Congratulations to all of the finalists for this year’s SuperRatings and Lonsec Fund of the Year Awards Dinner. A full list of the awards is available below.

SuperRatings MySuper of the Year Award

Awarded to the fund that has provided the Best Value for Money Default Offering.

Cbus Super
First State Super
Statewide Super


SuperRatings MyChoice Super of the Year Award

Awarded to the fund with the Best Value for Money Offering for Engaged Members.

Cbus Super
Mercer Super Trust
Statewide Super



SuperRatings Pension of the Year Award

Awarded to the fund with the Best Value for Money Pension Offering.




SuperRatings Career Fund of the Year Award

Awarded to the fund with the offering that is best tailored to its industry sector.

Cbus Super
Intrust Super
Mercy Super


SuperRatings Best New Innovation Award

Awarded to the fund that has developed and launched the most innovative product or service during the year.

First State Super Explorer
Hostplus Self Managed Invest
Intrust Super SuperCents
Kogan Super
Raiz Invest Super
Sunsuper Adviser Online Transact


SuperRatings Momentum Award

Awarded to the fund that has demonstrated significant progress in executing key projects that will enhance its strategic positioning in coming years.

Cbus Super
Mercer Super Trust


SuperRatings Net Benefit Award

Awarded to the fund with the best Net Benefit outcomes delivered to members over the short and long term.

Cbus Super


SuperRatings Smooth Ride Award

Awarded to the fund that has best weathered the ups and downs of the market, while also delivering strong outcomes.

Cbus Super
Media Super


SuperRatings Fund of the Year Award

Announced on the night.







Active management has fallen out of favour among investors, reflecting changing investor preferences and the scars of the Global Financial Crisis, which have led investors to shun stock pickers and more elaborate strategies in favour of lower-cost, vanilla products. Investors today are focused far less on alpha generation, with its goal of outperforming benchmarks, and are now far more content in generating the majority of their returns from index funds or similar passive strategies.

The growth in passive management has been astonishing. In the last five calendar years, investors moved US$1.5 trillion into funds managed by Vanguard, one of the world’s largest managers of passive strategies. Blackrock, the second largest passive manager, took in US$685 billion over the same period. Vanguard now manages close to US$4.0 trillion globally in passive strategies and on average owns around 7% of every listed US company, according to Bloomberg data. As passive managers continue to suck up funds, active managers are struggling to get a positive message through.

Passive managers don’t apply any security selection, meaning the money simply flows into passive or index strategies that replicate benchmarks like the S&P/ASX 300 Index in Australia or the S&P 500 Index in the United States, with Exchange Traded Funds making it easier than ever before for investors to gain relatively cheap passive exposure.

At its core, passive investing is a momentum strategy. It buys more of those stocks that go up in price and sells more of those that fall in price. Passive strategies tend to work best when financial markets experience strong upward moves in share prices. Passive management is used mostly in the portfolio management of equities (Australian, Global and Emerging Markets) and fixed income (Australian and Global) and have given rise to the major ETF providers that currently dominate the market (see chart below).

FUM share of Australia’s major ETF providers (August 2019)

Source: ASX, Lonsec

The beta rally has put active managers in the shade

The post-GFC period has been characterised by strong equity market returns, but given the length of the bull market to date, investors are questioning how long this situation can last.

Given the inevitable cyclicality of financial markets, the one thing that’s certain is that strong markets will not last forever. In a low return environment, market beta may end up providing disappointing returns, making alpha a valuable contributor to portfolios.

The aim of active management is to be an additional incremental return source, above market returns. Alpha doesn’t scale well with beta, meaning it becomes a smaller percentage of returns when beta is very high. This is the environment we find ourselves in, so we would expect beta to do well and for seekers of alpha to struggle. But even taking a broader view, the case for active management does not appear great.

The hard truth is that most active fund managers underperform benchmarks constructed by index committees. One of the world’s most widely used benchmarks for assessing US equity fund performance is the S&P 500 index. The committee looks at only a handful of criteria when looking to add new stocks to the index, including: liquidity, financial viability (four consecutive quarters of positive earnings), market capitalisation (must be greater than US$6.1 billion), and sector representation (the committee tries to keep the weight of each sector in balance with sector weightings of the S&P Total Market Index of eligible companies). Changes to the index are made when needed.

The S&P committee does no macroeconomic forecasting, invests over a long-term horizon with low portfolio turnover, and is unconstrained by sector or industry limitations, position weightings, investment style, or performance pressures. Yet this straightforward strategy has generally outperformed active fund managers.

Some active managers can consistently outperform

If alpha were easy to find, it wouldn’t exist. There are three general sources to generate excess return for investment portfolios: strategic asset allocation, tactical tilts within asset classes (including opportunistic investing), and superior fund manager selection. While opportunistic investments tend to be episodic alpha generators in portfolios, the biggest long-term drivers of alpha are asset allocation and manager selection.

Even as managers have struggled to generate alpha, a significant number of managers are still generating returns in excess of market indices. The key is having the right resources and the right approach to find them. Average active fund managers tend to underperform industry benchmarks, but the best fund managers outperform over longer time frames.

There’s a deep body of research that looks at how investors can gain an edge by identifying active fund managers that are able to tap sustainable sources of alpha. Research indicates that to meaningfully outperform, it is often helpful to find active fund managers with a portfolio that looks significantly different to the benchmark they are attempting to beat (i.e. they have a high degree of ‘activeness’).

In the financial literature, there are numerous studies showing that the average active fund manager underperforms the benchmark index after fees. However, research presented in 2006 by Martijn Cremers and Antti Petajisto of the Yale School of Management introduced an idea called Active Share. This is a new method of measuring the extent of active management employed by fund managers and is a useful tool for finding those that can consistently outperform. By analysing 2,650 US equity funds from 1980 to 2003, Cremers and Petajisto found that the top-ranking active funds—those with an active share of 80% or higher—beat their benchmark indices by 2.0–2.7% p.a. before fees and by 1.5–1.6% p.a. after fees.

Active share aims to measure the proportion of a manager’s holdings that are different to the benchmark. It is calculated by taking the sum of the absolute value of the differences of the weight of each holding in the manager’s portfolio versus the weight of each holding in the benchmark index and dividing by two. For a long-only equity fund, the active share is between 0% and 100%. The active share for fully passive strategies that replicate an index is 0%, and more than 90% for strategies that are very different to the benchmark index.

As you might expect, the portfolios of active, high-conviction fund managers will diverge significantly from the benchmark, and will frequently incur volatility relative to benchmark returns. However, this differentiation provides investors with the opportunity to add value over the long term.

What to look for when assessing active managers

Skilled managers with high active share have shown a higher tendency to outperform the market. Investors that tilt towards active managers with high active share have a greater chance of outperforming. They tend to be smaller fund management organizations, often where the founder is an investor first and invests his or her wealth alongside external clients, bringing their investing acumen to a portfolio of funds.

Active managers with high active share tend to maintain this high level consistently over time. This proves useful when conducting analysis to help identify managers that are likely to outperform in the future as well. While some of these managers may not have beaten the index in recent periods, when there are dislocations in markets, these managers will be well positioned to generate long-term returns above the fees they charge.

Active share by itself does not indicate whether a fund will outperform an unmanaged benchmark. There are other important aspects to consider when conducting manager due diligence. Here are a few things you should consider:

  • Find out as much as you can about the fund’s culture and process. Outperformers see investing as a profession and not a business. Examine the fund’s investment philosophy to see if it is consistent and lived out through the fund’s investment decisions. Does the manager exercise patience and discipline?
  • Successful active fund managers have low portfolio turnover with long holding periods of at least four years versus roughly one year for average performing funds. This is a useful metric to look at when assessing a fund’s buy/sell discipline. Another strong indicator is for active managers to add to stock holdings when market pricing improves, rather than giving in to agency behaviour of selling into a falling market.
  • Alpha generators are high conviction stock pickers. This means their portfolios are concentrated in their best ideas, leading to a higher level of ‘activeness’ and differentiation from the benchmark.

While there are active managers that are persistently generating alpha, finding them is not a simple task. For investors that are committed to generating long-term outperformance, it’s critical to have the right resources in place to identify these managers. A world class research effort is required to be able to identify and evaluate those managers that can generate consistent outperformance from the thousands of managers out there.

Historically, high valuations in a range of asset classes including equities, sovereign bonds, credit and unlisted assets mean future beta returns are expected to be lower. This will make it a challenging environment for investors to meet their investment objectives. For those with the knowledge and capacity, finding alpha can help bridge the gap.

With an increasing focus in the market on how we are all building our client portfolios, it is incredibly important to have a strong and defendable investment framework in place. This investment framework consists of, but is not limited to, how we structure our investment committee, what our APL looks like, and where we get our research from. However, the foundation for this framework must lie with a clearly defined and articulated investment philosophy underpinning all our investment decisions.

At its essence an investment philosophy reflects a broad set of investment beliefs. It underpins our investment strategy and process and ultimately is our ‘source of truth’ as it gives a frame of reference around all investment decisions.

Your investment philosophy should provide transparency and ensure consistency in your decision making and help mitigate behavioral biases such as chasing last year’s winners. Typically, an investment philosophy will be underpinned by some sort of empirical evidence supporting the philosophy. An example of this may be a belief in active management or an investment approach based on a valuation discipline.

There are a number of different approaches that can be taken when articulating your investment philosophy, but for many with a diverse client base, keeping it simple is the best solution. Think broadly about what you are trying to achieve across your client base, irrespective of whether they are wealth accumulators, retirees or high net worth clients.

  • Do you believe in diversification?
  • Do you believe that market beta is the primary driver of returns?
  • How do you define risk?
  • Do you believe markets are inefficient/efficient?

Answering questions such as this will help build the framework for what will become your investment philosophy. For anyone that has a more focused client base (for example; predominately retirees), you can start to ask questions around liquidity, income and timeframes.

Importantly, once you have established a set of principles that you believe in, ensure that you match this belief through your investment portfolios. For example, a philosophy based on protecting portfolios from downside risk and volatility, cannot be implemented via an index based solution.

It is always important to ensure that your investment philosophy does not remain a pretty plaque on the wall of your boardroom, but instead forms the basis for every conversation you have with your clients, as it should be clearly reflected in your recommended solutions. This is especially important in difficult market environments as a clearly articulated investment philosophy will be the reference point for your client education process.

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.”

Many retirees struggle to have enough income to fund a comfortable retirement because of an over-reliance on so-called “low risk” asset allocations, a problem that requires innovative solutions to overcome according to the team at Legg Mason’s Martin Currie.

Access the full article here.


Recent market turmoil is a timely reminder to super members not to allow short-term market movements to impact their investment decisions, according to leading research house SuperRatings.

As investors deal with a renewed bout of volatility and growing uncertainty surrounding the economic outlook, recent data show that members are often better off riding the wave rather than switching out of their current investment option in favour of something safer.

After a promising start to the 2020 financial year, markets took a dive through the first half of August, with super funds likely to feel the pinch. According to SuperRatings, the median balanced option return was a promising 1.3% in July, but this has likely been reversed due to August’s fall in share markets. The return for the median growth option, with two thirds of the portfolio allocated to local and international shares, was 1.6% over the year, while the cash option returned 0.1%.

Median Balanced option returns to 31 July 2019

 Period Accumulation returns Pension returns
 Month of July 2019 1.3% 1.5%
 Financial year return to 31 July 2019 1.3% 1.5%
 Rolling 1-year return to 31 July 2019 7.2% 8.2%
 Rolling 3-year return to 31 July 2019 8.4% 9.0%
 Rolling 5-year return to 31 July 2019 7.8% 8.4%
 Rolling 7-year return to 31 July 2019 9.5% 10.6%
 Rolling 10-year return to 31 July 2019 8.3% 9.3%
 Rolling 15-year return to 31 July 2019 7.6% 8.4%
 Rolling 20-year return to 31 July 2019 7.3% 8.0%

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.

AustralianSuper’s balanced option remains on top of the long-term returns chart, delivering 9.6% p.a. over the 10 years to the end of 31 July 2019, followed closely by Hostplus on 9.5% p.a. and UniSuper on 9.4%.

Top 10 performing funds over 10 years to 31 July 2019

Source: SuperRatings

The SR50 Balanced Index took a dive in the December quarter of 2018, only to rebound strongly through to the end of July 2019. Switching to a capital stable option at the end of December would have meant missing out on $4,384 by the end of July (for a starting account balance of $100,000).

Balanced options have bounced back
(Value of $100,000 invested over 11 months to 31 July 2019)

Source: SuperRatings

“The lesson for investors in the current market environment is that switching in response to short-term market movements is not a good idea,” said SuperRatings Executive Director Kirby Rappell.

Historically, the June quarter is the most challenging period for super, so members might be breathing a sigh of relief. Whether the worst of recent volatility is over remains to be seen, but members have reason to be optimistic. As the chart below shows, the September quarter has delivered an average return of 2.4% over the past decade, compared to the average June quarter return of 0.9%. For growth options and options focused on Australian or international shares, the results are even more pronounced. Australian share options returns have averaged 3.9% in the September quarter and -0.6% in the June quarter.

Average quarterly returns

Source: SuperRatings

“There are certainly some significant challenges facing markets at the moment and investors are forced to deal with a constantly shifting narrative,” said Mr Rappell.

“One of the key challenges facing funds and especially retirees at the moment is record low interest rates in Australia and the continual drop in bond yields. Lower interest rates mean retirees receive less income from annuities while investors start looking for riskier assets to add to their portfolio to generate the desired yield.”

Release ends


Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the merits of the superannuation or pension financial product(s) alone, without taking into account the objectives, financial situation or particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness. If SuperRatings advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each superannuation or pension financial product before making any decision about whether to acquire a financial product. SuperRatings research process relies upon the participation of the superannuation fund or product issuer(s). Should the superannuation fund or product issuer(s) no longer be an active participant in SuperRatings research process, SuperRatings reserves the right to withdraw the rating and document at any time and discontinue future coverage of the superannuation and pension financial product(s).

Copyright © 2019 SuperRatings Pty Ltd (ABN 95 100 192 283 AFSL No. 311880 (SuperRatings)). This media release is subject to the copyright of SuperRatings. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth.), no part of this media release may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of SuperRatings. This media release may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to SuperRatings copyrighted material, applies to such third party content.

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.

Back in the 1980s, the administration of the newly-created Australian Football League (AFL) believed that eleven Victorian clubs were unsustainable in a national competition. Victorian clubs, many of which were in a poor financial state, were offered incentive packages of up to $6 million to merge. One of the proposed mergers was to have been between Fitzroy and Footscray in 1989, but Footscray members rallied to raise enough money to retain their Club as a separate identity, and Fitzroy eventually relocated to Queensland in 1996 to transform the Brisbane Bears into the Brisbane Lions.

What does this have to do with Superannuation?

On 4 April 2019, APRA (the Australian Prudential Regulation Authority) issued a media release, quoting Deputy Chair Helen Rowell: ‘In some instances, acting in the best interests of members will require underperforming funds to merge or exit the industry. If trustees and trustee directors are not willing or able to meet their best interests duties to members, they should be prepared to face serious consequences.’.

The catalyst for this media release was the passing of new legislation granting APRA stronger powers to take action against the trustees of underperforming superannuation funds.  The Treasury Laws Amendment legislation requires trustees to conduct an annual Outcomes Assessment against a series of prescribed benchmarks, covering all of their fund’s MySuper and Choice superannuation product options, and enhances APRA’s power to refuse, or to cancel, a MySuper authorisation.

Previously, APRA had been pushing for more super fund mergers, based on the earlier ‘scale test’, which many in the industry argued focused unfairly on ‘sub-scale’ funds, some of which were delivering perfectly satisfactory returns and services to their members.   In her Opening Statement to the House of Representatives Standing Committee on Economics on 10 October 2017, Helen Rowell stated that ‘The metrics considered under the existing scale test are insufficient to indicate whether a trustee is promoting the financial interests of, and providing quality, value-for-money outcomes for, fund members’.

Just as the AFL has made numerous, almost annual changes to the rules governing the world’s oldest major football code, Prudential Standard SPS 515 has gone through multiple revisions in this tumultuous environment, with the latest draft version bearing little resemblance to the original.

In the first version released in December 2017, strategic and business planning and member outcomes were contained in separate prudential standards. The strategic planning requirements sat rather unwieldy as part of the prudential standard on risk management.  The member outcomes requirements appeared to be somewhat more business operations focused, requiring funds to design a member Outcomes Assessment by segmenting its business so that ‘all parts of its business operations… are captured; and the assessment considers the outcomes provided to beneficiaries in each segment’. The way to assess each outcome was also unnecessarily rigid, requiring assessment with reference to both ‘objective benchmarks and targets, both internal and external’ and ‘outcomes provided to beneficiaries of other [funds]’.

It was pleasing to see that the December 2018 version of SPS 515 fixed both of the above issues.  Strategic planning and member outcomes requirements were amalgamated into the same prudential standard. Outcomes Assessments became member cohort-focused and there was no longer an explicit requirement to compare every single outcome metric to other funds. This version of SPS 515 was much more logically structured, and also struck a better balance between being prescriptive and permitting flexibility for funds to determine their own member outcomes assessment framework to suit their particular circumstances.

However, the passage of legislation to require an annual Outcomes Assessment under the SIS Act in early April 2019 necessitated further revisions to SPS 515.  The legislated requirements are more prescriptive, requiring comparison of a fund’s MySuper products to other MySuper products offered by other funds. For Choice products, funds are required to determine comparable Choice products for comparison purposes.

On 30 April, APRA issued the revised SPS 515 for industry consultation. The revised SPS 515 introduced a new ‘business performance review’ requirement that covers both monitoring of business plans and the Outcomes Assessment. The Outcomes Assessment encompasses two parts, the outcomes assessment as required under SIS and outcomes achieved for different cohorts of beneficiaries.

It is not immediately clear what specific outcomes are envisaged to be covered in the latter, nor is it clear whether APRA requires assessment by cohorts to apply to the Outcomes Assessment under SIS. Additionally, APRA requires funds to specify relative weights to different areas in making an overall assessment. As APRA issued only the revised Prudential Standard for consultation without the relevant Prudential Guidance, it is not 100% clear how APRA envisages the new requirements to work.

There is also uncertainty about the timing of the first annual Outcomes Assessment. As the relevant legislation became effective in April 2019, arguably the first annual assessment needs to be completed within a year, so by April 2020.

Meanwhile, the prospective commencement date of 1 January 2020 for SPS 515 draws ever nearer.  The latest legislative and prudential requirements have changed significantly from the earlier versions. Trustees need to review their assessment framework to cater for these changes, including how to determine the comparable Choice products and what summary results of the outcomes assessment to make publicly available as required by the legislation.

Whatever final form the Outcomes Assessment takes, both regulators and trustees need to be flexible enough to recognise that not everything that makes an organisation successful can be captured in calculable metrics.

After Footscray’s members saved their Club from extinction in 1989, they became the Western Bulldogs and stumbled from moderate success to financial crisis over the following 25 years.  However, in 2016 they memorably won the ultimate AFL prize, the premiership flag, paid off a multi-million-dollar debt and consolidated their position as a permanent community focus for Melbourne’s Western suburbs.  Definitely a favourable outcome for their members!

Prepared by Minjie Shen – Manager, Consulting and Bill Buttler – Senior Manager, Consulting

In what has since been touted as ‘Miracle May’, investors welcomed the shock federal election outcome, which saw the Morrison government returned to power for another three years. The Monday following the election weekend saw the S&P/ASX 200 Index surge in a post-poll relief rally, adding approximately $33 billion to its market capitalisation in what was the single largest gain this year. Much to the embarrassment of the political pundits who had boldly claimed a Labor victory was inevitable, the Coalition managed to secure a majority government in the face of pessimistic opinion polls and betting markets.

Investors have experienced a mild reprieve from some of the recent negativity, while the more pessimistic scenarios have been tempered by upcoming tax cuts—equivalent to around 0.5% of GDP—along with the prospect of further rate cuts from the RBA, APRA’s move to lower the serviceability buffer for home loans, and the removal of downside risk associated with Labor’s tax policy. At the same time, strong commodity prices are boosting export receipts and the government’s fiscal position. However, global risks remain, highlighted by the RBA’s concern about the US-China trade war, and some not-so-subtle indications that the Australian economy is in need of some real structural reform to take the pressure off monetary policy.

Period returns to end May 2019 (% p.a.)

Source: FE, Lonsec

Leading up to the election, equity markets had fully priced in a Labor victory, which had placed significant downward pressure on valuations, in part due to the proposed overhaul of the current taxation laws. As such, when the ‘Messiah from the Shire’ was safely returned to the lodge, investors reacted with exuberance, which saw the S&P/ASX 200 TR Index generate a 1.7% return for the month of May. While in isolation this may seem uninspiring, contrast this with the MSCI World ex Australia NR Index (AUD Hedged), which fell -6.0% over growing concerns of a synchronised global slowdown in concert with the on-again, off-again escalating US-China trade war. Resultingly, Australia was the only advanced economy able to buck the trend during the month of May and enjoy gains in its equity market.

Broadly speaking, investors had shifted their asset allocation away from domestic equities in anticipation of the abolition of excess franking credit refunds. The reason for this was two-fold. Returns on fully-franked securities were anticipated to decline, which in conjunction with a static equity-risk premium necessitated a lower entry price to entice prospective investors. Furthermore, the existing system favours an overweight allocation to domestic equities due to the favorable taxation treatment for those in a zero-tax environment.

Logically, once this incentive is removed, capital outflows overseas will likely ensue. In tandem with this was the proposed halving of the capital-gains tax concession which would have significantly dinted the value proposition associated with investing in property and shares. As such, simply maintaining the status quo was enough to see an extensive re-rate across the market throughout May.

The Financials sector was one of the largest beneficiaries of the election outcome, with the ‘big four’ surging 6–10% on the Monday following the election. Once the animal spirits had subsided, this translated into a 2.6% gain for the S&P/ASX 200 Financials TR Index for the month. Labor’s proposed negative gearing limitations, CGT amendments, increased bank levies and more onerous restrictions on mortgage brokers had all coalesced into an unfriendly environment for future bank earnings. This is in stark contrast to the reform-shy Coalition, which was rewarded for sticking with the status quo. Given then Treasurer Morrison was opposed to a Royal Commission into Financial Services, it is perhaps unsurprising that this sector received a healthy post-election bump.

Likewise, A-REITs enjoyed a surge with the S&P/ASX 200 A-REIT TR Index achieving a 2.5% return for the month of May. This was again attributable to more sanguine housing market sentiment with the threat of proposed changes to negative gearing and CGT discounts now ameliorated. Specifically, Stockland, which is one of Australia’s largest diversified property developers, has since rallied 14% due to its large residential property exposure. The subsequent dovish pivot by the RBA, which cut interest rates to historic lows at its June meeting, has since provided additional tailwinds for the sector too.

Source: FE, Lonsec

Similarly, the Coalition government and health insurers are singing from the same hymn sheet, which saw the S&P/ASX 200 Health Care TR Index deliver 3.3% for the month of May. As above, the prospect of a Labor government mandating capped health insurance premiums and increased regulatory scrutiny had seen the likes of Medibank and NIB de-rate significantly prior to the election. However, following the surprise election announcement, Medibank and NIB subsequently shot the lights out and returned 11.5% and 15.8% at the close on Monday 17 May, respectively. More broadly, the perceived ability for the Coalition to demonstrate fiscal responsibility in the face of gathering economic storm clouds ushered in a 2.0% return for the S&P/ASX 300 Consumer Discretionary TR Index.

While it may have been ‘Miracle May’ for the Coalition and equity investors, unfortunately you can’t have winners without losers. Shareholders invested in Sportsbet’s parent company, Flutter Entertainment, were left aghast at the election result, given Sportsbet had presciently paid out on a Labor win. Equally, Clive Palmer has been left questioning his return on investment, following a $55 million advertising blitz that failed to deliver his party a single seat in parliament.

While miracles are always welcome by investors, unfortunately they are often unreliable when it comes to long-term, sustainable growth. While markets have received a nice boost, the weakness in Australia’s underlying position is difficult to ignore. The latest National Accounts data highlighted the extent of the slowdown, with quarterly growth just 0.4% and annual growth a meagre 1.8%. Households contributed just 0.1% to growth in the March quarter as heightened uncertainty, subdued confidence, and weakness in housing combined with still weak wages growth to constrain household spending. A miracle may have saved us in May, but we have to get through the rest of 2019 and beyond.

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