Lonsec has partnered with BT Financial Group to make its suite of Listed and Retirement Managed Portfolios available on the BT Panorama platform.

BT Panorama users now have access to all three of Lonsec’s Managed Portfolios, with the Multi-Asset Managed Portfolios already available on the platform.

“We’re very pleased to partner with BT to enable their users to leverage Lonsec’s investment knowledge and resources by utilising our full suite of Managed Portfolios,” said Lonsec CIO Lukasz de Pourbaix.

“This has been the most challenging market we’ve seen in a generation. For financial advisers and their clients, it really emphasises the need for professionally managed investment solutions that can manage risks and take advantage of opportunities as they arise.”

Lonsec’s full suite of Managed Portfolios are also available on the Netwealth, HUB24 and Macquarie platforms. Lonsec’s Listed Managed Portfolios are available on Praemium’s platform, along with Lonsec’s Core and Income Separately Managed Accounts (SMAs).

Lonsec’s portfolios harness the depth and breadth of Australia’s leading research house, incorporating dynamic asset allocation combined with an active approach to investment selection. They are also underpinned by Lonsec’s minimum quality criteria, which selects from a pool of funds rated ‘Recommended’ or higher by Lonsec’s investment research team.

Lonsec’s Listed Managed Portfolios provide investors with capital growth and income by investing in exchange-traded securities and individual stocks across a range of asset classes. Lonsec’s Retirement Managed Portfolios are objectives-based and focused on delivering an attractive and sustainable level of income.

Lonsec’s Multi-Asset portfolios are designed for investors seeking a diversified portfolio aimed at generating growth. They invest across a diversified range of Australian equities, global equities, property, infrastructure, fixed interest, and alternatives.

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Lonsec has partnered with AMP to make its Retirement Managed Portfolios available via MyNorth Managed Portfolio.

The portfolios harness the depth and breadth of Australia’s leading research provider, allowing users to build high-quality retirement solutions incorporating Lonsec’s best investment ideas. Underpinning the portfolios is Lonsec’s strict quality criteria, requiring funds to be rated ‘Recommended’ or higher by its investment research team.

“Our managed portfolios give financial advisers access to investment solutions supported by one of Australia’s largest investment research and consulting teams,” said Lonsec CEO Charlie Haynes.

“Being able to draw on our investment selection and portfolio construction expertise is a real plus, and we’re proud to be able to extend this access via the North platform users.”

Lonsec’s Retirement Managed Portfolios are objectives-based and focused on delivering an attractive and sustainable level of income while generating capital growth through a diversified portfolio of managed investments.

Lonsec offers three Retirement portfolios: Conservative, Balanced and Growth. Each are designed to achieve different risk and investment objectives over various timeframes. They are constructed using a range of funds that play a specific role, such as income generation, capital growth and risk control, and backed by Lonsec’s rigorous governance and review processes.

“Our Retirement Managed Portfolios have been constructed to manage the risks most relevant to investors in the retirement phase,” said Lonsec’s Chief Investment Officer Lukasz de Pourbaix.

“By diversifying across asset classes, managers and return sources, we aim to manage risks such as capital drawdown, which can materially impact the longevity of a retirement portfolio, particularly in the early stages of transitioning from superannuation to the pension phase of investing.”

“We’re very excited to be working with AMP to make these portfolios available to AMP’s North wrap users.”

Inclusion on North further expands the distribution of Lonsec’s Managed Account offering, following its existing availability on the BT, Macquarie, HUB24, Netwealth and Praemium platforms.

Lonsec’s retirement portfolios have been constructed to meet the income and capital objectives of investors in the retirement phase as well as to manage risks that are specifically relevant to retirees.

AMP’s North platform offers advisers flexible and efficient access to a range of investment products, which now include Lonsec’s retirement portfolios, giving advisers the tools they need to meet their clients’ goals.

The FASEA Code of Ethics Standard is now in force as of 1 January 2020, and the challenge for advisers is not just to pass the exam but also to make the necessary changes to their business practices.

According to leading research house Lonsec, the Code now requires advisers to demonstrate that they are acting in their client’s best interest while avoiding even a ‘perception’ of conflicted recommendations.

“For advisers the FASEA standards are no longer an intellectual exercise. Despite the practicality issues, they are now the yardstick against which they will be judged by regulators, clients and the community,” said Lonsec CEO Charlie Haynes.

“The reality is that the only way an adviser can comply with the standards effectively and efficiently is to access quality investment research and technology tools that enable them to provide detailed product comparisons across all asset classes, including superannuation funds and investment options.

“This goes to the heart of Standard 9 of the Code of Ethics, which requires advisers to make recommendations with competence.”

Lonsec also foreshadowed that conflicted remuneration, even if an adviser considers it to be minor, manageable, or largely irrelevant, could put licensees in breach of the standards.

Standard 3 of the FASEA Guidelines states that an adviser is in breach “if a disinterested person, in possession of all the facts, might reasonably conclude that the form of variable income could induce an adviser to act in a manner inconsistent with the best interests of the client.”

This means that all conflicts, even a preference to use an in-house practice or dealer group product, could be viewed as an inducement to act in a way that isn’t in the client’s best interest.

“Avoiding even perceived conflicts is now a requirement for advisers, so practices should strongly consider moving to a conflict-free environment to safeguard their position,” said Mr Haynes.

“Lonsec is now offering to solve this and help advisers moving forward by acquiring the investment management rights from existing portfolios and to manage the investment process on behalf of the adviser without ongoing conflict.”

Standard 6 also raises the bar for advisers, stating: “Where your clients indicate they only wish to invest in ethical or responsible investments, you will need to consider whether limiting your product recommendations in this manner is appropriate.”

According to Lonsec, meeting this standard means going beyond recommending branded ‘ethical’ products to understanding exactly what the product invests in and whether this indeed aligns with the client’s expectations.

“Advisers now have a legal responsibility to ensure their client’s preferences are taken into account,” said Mr Haynes. “For example, if the client doesn’t want fossil fuels in their portfolio, simply recommending an ESG product probably won’t be sufficient from now on. The adviser needs to have a complete understanding of the product’s underlying investments and its process.

“That’s why Lonsec is introducing a new sustainability rating and will provide data on how individual investment products stack up against the United Nation’s 17 Sustainable Development Goals. We want to give advisers all the tools and information they need to deliver advice that they can clearly demonstrate meets the FASEA standards and their best interest duty.”

Super members have every reason to be optimistic about 2020, but when it comes to a repeat of 2019’s double-digit returns, it would be wise to temper expectations.

According to estimates from leading research house SuperRatings, 2019 was the best year for superannuation funds since 2013, with the median balanced option returning 13.8%. Despite a selloff in Australian shares in December, funds entered the new year in a strong position as markets shrugged off a string of negative economic news and rising geopolitical tension.

However, funds are already battling the new normal of lower yields and returns, which will make a repeat of 2019’s results unlikely in 2020.

Looking back over 2019, the median balanced accumulation option returned 13.8% over the year to the end of December and has returned 7.7% p.a. over the past decade. December saw an estimated fall of 0.9%, ending an otherwise stellar year for Australian shares, on a sour note. Markets were driven predominately by the health care and materials sectors, while the financial services sector, despite delivering a positive result, remains largely beaten down, thanks mostly to the major banks.

The median growth option returned an estimated -1.1% in December and 16.0% over the year, while the capital stable option returned an estimated -1.0% and 7.0% respectively.

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

  1 mth 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SR50 Growth (77-90) Index -1.1% 16.0% 9.0% 8.2% 10.0% 8.2%
SR50 Balanced (60-76) Index -0.9% 13.8% 8.1% 7.4% 8.8% 7.7%
SR50 Capital Stable (20-40) Index -1.0% 7.0% 4.7% 4.5% 5.2% 5.4%

Source: SuperRatings

Pensions performed similarly well in 2019, with the median balanced option returning an estimated 14.9% over 2019, compared to 18.2% for the growth option and 8.0% for the capital stable option.

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

  1 mth 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SRP50 Growth (77-90) Index -1.2% 18.2% 9.9% 9.3% 11.1% 9.1%
SRP50 Balanced (60-76) Index -1.0% 14.9% 8.8% 8.0% 9.7% 8.5%
SRP50 Capital Stable (20-40) Index -1.0% 8.0% 5.4% 5.2% 5.8% 6.1%

Source: SuperRatings

“We’re anticipating a solid year for super in 2020, but the key challenge for funds will be the low return environment,” said SuperRatings Executive Director Kirby Rappell.

“Even with the possibility of a pickup in economic growth, yields are extremely low and it’s getting harder to find opportunities in the market. Company earnings growth is slowing, and Australian consumers are under pressure, so fundamentally it will be more challenging than 2019. That doesn’t mean it will be a bad year, but super members should not expect to bank another 13 per cent.”

Super’s long-term growth story still a winner

As the chart below shows, 2019’s double-digit return compares favourably to recent years and is significantly higher than the average return (6.4% over the past 20 years). Based on SuperRatings’ estimate of 13.8%, 2019 would represent the highest return since 2013 and the fourth-highest over the past two decades.

Median balanced option calendar year returns 2000-2019

* Estimate

Source: SuperRatings

Following the volatility of 2018, super funds saw steady growth over 2019 with only three down months during the year, with the largest fall in the median balanced option estimated to be -0.9% in December.

The main drivers of performance typically come from equities, of which Australian shares generally make up the greatest proportion. As the chart below shows, the Australian share market delivered a return of 18.4%, while international shares delivered 25.4% (unhedged) and 25.8% (40% hedged in Australian dollars). Meanwhile, listed property returned 14.2%, fixed interest – another major asset class for funds – returned 4.4%, and cash returned 1.5%. Another important asset class is Alternatives (including private equity), although market-based measures of performance are harder to determine as they are offered within diversified portfolios rather than standalone options.

Asset class returns in 2019

Returns based on the following indices: S&P/ASX 200 Index, MSCI World ex-Australia Index (USD), S&P/ASX 300 A-REIT Index (Industry), Vanguard Australian Fixed Interest Index ETF, Bloomberg AusBond Bank Bill Index (AUD). Hedging based on AUD/USD exchange rate of 0.7058.

Since the GFC, funds have ridden market turbulence through 2011, 2015 and 2018 to build significant wealth for members. Looking back over the past 15 years to 2005 (before the GFC hit), the median balanced option with a starting balance of $100,000 would have grown to an estimated $259,340 by the end of 2019 (a return of 159.3%). Similarly, the median growth fund would have risen to an estimated $264,208 (a return of 164.2%).

Growth in $100,000 invested over 15 years to 31 December 2019

Source: SuperRatings

Expect further fund consolidation in 2020

Over the course of 2019 there was a number of high-profile mergers, and 2020 is expected to see more funds come together to achieve greater scale. Mergers have typically been based on geographic proximity, similar industry sectors and strategic fits, with funds seeking merger partners that are strong in areas in which they may be weaker.

A key driver of mergers will be the sustainability of operating expenses, which as the chart below shows, is a challenge for some funds across all size categories. Though, smaller funds are more likely to have a high cost per member (CPM) and management expense ratio (MER), which measure the operational costs of the fund relative to its size.

Sustainability of cost structures

Source: SuperRatings

“With the increased regulatory scrutiny on the sector, funds are focused on the challenge of increasing scale and driving down fees,” said Mr Rappell. “It’s pleasing to see that there’s a clear focus among providers on their plans to adapt to the changing landscape, which should support continued uplift in member outcomes.”

However, there remains a number of providers who are struggling to deliver sufficient value for money and the industry’s ability to address this is critical. APRA released its MySuper Heatmaps in December 2019 which highlight laggards based on investment returns, fees and sustainability metrics and has emphasised a tougher approach going forward. APRA also now has stronger powers to force underperforming funds to merge, which is likely to further drive consolidation across the industry.

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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:

Kirby Rappell
Executive Director
Tel: 1300 826 395
Mob: +61 408 250 725
Kirby.Rappell@superratings.com.au

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.

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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
Jeff.Bresnahan@superratings.com.au

Kirby Rappell
Executive Director
Tel: 1300 826 395
Kirby.Rappell@superratings.com.au

Super funds are off to a positive start in the December quarter, regaining momentum following a rocky September and paving the way for double-digit returns for the 2019 calendar year.

While markets have come under pressure in recent months, super funds have once again proved they are up to the task of navigating the significant uncertainty in markets, geopolitics, and the global economy.

Super fund returns held up well in October, despite weakness from Australian shares and signs of softer economic growth globally. The major financials sector has come under pressure due to constrained lending, lower net interest margins, and continued fallout from the Royal Commission. IT shares also suffered a dip as investors questioned the lofty valuations of Australia’s local tech darlings.

According to SuperRatings’ estimates, the median balanced option returned a modest 0.3% in October, but the year-to-date return for 2019 is sitting at a very healthy 12.5%. The median growth option has fared even better, returning 14.4%, while the median capital stable option has delivered a respectable 7.1% to the end of October.

Over the past five years, the median balanced option has returned an estimated 7.6% p.a., compared to 8.3% p.a. from growth and 4.7% p.a. from capital stable (see table below).

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

  YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SR50 Growth (77-90) Index 14.4% 11.9% 10.1% 8.3% 10.1% 8.5%
SR50 Balanced (60-76) Index 12.5% 10.5% 8.9% 7.6% 9.1% 7.9%
SR50 Capital Stable (20-40) Index 7.1% 6.8% 5.0% 4.7% 5.3% 5.6%

Source: SuperRatings

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

  YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SRP50 Growth (77-90) Index 16.4% 13.3% 11.2% 9.4% 11.4% 9.5%
SRP50 Balanced (60-76) Index 13.8% 11.7% 9.8% 8.3% 9.9% 8.7%
SRP50 Capital Stable (20-40) Index 8.3% 7.7% 5.9% 5.5% 6.0% 6.4%

Source: SuperRatings

“This year has provided further solid evidence of the ability of super funds to deliver for their members through a challenging market environment,” said SuperRatings Executive Director Kirby Rappell.

“Whether it’s the US-China trade conflict, the weaker economic outlook, falling interest rates, or the rolling Brexit saga, there’s been a lot for funds to take in. This has been a real test of their discipline and ability to manage risks on the downside. Growing wealth in this environment while protecting members’ capital is a tall order, but they have managed it well.”

Shifting asset allocation key to managing risk

One of the most important trends in the superannuation industry is the broadening of members’ investments across different asset classes. Over the past five years, super funds have shifted away from Australian shares and fixed income and moved a higher proportion of funds into international shares and alternatives (see chart below).

Change in asset allocation (2009 to 2019)

Super fund asset allocations have shifted towards alternatives

Source: SuperRatings

The shift to alternatives is significant and has been the subject of debate within the industry. Alternatives include private market assets and hedge funds, which despite the negative connotations can provide an important source of diversification and downside protection when markets take a turn for the worse.

These assets tend to be less liquid, but they can play an important role for funds looking to generate income while managing risks for their members in a world characterised by low yields and growing uncertainty. However, funds should be clear about their alternatives strategy and the risks they could potentially add to members’ portfolios.

“This shift in asset allocation is in part being driven by the low interest rate environment, which has prompted super funds to reach for yield by allocating to alternatives and other less liquid assets,” said Mr Rappell.

“This isn’t necessarily a bad thing, and it may in fact result in a more robust asset allocation, but it’s something members should be aware of. Alternatives can help protect capital under certain market conditions, but they can also be used to boost returns by taking on some additional risk. We generally think the shift to a broader asset allocation is positive, but funds should not be complacent in ensuring risk is appropriately managed.”

A combination of factors has created fertile ground for market volatility, resulting in a bumpy ride for super members, who have experienced six negative monthly returns over the past year.

According to SuperRatings, the median balanced option return for August was an estimated -0.5%, with the negative result driven by a fall in Australian and international shares. The median growth option, which has a higher exposure to growth assets like shares, fared worse, returning an estimated -0.9%.

In contrast, the median capital stable option, which includes a higher allocation to bonds and other defensive assets, performed more favourably with an estimated return of 0.3% (see table below).

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

1 month 1 year 3 years 5 years 7 years 10 years
SR50 Growth (77-90) Index -0.9% 5.2% 8.8% 8.0% 10.2% 8.5%
SR50 Balanced (60-76) Index -0.5% 5.3% 8.0% 7.5% 9.2% 8.0%
SR50 Capital Stable (20-40) Index 0.3% 5.3% 4.8% 4.8% 5.4% 5.7%

Source: SuperRatings

Investors were caught off guard in August as trade negotiations between the US and China broke down, while a range of geopolitical and market risks, including further signs of a slowing global economy, added to uncertainty.

In Australia, a disappointing GDP result for the June quarter revealed a domestic economy in a more fragile state than previously acknowledged. Action from the Reserve Bank to lower interest rates is expected to assist in stabilising markets but could be detrimental for savers and retirees who rely on interest income.

Pension products shared a similar fate in August, with the balanced pension option returning an estimated -0.6% over the month while the growth pension option returned an estimated -1.0% and the capital stable pension option was mostly flat with an estimated return of 0.3%. Long-term returns are still holding up well, with the median balanced option for accumulation members delivering 9.2% p.a. over the past seven years (in excess of the typical CPI + 3.0% target) and the median balanced pension option returning 10.2% p.a.

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

1 month 1 year 3 years 5 years 7 years 10 years
SRP50 Growth (77-90) Index -1.0% 5.9% 9.9% 9.2% 11.5% 9.4%
SRP50 Balanced (60-76) Index -0.6% 6.2% 8.7% 8.0% 10.2% 8.8%
SRP50 Capital Stable (20-40) Index 0.3% 6.2% 5.5% 5.5% 6.3% 6.4%

Source: SuperRatings

“There will always be negative months for super members, but the timing of negative returns can have a real impact on those entering the retirement phase,” said SuperRatings Executive Director Kirby Rappell.

“For members shifting their super savings to a pension product, a number of down months in relatively quick succession will mean they begin drawing down on a smaller pool of savings than they might have anticipated. As members get closer to retirement, it’s important that they review their risk tolerance to make sure they can retire even if the market takes a turn for the worse.”

As the chart below shows, down months in the latter part of 2018 took their toll on pension balances, although they were able to recover through 2019 to finish above their starting value by the end of August 2019.

Pension balance over 12 months to end August 2019*

Pension balance over 12 months to end August 2019
Source: SuperRatings
*Assumes a starting balance of $250,000 at the end of August 2018 and annual 5% drawdown applied monthly.

Comparing balanced and capital stable option performance shows that the balanced option suffered a greater drop but was able to bounce back relatively quickly. A starting balance of $250,000 fell to $232,951 over the four months to December 2018, before recovering to $252,091 at the end of August 2019.

In contrast, the capital stable option was able to better withstand the market fall, with a starting balance of $250,000 dropping to only $241,746 in December before rising back to $252,201.

While both performed similarly over the full 12-month period, a member retiring at December 2018 could have been over $8,500 worse off if they were in a balanced option compared to someone in a capital stable option. While a capital stable option is not expected to perform as well over longer periods, it will provide a smoother ride and may be an appropriate choice for those nearing retirement.

“Super fund returns have generally held up well under challenging conditions, but there’s no doubt this has been a challenging year for those entering retirement,” said Mr Rappell.

“Under these market conditions, timing plays a bigger role in determining your retirement outcome. At the same time interest rates are at record lows and moving lower, so the income generated for retirees and savers is less, particularly if someone is relying on interest from a bank account. In the current low rate and low return environment, it’s harder for retirees to generate capital growth and income.”

Super funds have had a convincing finish to what was a bumpy 2019 financial year, with an improvement in sentiment and a rallying share market in June helping funds over the line with solid returns.

A promising 2.0% gain in the September 2018 quarter seemed to vanish before members’ eyes as funds suffered a 4.7% loss in the December quarter. Funds fought back strongly in the final six months, helped by a solid performance in June, bringing the FY19 result to 6.9%.

According to SuperRatings’ data, the median balanced option returned 2.3% in June, driven predominately by a rebound in Australian and international share markets. By comparison, the top 10 funds achieved an average return of 8.5% for the year. The return for the median growth option, with two thirds of the portfolio allocated to local and international shares, was 7.4% over the year, while the median capital stable option returned 5.3%.

While funds have ridden the wave of market fluctuations since the Global Financial Crisis, the FY19 financial year has nevertheless proved a fitting bookend to super performance over the past decade, during which the superannuation system has amassed an additional $1.3 trillion for members.

Median balanced option financial year returns since introduction
of compulsory SG

* Interim return

Source: SuperRatings

Australia’s leading super funds in 2018-19

UniSuper was the highest returning balanced option over the 12 months to 30 June 2019, delivering a 9.9% gain to members. This was followed by QSuper and Media Super, which returned 9.7% and 8.8% respectively. Both UniSuper and QSuper are among the top returning funds over 10 years, narrowly trailing AustralianSuper, which remains on top of the long-term leader board with a return of 9.8% p.a.

Top 10 returning super funds over 1 year

Source: SuperRatings

Top 10 returning super funds over 10 years

Source: SuperRatings

“UniSuper was a standout performer for the 2019 financial year, and they have also delivered consistently strong outcomes for their members over the past 10 years,” said SuperRatings Executive Director Kirby Rappell. “While year-to-year performance can fluctuate, the ability of the fund to provide solid returns over the long term, while protecting their members’ savings against the ups and downs of the market has been key to their success.”

While superannuation continues to deliver for members, SuperRatings warned that the system could become a victim of its own success, as higher account balances mean members will feel more of the bumps as markets move.

“The 4.7% drop we saw in the December quarter was felt more acutely for someone with a $100,000 balance than one with only $10,000,” said Mr Rappell. “Members should enjoy the strength of returns we’ve seen over the past decade, but as more and more workers enter and exit the system, it’s important that we keep talking about how funds manage market pullbacks and other risks for their members. The uncertainty that many consumers and investors feel at the moment reminds us that super is a long-term game, and members must have an understanding of both risk and return, and the effect they have on their retirement savings.”

High returns are not a free lunch – consumers should understand risk

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 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.

While measuring risk can be tricky, it’s essential to understanding the value that members are getting from their fund. The conversation around risk will become increasingly important as a greater number of people begin transitioning to retirement and drawing down on their super.

Risk can be measured as the degree to which returns fluctuate over time. Members want high returns, but they also want consistent returns. Unfortunately, higher returns often mean taking on more risk, which means returns will be less consistent. The table below shows the top 10 funds ranked according to their risk-adjusted return, which measures how much members are being rewarded for taking on risk.

Top 10 funds ranked by risk and return (over 7 years)

Fund Risk/return ranking1 Return % p.a.
QSuper – Balanced 1 9.5%
CareSuper – Balanced 2 10.4%
Hostplus – Balanced* 3 11.1%
Cbus – Growth (Cbus MySuper)* 4 10.7%
BUSSQ Premium Choice – Balanced Growth 5 9.8%
Sunsuper for Life – Balanced 6 10.5%
Catholic Super – Balanced (MySuper) 7 9.7%
CSC PSSap – MySuper Balanced 8 9.4%
HESTA – Core Pool 9 9.9%
Media Super – Balanced 10 9.9%

1 Risk/return ranking determined by Sharpe ratio

* Interim return

Source: SuperRatings

QSuper’s return of 9.5% p.a. over the past seven years is slightly below the average of 10.1% 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 and Hostplus were able to deliver higher returns, but for a slightly higher level of risk.

High returns are not a free lunch – consumers should understand risk

Following the introduction of MySuper, which provides a low-cost, ‘set-and-forget’ alternative for members, we have seen lifecycle strategies become increasingly popular. Members starting their working life in a lifecycle product are given a higher allocation to riskier growth assets like shares, which is gradually shifted over to safer assets as they age.

This allows members to benefit from higher risk and return earlier on in their working life, and having more certainty as they get closer to retirement. Approximately one third of MySuper products have some sort of age-based strategy, and tend to be offered by retail master trusts.

The chart below shows how a lifecycle product’s asset allocation changes as members age. For those starting out in the workforce, the allocation to growth assets like equities is high (around 90% for the median fund) and is reduced over time to around 50% by the time the member reaches the age of 60.

Lifecycle vs Single Default GAA

Source: SuperRatings

When assessing the performance of lifecycle products, SuperRatings found there are some retail funds that have improved their position. smartMonday MySuper – Aon MySuper High Growth (11.8% p.a.), ANZ Smart Choice Super – MySuper (10.2% p.a.) and Mercer SmartPath – MySuper (9.9% p.a.) have delivered strong returns over the three years to 30 June 2019 for younger members (in the 1995-1999 cohort), in excess of the not-for-profit median across both single default and lifecycle MySuper products.

A world-beating performance from Australian shares has been overshadowed by the re-emergence of geopolitical uncertainty and a wave of risk aversion in global markets, leading to softer performance for super funds in the final stretch of the financial year.

According to estimates from leading superannuation research house SuperRatings, the typical balanced option return was -0.7% in May as funds were dragged down by falls in international shares triggered by the re-emergence of the US-China trade conflict and uncertainty surrounding central bank policy.

The bright side has been the resilience of Australian shares and property, both of which saw a brief boost from the Coalition’s surprise election win, but this was not enough to save super funds from a month of negative performance.

Markets have since recovered following May’s weakness, but members should not expect a bumper end to the financial year. The year-to-date return is sitting at 5.1% for the median balanced option, which is below the 8.5% per annum return achieved over the past ten years.

Estimated median Balanced option returns to 31 May 2019

Period Accumulation returns Pension
returns
Month of May 2019 -0.7% -0.7%
Financial year return to 31 May 2019 5.1% 5.8%
Rolling 1-year return to 31 May 2019 4.8% 7.3%
Rolling 3-year return to 31 May 2019 6.8% 8.1%
Rolling 5-year return to 31 May 2019 6.6% 7.6%
Rolling 7-year return to 31 May 2019 8.7% 10.5%
Rolling 10-year return to 31 May 2019 8.5% 9.7%
Rolling 15-year return to 31 May 2019 7.5% 8.1%
Rolling 20-year return to 31 May 2019 6.8%

Interim results only. Median Balanced Option refers to ‘Balanced’ options with exposure to growth style assets of between 60% and 76%. Approximately 60% to 70% of Australians in our major funds are invested in their fund’s default investment option, which in most cases is the balanced investment option. Returns are net of investment fees, tax and implicit asset-based administration fees.

Members in the median growth option, which includes higher weightings to growth assets like Australian and overseas shares, suffered a larger fall of 1.2% in May, while the median International Shares option fell 4.0% and the median Australian Shares option held firm, returning 1.4%.

“It’s been a disappointing end to the financial year for super, but long-term performance remains robust,” said SuperRatings Executive Director Kirby Rappell. “The median balanced option return over the past 10 years is around 8.5%, indicating that super has delivered solid returns even in a low interest rate environment.”

Downside risks to the Australian economy, including weak inflation, falling home prices, and tighter credit conditions are taking their toll on consumer confidence, while the geopolitical risks in the form of US-China trade negotiations have also contributed to market volatility.

SuperRatings Index return estimates to 31 May 2019


Source: SuperRatings

However, the Australian market has held up reasonably well over the financial year to date, with the S&P/ASX 200 Index returning 7.6% so far to the end of May, outperforming global share performance of 6.3% measured by the MSCI World Ex-Australia Index. Listed property has been the leading asset class so far this financial year, with the S&P/ASX 200 A-REIT Index returning 14.5%. Both property and shares saw a modest boost in May with the negative gearing debate now effectively put to bed following the federal election.

“Labor’s negative gearing proposals were thought to favour developers by limiting tax concessions to new stock, but so far the improvement in sentiment has outweighed any negative impact, which may give some super funds a temporary boost to their property portfolios,” said Mr Rappell.

Long-term super performance steady

The negative performance for super funds in May has been reflected in a slight fall in the Balanced and Growth option indices for the month but long-term performance remains strong. According to SuperRatings’ data, $100,000 invested in the median Balanced option in May 2009 is estimated to have reached an accumulated $217,391 today.

The median Growth option is estimated to be worth $230,873 over the same period, while $100,000 invested in domestic and international shares ten-years ago is now worth $244,382 and $258,181 respectively. In contrast, $100,000 invested in the median Cash option ten years ago would only be worth $129,748.

Growth in $100,000 invested over 10 years to 31 May 2019


Source: SuperRatings

Release ends

Leading research house and managed account provider Lonsec will work with financial advisers seeking to transition from conflicted advice models and introduce a greater degree of independence in their investment decisions.

Lonsec is offering to acquire in-house managed portfolios from advice licensees to enable them to take advantage of best practice governance principles and Lonsec’s experienced team of portfolio construction experts.

With a shift currently taking place in the advice industry in the wake of the Royal Commission into Financial Services, Lonsec said advisers are acutely aware of the need to present a professional, conflict-free advice environment for their clients.

“Advice models have come under a great deal of scrutiny by the Royal Commission as well as the regulators and the community,” said Lonsec CEO Charlie Haynes.

“The Royal Commission may have stopped short of a ban on vertically integrated or conflicted financial advice, but advisers know they need to start moving quickly in this direction to meet community expectations.”

While it is becoming increasingly unpalatable for licensees or advisers to charge portfolio management fees for in-house managed accounts, advisers are also cognisant of regulatory developments.

An empowered ASIC is investigating how platform providers ensure the integrity of managed accounts constructed by advice licensees who might lack the expertise or resources to act as specialist investment managers.

For many advisers, the question is how best to manage conflicts, either by outsourcing the portfolio construction process or introducing a greater degree of independence in their investment decisions.

Lonsec is proposing to acquire the investment management rights from existing managed account providers, enabling them to focus on the provision of advice without conflict.

Licensees have the flexibility to retain their existing branding, investment mandate and platform, or transition to Lonsec’s own professionally managed portfolios incorporating best ideas and insights from Australia’s leading investment product research house.

“An outsourced managed account solution is becoming increasingly popular, not just in order to reduce conflicts but to allow advisers to focus on their clients’ needs and aspirations while leaving the investment process to specialised portfolio managers,” said Mr Haynes.

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.