Bigger super funds do better while corporate funds generally have higher returns as well as higher volatility, according to a working paper released by the Australian Prudential Regulation Authority (APRA).
APRA executive general manager Charles Littrell says the information extracted from APRA’s database, which now has seven years of superannuation history, describes what is happening in the industry, but not why. “We have years in front of us to find out why, but this was a good time to stop and say what,” he says.
Members, financial planners and super funds will not be able to use the information contained in the paper to make decisions, but Littrell says trustees can use it to benchmark themselves against the industry.
While investment returns net of expenses for all funds averaged 6.68 per cent a year, the paper identified large differences between fund types, ranging from corporate funds with an average annual net return of 6.96 per cent to retail funds with an average annual net return of 4.51 per cent.
It found that while public sector and corporate funds report the highest returns and volatility, retail and industry funds report significantly lower returns and volatility.
Interestingly, APRA found evidence of a negative relationship between returns and expenses, which, it says, suggests there are no investment advantages for fund members in belonging to a fund with high expenses.
APRA’s research also shows that economy of scale does help super funds. Funds with more than $500 million in assets generated an estimated 1.08 per cent in annual expenses, against an estimated 1.37 per cent a year for funds with less than $10 million in assets.
Of concern, however, was that APRA found no evidence to show that super expense ratios have fallen in recent years. Nonetheless, there were large differences between industry sectors in estimated expenses, with public sector funds having the lowest on an asset weighted basis at 0.58 per cent a year and retail funds the highest at 1.32 per cent.
Littrell says further research will follow this paper to provide reasons for some of its findings. A paper on expense ratios will be out shortly.
