Smaller super funds shine in latest fiscal year, defying regulatory pressures

Top-performing superannuation funds for the latest fiscal year include a number with assets that Australian regulators have suggested are too small to deliver adequate retirement outcomes at reasonable cost for members, according to a report by Melbourne-based investment consultant Frontier Advisors.

"Frontier's analysis demonstrates that even over the longer term, the correlation between performance and size is not conclusive," with asset allocation a bigger factor in determining outcomes, according to a Frontier news release Friday.

The Australian Prudential Regulation Authority is effectively saying "bigger is better, and we're saying" small funds can deliver strong performance, too, said David Carruthers, principal consultant and head of Frontier's members solutions group, in an interview.

While scale benefits are real, there are drawbacks to being big as well, Mr. Carruthers noted. For example, some funds in Australia have become too big to be able to get enough exposure to move the needle in attractive niche market segments — such as Australian small-cap equities or solar farms, he said.

For a behemoth like Melbourne-based AustralianSuper, the biggest industry fund with more than A$261 billion in retirement assets, investing in a small-cap Australian company would probably only make sense if it moved to take the company private, perhaps partnering with a private equity firm, Mr. Carruthers said.

The regulators have come out and almost said "if you're less than A$30 billion, merge with somebody else, and we're saying" the evidence just doesn't support that contention, Mr. Carruthers said.

The latest rankings by SuperRatings, the superannuation fund research and ratings firm, showed the balanced default funds of Qantas Super, Christian Super, legalsuper, Energy Super, Australian Catholic Superannuation and Retirement Fund and TelstraSuper – all with between A$472 million and A$2.6 billion in assets – among the top 10 in terms of returns for the 12 months ended June 30.

The Frontier news release said the ambiguous connection between performance and size is relevant to continuing debate around the MySuper default fund performance test the government introduced last year, under which funds that don't measure up face enormous pressure to merge with bigger funds.

Mr. Carruthers suggested the test is a one-dimensional approach to a difficult, nuanced problem — distinguishing good funds from bad funds. One simple test focused on performance in a given year is a blunt instrument, he said.

For example, Christian Super's My Ethical Super offering — one of 13 MySuper products, out of 76 assessed, that failed the maiden performance test for the fiscal year ended June 30, 2021 — delivered the third-highest returns for the latest year. Having failed the test last year, Christian Super was obliged to inform its members of its failing grade and direct them to consider better performing funds. Anyone who took that opportunity to move missed out on some of the best returns in the market over the latest year, Mr. Carruthers noted.