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Chris Brycki from Stockspot talks about their 2021 Fat Cat Funds Report which assesses the best and worst performing super funds, including how ESG options performed, and lessons for retirees and SMSFs.
The Stockspot Fat Cat Funds Report is a research report we’ve been doing for the last nine years. The report helps to identify the best and worst performing super funds in Australia in different risk categories, from conservative all the way through to high growth.
The data isn’t easy to find, so we have to go onto the websites of every single super fund in order to pull that data and information on the performance and fees. And then we try and assess apples with apples. So we have to adjust the risk categories based on the level of growth and defensive assets that each of the funds hold.
Pretty much every year for the last nine years our findings have been the same – that lower cost funds in general do better than higher fee funds. And unfortunately, the under performers have been pretty consistent over the last nine years.
The good news is that some of these underperformers have change management or they’ve been sold recently and they’re going to be restructured, which is good news for people that have been long suffering investors or members of these funds. But there’s also some great funds out there. And consistently we find there are funds doing fantastic things for members and generating very consistent performance.
What do the worst performing funds have in common?
Generally, the one thing they have in common is higher fees, and I would caveat that with, with anything there are always some random funds that have high fees that do well, just as there are always randomly some funds that have low fees that do poorly because usually their asset allocation was not right, or they pick some poor assets to be investing into.
However, in a general sense, what we find every year is that the more you pay with your super, the worse your performance is. And that is seen across all the different risk classes.
What do the best performing funds have in common?
Yeah. So generally the better performing funds are the ones with low fees. For instance, the top three performing funds this year in the Growth category, which is the category most Australians have their money invested into, have on average, fees of about 0.8% per year, whereas the worst performing funds, the top three worst performing have fees of over 2% per year.
Now, generally, what we find is that industry funds usually have lower fees than retail funds, and as a result, in our top five, we usually see four or five industry funds. This year we see four out of five top funds being industry funds. And in our worst performing funds, we usually see a majority of retail funds. This year, four out of the five worst are retail funds.
How many funds beat the index?
So very few if you have a look at, and we use as a comparison point the Vanguard multi asset funds. The reason why, they’ve existed for a long time. They also publish their performance on an after tax basis for an accumulation member. So we use that as a good benchmark for how the index has performed for a multi asset fund. And what we find pretty much every year is about 90% of super funds of an equivalent risk level underperform that Vanguard multi asset fund, which is actually pretty consistent with the findings in other markets.
So there’s been similar studies in the UK looking look at bare bones, simple multi asset fund verse a lot of the more complicated strategies, and in a similar way, they find that around 90% underperform.
Do any funds consistently beat the index?
So we’re looking at five year performance. So we do find about 10% outperform over five years. But as we also see that the outperforming funds do tend to chop and change over time based on the asset allocation of those funds or the particular assets that they’ve invested in. So sometimes a top performing fund of one five year period will actually become a bottom performing fund.
A good example of that actually was the MTAA industry fund, which was at the top of most league tables back in 2009 or 2008 just before the financial crisis. But then due to some big hedging losses they ended up at the bottom of most of the league tables.
Do larger funds perform better?
Look, I’d say in general, bigger funds do a little bit better, but it’s certainly not a clear trend. And there is definitely some bigger funds that have done poorly and some small funds that have done really well. So it’s not something we see as a determining factor. Mainly because some of these big funds actually have a lot of active managers charging high fees, and so they’re not actually passing on lower costs to their members, whereas some of the smaller funds are just investing into index funds and are able to perform better.
So fees seems to be a bigger driver of performance rather than size and scale. And equally, some of the bigger funds out there have some of the higher per member administration costs. So there doesn’t seem to be the level of economies of scale that some people in the industry talk about.
How did ESG options perform?
So over the last five and ten years ESG options have in general perform quite well, and a lot of that is due to the sectors that most ESG funds are overweight in verse underweight in.
So in general, what we see is that ESG funds have more of them member money invested into sectors like technology and healthcare. Those are the two sectors that have done extremely well over the last decade. And less money invested into natural resources of mining, which is a sector that has underperformed. And just due to the sector tilts, ESG has done well.
Now this year there are a few less ESG funds in our top list than they were last year. Last year was the year that we saw the most ESG funds, and that was due largely to the fact that technology verse mining had really reached a bit of an extreme. But what we’ve seen this year is that because of mining companies and natural resources businesses have actually performed quite well as commodity prices have risen. Then there’s been a bit of mean reversion and ESG hasn’t performed quite as well this year.
Do we need to think about risk differently when it comes to super?
Yeah certainly because you can’t access super for a long time for someone in their 20s or 30s, seeing a big market drawdown is less relevant. However, what we did see last year was that people in their 20s and 30s were the groups that really needed to draw out of their super in the early release scheme more than others.
And so that’s a new factor that people need to consider is that during a market stress event, they may need the money even before retirement. Also, although the data does suggest that risk assets, growth assets tend to do better over the long run, like shares and property. There are certainly periods of time in history where they haven’t been the best performing asset class for a long period of time.
A great example being Japan from the late 90s onwards, where government bonds and gold performed a lot better than equities for the next 30 years. So we still see there being value for younger members having a diversified portfolio with different assets, although there’s obviously a bigger propensity to take risk.
What are some implications for retirees?
Well, the mathematics of that is quite simple in that if you expect for, let’s say, a high growth portfolio over the long run for the return to be something like 8 or 9% per year and ifyou’re paying 1% a year in fees, fees as a proportion of your overall return is relatively low.
Whereas if you’re in a conservative strategy that’s only returning 5% a year and you’re paying 1% in fees, that’s 20% of your return, that’s going away in costs.
So what’s the implications for retirees? Well, retirees need to be even more conscious of the cost side of their portfolio, particularly these days in a low returning environment. Because all asset returns are essentially pegged a risk free rate retires should be expecting to get lower returns now than they have got over the last 20 years just because of interest rates and as a result, the cost part of their super is even more important to focus on.
Is the government doing enough to combat poor performing funds?
What we’ve seen recently is the government has really ramped up their efforts to make consumers more aware of which funds are performing well and which ones are not. I personally think that’s great news. That’s something we’ve been pretty passionate about doing for the last nine years.
So we think consumers, especially in this area where there’s unfortunately, everyone needs to have super, but doesn’t have necessarily the financial background to be able to analyse super funds. Sometimes you just need to be told if your fund’s a dud. And so the government now naming and shaming the worst performing my super funds is great news.
I think this year they’ve named 13 as duds that have consistently performed poorly and they forced those funds to actually communicate that with members. Communicating with members is incredibly important because we’ve been publishing the Fat cat report for nine years, and it’s been the same funds in the bottom performers. But we noticed that the amount of money in these funds doesn’t really change year to year.
So the message from our report doesn’t seem to be getting to the end members, whereas the government’s forcing these funds to actually send a message to members. Whether it motivates them to change funds is another story.
It’s also good news that the government is publishing a comparison of all of the MySuper funds. At the moment that they’ve got a comparison of about 80 different funds on the ATO website that you can check out.
The issues we see with this comparison, though, it’s twofold. One it only looks at 80 funds. And while that does cover the large percentage of money in Australia because it’s all the MySuper funds, it doesn’t include yet any of the choice options, but also, and probably more importantly, it isn’t a like for like risk comparison. And so what you have in that MySuper list is some funds with 98% growth as sets and 2% offensive assets, which inevitably have performed better over the last seven years verse a fund with less growth assets verse offensive assets.
But this really doesn’t tell consumers a lot around whether their fund is a strong or a weak performer because it’s just the underlying asset mix that has been the driver, as opposed to any level of skill of the fund manager or costs or other more important long term drivers of performance.
Do you think we could see significantly more underperforming funds next year?
We only publish the ten worst, and there’s a lot more than that that are actually under performing benchmarks. So I wouldn’t be surprised if there’s many more than 50 underperformers next year once they open it up to all the choice funds.
Keep in mind also, we haven’t looked at all the single asset class funds, and there’s a lot of underperformers there as well. So when we used to publish this report and show all of the underperformers as opposed to the top ten or the bottom ten, we saw hundreds of them, and we certainly expect to see hundreds going forward.
That’s probably why a lot of these funds are actually amalgamating, merging funds, doing super fund transfers, shutting down funds because they see this coming up and they don’t want to be listed as one of these underperformers. And our research shows that some of these bigger managers could have dozens and dozens in there.
What can SMSFs take from your report?
The thing I would take from this as an SMSF is that first of all, you’re not missing out on too much not being able to access APRA regulated funds because a large majority of them underperform something that just any SMSF can access, which is low cost index funds or ETFs.
So as long as you’ve got your asset mix right as an SMSF, you’ve got your underlying investments in sensible, low cost funds and then really you’ve crunched down the costs of your SMSF administration, and so your overall costs are quite low then you’re actually in a pretty good position to perform well compared to even the biggest APRA regulated funds.