In a financial landscape marked by inflationary and interest rate pressures, the 2023 fiscal year witnessed remarkable performances in equity markets, with the ASX 200 index delivering a total return of 14.8%, and the MSCI All Countries ex AU index soaring at 23.2%.
However, the ability of managed funds and superannuation funds to replicate these returns has raised questions for investors.
"Reproducing the returns of indices is proving to be immensely challenging for managed funds and superannuation funds,” said Alex Dunnin, executive director of research and compliance at Rainmaker Information.
“This has huge implications for fund members choosing investment options.”
Shedding light on the struggles faced by many funds, Dunnin referenced the S&P Indices Versus Active (SPIVA) mid-year report for Australian managed funds, released in September 2023.
The report revealed startling statistics. Over the past financial year, a staggering 76% of actively managed Australian equities funds underperformed the S&P ASX 200 index.
The situation was slightly better when considering the three-year comparison, with 57% of funds underperforming. However, 15-year returns painted a grim picture, with 81% of funds failing to match their benchmark index.
Turning the focus to Australian mid and small-cap equities funds, results improved over shorter timeframes. 65% of these funds underperformed over the past year, with 60% doing so over a three-year period.
The long-term 10-year comparison showed 76% of these funds underperforming.
International equities has been a top performing asset class of late, yet managed funds faced challenges in delivering the benchmark returns in this sector as well.
76% of funds underperformed when compared against the S&P Developed Ex-Australia Large Mid Cap index during the past year.
Over a three-year period, 83% of funds underperformed, over five years 91% failed to match their benchmark, while a whopping 95% of funds underperformed over 15 years.
The situation was most dire in the 15-year category, where 95% of international equities managed funds underperformed.
Furthermore, the annual Your Future Your Super (YFYS) performance test administered by the Australian Prudential Regulation Authority (APRA) expanded to cover superannuation 'Trustee Directed Products' (TDPs).
In the inaugural results for TDPs, 96 out of 805 assessed failed the test, translating to a 12% failure rate.
The failure rate for TDPs offered through platforms was alarmingly high at 25%,while not-for-profit (NFP) funds fared significantly better with a failure rate of only 1%.
Dunnin, while acknowledging the better results compared to managed funds in the SPIVA scorecard, pointed out that the APRA test currently does not assess TDPs investing in single asset classes, effectively omitting pure equities-focused products.
Rainmaker Information's analysis of net returns of workplace super products further supported these findings.
Only 7% of Australian equities products outperformed the ASX 200 benchmark for 2022-23, 41% outperformed over a three-year period, but this number decreased to 31% over five years.
In terms of sector medians, even as the ASX 200 returned 14.8% over the past year, the median Australian equities super fund option yielded 13.8%, and this underperformance pattern extended over three and five years.
Meanwhile, international equities-focused products fared even worse, with none outperforming the benchmark MSCI All Countries ex AU index over one, three, or five years.
“These revelations emphasise the need for a critical re-evaluation of investment strategies, especially in the context of superannuation and managed funds,” said Dunnin.
“As investors navigate a complex financial landscape, the ability of funds to match or surpass index returns becomes increasingly vital for securing the financial future of fund members.”
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Total risk market inflows were down a marginal 0.6% over the year to June 2024, decreasing from $18.3 billion to $18.2 billion.
Dual access ETPs, which are transacted both on stock exchanges and off-market through funds managers, can cost four times as much as the rest of the Australian ETP market.
