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Super returns report opens new dimension in active-passive debate

Glenn Freeman  |  08 Jun 2017Text size  Decrease  Increase  |  

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Default superannuation fund investment allocations significantly outperformed their member-customised equivalents, according to a five-year study conducted by Vanguard and Sunsuper.


The report, How Australia Saves, analyses the transaction behaviour and investment experience of around 1 million Sunsuper members in the five financial years spanning 2012 and 2016. The new study will be conducted annually, and is a localised version of How America Saves, conducted by Vanguard since 2000 and analysing trends in defined contribution plan participant behaviour and retirement plan design.

Average returns for members invested in Sunsuper's default lifecycle investment option were tightly clustered around 8.3 per cent per annum, with a downside return of 8.1 per cent. This strategy gradually adjusts asset allocations from higher growth and risk options towards more conservative options over a period of years.

Average returns were more broadly dispersed among the cohort of funds invested in both the diversified balanced strategies--which include growth, balanced, and conservative--and self-directed, where members choose up to 10 individual options from a list of 21 diversified and single asset class options.

Especially within the self-directed group, very few funds experienced better return outcomes relative to the default strategy over the five-year period--with a high of 8.4 per cent.

"That was a little bit surprising. We would have thought some self-directed members would have had better return outcomes than that," says Paul Murphy, senior manager superannuation policy, Vanguard Australia, describing the findings as "a strong endorsement of the default strategy and choice architecture of the MySuper framework".

While the downside returns of the lifecycle cohort was only 8.1 per cent, these fell to 5.9 per cent and 5.1 per cent, respectively, for those in the diversified balanced and self-directed options.


Distribution of 5-year estimated total returns by investor type, 30 June 2016



The study split its analysis across three core groups of super members--those in the accumulation, pre-retirement and draw-down phases--with the starkest findings in the first two. Along with some surprising outcome comparisons between the different super strategies and demographic cohorts, the study also highlighted differences between the US and Australian superannuation and pension systems.

"You might expect some people to say, 'I don't like the idea of risk, I'm going to go to 100 per cent cash, or some might pin their ears back and go 100 per cent equities--but there were very few people at either extreme in the overall group," says Murphy.

Less than 1 per cent of Sunsuper's members in the pre-retiree phase held such extreme allocations.

"This is a reflection of the choice architecture, that's encouraging people to have a diversified portfolio, and might also reflect that we haven't had a big market meltdown that might prompt ... impulsive switching or things like that," he says.

This contrasts with the findings in the latest iteration of the US study, where around 6 per cent held concentrated asset exposures--though this has been trending down significantly, falling from 20 per cent over the last decade.

"It's one of the interesting things about our industry, around how people react to market movements, by changing their investments after the event and crystallising their losses after a stock-market decline or something like that.

"This is showing that even though markets have been relatively volatile ... it didn't actually lead to a great deal of switching," Murphy says.

"What that suggests is that it's only when you actually have a complete crash or absolute negative returns that drives that kind of behaviour--though that's a hypothesis and the kind of thing that we want to test [by comparing current data against future findings]."

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Glenn Freeman is a senior editor at Morningstar.

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