higher allocations than the average fund to traditionally more expensive asset classes such as infrastructure, private equity and unlisted property. These asset classes have continually outperformed cheaper alternatives.

It’s only when all actual fees and returns are combined that the range of results is clearly evident in dollar terms, as the following graph indicates. The graph shows the disparity of net earnings on a $50,000 starting balance (and $50,000 salary) with SGC contributions mapped over both the last 3 and 10 years. Notably, many of the funds that added the most value, over both the short and long term, invested into the more expensive asset classes. Driving people into low-cost options will come at the expense of future earnings, something that taxpayers will ultimately have to bear.

Net benefit trend analysis (over 3 and 10 years)

Source: SuperRatings

And the anomalies continue. The heatmaps are judging funds on short term performance over just 3 and 5 years. Whilst it will be claimed this is necessary due to the limited performance history of MySuper products, it should be noted that most funds have been around for over 25 years and that their default option provides an accurate MySuper proxy.

As Bresnahan said, “Given super is a key plank of Australia’s economic future, it seems counter-intuitive for the Government’s regulator to not measure funds over a more realistic period. Certainly, it is commonly accepted that 7, 10 and 15 year performance analysis is best practice given the long term (60 years plus) nature of superannuation membership.”

Again, a consumer moving funds due to seeing a 3-year performance gap, mid-way through an economic cycle, will no doubt be moving for the wrong reasons.

The way forward

Bresnahan says, “Australians are not stupid, but they remain frustratingly unengaged with their superannuation.” This problem remains the real challenge for much of the industry. APRA’s endeavours are admirable, but questionable at the same time. He goes on to say, “A regulator should set the structure under which funds need to operate. The morphing of this regulatory process into public comparisons leaves it open to being seen as stepping across the line. One wonders what they are actually trying to achieve by moving into this public domain.”

If APRA must continue down this path, then SuperRatings suggests that they need to concentrate on the whole picture, rather than isolated parts therein. This should, aside from earlier mentioned issues, also include:

  1. Regulations to enable consistent fee disclosures, including the inequitable use of tax deductions and transparency to members;
  2. The disclosure of risk within portfolios, both via the assumptions within their growth/defensive disclosures and accepted risk measures;
  3. Compulsory disclosure of major asset holdings;
  4. Moving members into go-forward products and removing legacy structures;
  5. Continued rationalisation of member accounts; and
  6. Increased focus on the decumulation phase and the optimisation of the alignment with retiree objectives.

Identifying poorly run funds is not difficult and APRA would be well aware of them. A series of simple measures such as the non-public fee analysis shown below, when combined with other key assessments, quickly shows those funds who have spent the past few decades masking conflicts of interest at the expense of members.

When it costs a fund over $1,200 to run every account (versus a median of $300) or a fund’s operating expenses as a percentage of assets are over two and a half times the median, then those funds bear further scrutiny. Similar work can be done across Investments, Governance, Administration and Insurance, to name a few. By putting together the whole picture, the poor funds are very quickly exposed.

Operating expenses versus size and members

Source: SuperRatings

But it’s not all gloom and doom for the process. Importantly, after 14 years of industry debate, APRA has finally made a call on what constitutes a growth asset and what constitutes a defensive asset. The growth/defensive debate remains loud within the industry but with APRA’s call of Australian Unlisted Property and Australian Unlisted Infrastructure being 25% defensive, at least there is a starting point. SuperRatings suspect this will not however be the final position.

Certainly, APRA’s front foot involvement with data will give cause for reflection for all super funds, as the funds review their results and assess whether it has any implications for their future.

SuperRatings continues to watch the evolution of the market and continues to monitor funds on their effectiveness in responding to key challenges. We look forward to seeing whether the heatmaps evolve over time and remain broadly supportive of APRA’s underlying intentions. However, we underline that this remains only part of the picture and that the risk of making providers look alike is real. In an environment where innovation is needed, regulatory settings to support innovation are vital to ensure a vibrant industry that thrives into the future resulting in better outcomes for members.

Release ends

We welcome media enquiries regarding our research or information held in our database. We are also able to provide commentary and customised tables or charts for your use.
For more information contact:

Jeff Bresnahan
Founder & Chairman
Tel: 1300 826 395

Kirby Rappell
Executive Director
Tel: 1300 826 395

Veronica Klaus Head of Lonsec Investment Consulting spoke on a panel at the Professional Planner Researcher Forum in Sydney last week.

Veronica discussed the inconsistency and confusion around asset class definitions, which is one of the biggest issues confronting the industry. The way in which assets are defined as growth, defensive, etc. often lacks transparency and ultimately makes it harder for financial advisers to make the right recommendations for their clients.

However, as Veronica explains, the superannuation funds aren’t necessarily the ones to blame for the problem.


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