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Australia's super system a proven winner

Glenn Freeman  |  15 Jun 2017Text size  Decrease  Increase  |  

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Australian investors in managed funds received the highest returns, beating the US, UK, Europe and Asia, according to a wide-ranging global study from Morningstar.

The study, Mind the Gap: Global Investor Returns Show the Costs of Bad Timing Around the World, uses the Morningstar Investor Returns methodology to generate a dollar-weighted fund return, incorporating the effect of cash inflows and outflows from purchases and sales, as well as the increase in a fund’s assets.

It found investor returns across the globe varied from stated returns, on average, by a range of negative-1.4 per cent to 0.53 per cent per year.

Australian super fund investors benefited from the largest positive investor return gap, at 0.53 percent per year, while Singapore investors wore the biggest shortfall of 1.4 per cent.


Exhibit 1 5-year investor returns in Australia


Source: Morningstar Inc. Data as of Dec. 31, 2016.


Investors achieved better outcomes when using systematic investment programs, and utilised lower-cost funds.

 “Steady investment contributions to savings plans and automatic rebalancing proved to be key in generating positive investor returns in countries including Australia, South Korea, and the United States,” says Russel Kinnel, chair of Morningstar’s North America ratings committee.

“As savings plans increasingly offer an automatic investment option, investors are also getting more access to lower-cost funds. Our research demonstrates that, when sorted on fees, lower-cost funds produced better investor returns across the board, a trend surfacing in Luxembourg and the United States," he says.

The study captured average investor returns over a five-year period to December 2016. It drew on preliminary Morningstar open-end mutual fund data from Australia, Canada, Hong Kong, Luxembourg, Singapore, South Korea, Taiwan, the United Kingdom, and the United States.


Exhibit 2 Investor returns gaps around the world


Source: Morningstar Inc. Data as of 31/12/2016.


In addition to the top investor return figures in Australia, returns per year were positive for allocation funds in the US--at 0.05 per cent--and in South Korea--0.47 percent.

These countries all offer investment vehicles with automatic contribution or payment options, which keep investors on track and prevent them from unwise market timing moves.

For Australian super fund investors, the study findings should be a reminder of the effectiveness of our national retirement saving system, with compulsory employer superannuation contributions introduced in 1992.

The current superannuation guarantee (SG) rate is 9.5 per cent of employee ordinary time earnings, with employers required to contribute this proportion of each employee's salary on a regular basis, at least four times per year. These contributions must be paid into a complying super fund or retirement saver account.

While Australian governments and special interest groups have, at various times, suggested the scrapping of compulsory super, or other substantial changes--this latest finding supports the argument for at least retaining the system in its current form--if not further increasing the SG rate.

The investor return gap in the US declined to 37 basis points, annualised over a 10 year period, from 54 basis points--this suggests investors are making less harmful market timing calls.

In the UK, diversified-equity fund investors produced better results on average than allocation fund investors, with investor returns gaps of negative-0.27 per cent and negative-0.55 per cent, respectively.

When grouped by expense ratio, investor returns declined as funds rose in cost, often by more than the difference in cost. This suggests a combination of poor behaviour from both investors and fund managers in high-cost funds, contrasting with both smarter investors and managers in lower-cost funds.

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Glenn Freeman is a senior editor at Morningstar.

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