Superannuation funds: Does size really matter?

When it comes to choosing a superannuation fund, it’s natural to think that big is better.

After all, it’s a handy rule of thumb that works for a lot of things in life and it’s one way to simplify the choice you need to make between dozens of different super funds. But does being big really make a super fund better?

Super funds: Do big funds perform better?

Although many of the big super funds want you to believe they are superior to their smaller siblings, unfortunately the truth is not that straightforward. Like most investments, questions about what asset performs best depends on the time period you are talking about.

To help readers understand this issue a little better, SuperGuide has reviewed some of the data produced by superannuation research firm, SuperRatings. If you look at the table below, it shows the median return of Balanced (60%-76% growth assets) investment options for the large group of super funds tracked by SuperRatings. These are categorised by the size of the asset pool the super fund administers on behalf of its fund members.

The table shows which category of super fund (by asset size) achieved the highest median return for the Balanced investment option in each of five time periods over the past 10 years stretching up to 31 March 2019.

The results highlight that for the Balanced investment option:

• Over a 1-year period, the highest median return was achieved by super funds with under $5 billion in assets (7.2%).
• Over a 3-year period, the highest median return was achieved by super funds with between $10 billion and $20 billion in assets (8.8%).
• Over a 5-year period, the highest median return was achieved by super funds with between $10 billion and $20 billion in assets (7.7%).
• Over a 7-year period, the highest median return was achieved by super funds with between $10 billion and $20 billion in assets (8.7%).
• Over a 10-year period, the highest median return was achieved by super funds with between $20 billion and $50 billion in assets (8.9%).

Median returns by total fund size as at 31 March 2019

Source: SuperRatings

Note: Returns are net of investment fees, tax and implicit asset-based administration fees. Fund Net Assets are as at 30 June 2018. Investment Returns are as at 31 March 2019.

Great, but what does it mean?

Although all these numbers can seem a bit nerdy, the main message from the SuperRatings research is in most cases there is no clear relationship between super fund size and investment performance.

When you look over the performance of a large group of super funds at different times over a 10-year period, the size category of funds achieving the highest median return varied. There was no clear pattern of a certain size fund performing best.

Interestingly, the difference between the highest and the lowest median returns by different sized funds was not particularly large – except over the 3-year time period, where the highest return was 8.8% and the lowest 7.9%.

Over the 10-year period, the median returns clustered more closely together, with the highest being 8.9% and the lowest 8.3%. Even then, some small super funds (with assets under $5 billion) performed well to give a median return of 8.4%, compared with the category covering the largest super funds ($50 billion plus), whose median return was 8.9%.

This again reinforces the idea that there is only a weak relationship between the size of a super fund and how well it will perform when it comes to the investment return achieved by its Balanced investment option.

What about the biggest funds?

So if holding lots of assets on behalf of fund members doesn’t necessarily mean a super fund performs any better than a super fund with fewer assets, what happens when you look at the performance of the biggest funds?

Well, SuperRatings took a look at the 20 largest super funds in Australia over a 10-year time period to see what happened and whether the largest of these big super funds outperformed their slightly smaller – but still pretty large – rival super funds.

Largest 20 super funds (Balanced investment options) – Performance and ranking over 5 years and 10 years to 31 March 2019

Source: SuperRatings

Note: Returns are net of investment fees, tax and implicit asset-based administration fees. Fund net assets are as at 30 June 2018. Investment returns are as at 31 March 2019.

Looking at the 10-year and 5-year median investment returns for the Balanced investment option of 20 of the largest super funds in Australia, the investment returns again failed to show that being the biggest in terms of the amount of assets you manage doesn’t mean you will necessarily achieve the highest returns.

In fact, some of the largest super funds achieved some pretty ordinary returns.

Over the 5-year period, the fourth largest super fund in terms of assets, the performance of Colonial First State’s FirstChoice Superannuation Trust saw it ranked at 111, while over the 10-year period it only managed to be ranked at 67.

Ranked at number seven in terms of assets, the performance of Retirement Wrap (BT’s Lifetime Super Employer – BT Multi-manager Balanced) was also a disappointing 115 over the 5-year period and 81 (out of 98 super funds) over the 10-year period. Both Colonial First State and BT Retirement Wrap are retail super funds

These results seem to indicate that again, being bigger in terms of asset size is no guarantee of top performance for a Balanced investment option over the longer term.

For more about the latest super fund performance, see SuperGuide articles:

• Super fund performance: Monthly returns to September 2020
• Super fund performance over 28 financial years (to June 2020)

So what’s going on?

Why wouldn’t bigger super funds have an advantage over their smaller rivals?

This is an issue the Productivity Commission (PC) gave some thought to during its recent inquiry into the performance of the super industry in Australia and its subsequent lengthy report, Superannuation: Assessing Efficiency and Competitiveness.

The PC report pointed out that picking a super fund with a strong (although not necessarily top) investment performance was important to the amount a member receives in retirement. It found a typical full-time worker whose super fund was in the bottom 25% of super funds when it came to investment performance over their lifetime, would retire with a final balance 54% (or $660,000) lower than if they are in a super fund with investment returns in the top 25% of funds.

The PC also highlighted the importance of being in a super fund that is large enough to benefit from the so-called ‘economies of scale’ that come with more assets. These include things like making administration costs cheaper by spreading them across more members, or the reduced cost of investing that goes with a bigger asset base.

For this reason – rather than better investment returns – the PC believes smaller super funds should be encouraged to merge. “Size is not the sole determinant of performance, but both underperformance and evidence of clear economies of scale point to scope for more fund mergers in the interest of members,” the report noted.

Does fund type matter?

Another point highlighted by the PC report was that not all types of super funds have the same return performance as they get bigger, which is reflected in the SuperRatings research data.

The report echoed the SuperRatings data when it noted: “Net returns are positively related to size for not-for-profit funds. No corresponding correlation was found for for-profit fund”.

Translated, this means fund size has a stronger relationship with good investment performance for not-for-profit super funds (like industry funds) than it does for for-profit funds (like retail super funds).

So it might be sensible to also consider the type of super fund you select for your retirement savings, not just how big it is.

For more information, see SuperGuide article What are the different types of super funds?

Fund size and your super: What are the lessons for members?

The research by both the PC and SuperRatings highlights some important points super fund members can consider if they want to achieve strong investment returns for their retirement savings.

But trying to pick the best performing super fund every year is impossible. As ASIC’s MoneySmart website notes: “No-one can reliably predict which fund will perform the best. It’s far better to pick the right investment strategy and the fund with lower fees, and take the ups and downs of investment performance in your stride.”

To help you choose the right fund, here’s some points to consider:

1. Returns change from year to year

A super fund’s investment performance varies from year to year, so some years the performance will be lower than others.

2. Aim for reasonable, rather than stellar performance

Nobody can pick next year’s top performing super fund.

3. Check the fund’s performance over 5-year and 10-year periods

You will be saving for your retirement over many years, so looking at the performance results from short periods like 1-year or 3-year won’t tell you much.

4. Check you are comparing similar types of funds

As the PC report noted, size is more closely related to investment performance when it comes to not-for-profit super funds than for-profit super funds.

5. Ensure you compare the same investment option

Check you are comparing the same type of investments. The investment return for a cash investment option can’t be compared with a Balanced investment option as they hold very different investment assets and tells you little about how well your fund is performing.

For more information about selecting a super fund, see SuperGuide article How to compare super funds in 7 easy steps.