What are the best performing funds and mirrors in Australia? Hostplus, Canva and the year of super loss - Michael West

Australians get a harsh shock when they open their retirement statements. For most, it was a rare year of loss. Only three funds ended up black. Callum Foote and Michael West investigate super returns and the best performing fund of all, Hostplus.

It’s an obvious thing, but it’s still of no value. When interest rates rise, the stock market tends to fall. And that’s exactly what happened to the savings of millions of Australians for the year to June. Opening our pension fund letter, we found that our scores were lower than the previous year.

The stock market decline has been compounded by an unusual phenomenon; bonds also fell. Bonds are an important part of a “balanced” super portfolio, and when bond yields (interest rates on debt) rise, bond prices fall. The good news is the market has bounced since then, so the positive returns over the past seven weeks should send most of us back into the dark.

Tracing the league tables, historic trends prevail, even in this turbulent year to June 2022. Industrial funds tend to outperform retail funds. Their lower costs are reflected – preferably on a five-year or longer basis – in higher returns. Ironically, for-profit is better than making a profit.

That said, boasting of industry funds that takeovers work – that is, taking over other funds so you can manage more money on the same cost basis means greater efficiency, better return ergo – is still a mirage. The industrial giant Australian Super is no more efficient despite its size, it has recently increased its admin fees.

SuperRatings found industry superfund Hostplus to come out as the best performing superfund of the year, with Qantas and Christian Super options coming next as the only funds with positive results for the year through June. Are their results supported by valuation fraud? We’ll get it soon.

A balanced superfund is a fund that owns one-third to three-quarters of what is known as a growth asset. Growth assets are assets with more volatile returns – not as safe – such as stocks; and it is favored by those who wish to take a higher risk approach, mostly young people.

So, safer options are better and stock-weighted options are worse. The bright spots are gold, infrastructure and cash – the safest options, ‘defensive’ investments. And this is the main reason why industrial funds got better last year, they hold great long term positions in infrastructure: airports, ports, real property.

Hostplus and super funds lurk

Is all as it seems in industrial retirement land? While we’ve long praised industry funds for their lower fees and higher returns, penalized retail funds – such as the shocks managed by ANZ and AMP where fees are very high and underperforming – have lifted their game. The banks that control them have been pressured to partially close and limit costs entirely.

It started around the time that Chris Brycki, founder of Australia’s first digital investment provider to operate an ETF (exchange traded fund) started publishing his annual Fat Cats report identifying the worst performing super funds (and you really start exposing them).

ANZ head Shayne Elliott is said to have told colleagues he didn’t want to see his bank show up in that Fat Cats survey again so the very bad players were shut down for new investors and then whipped into IOOF.

Find the biggest fat cat from the Australian super fund industry

Where retail funds, operated by banks, invest in public markets such as the ASX, industrial funds lack transparency, make big bets in unlisted investments such as infrastructure such as airports and ports, even team up with foreign vulture funds (vid Hesta and KKR take the hospital private, and offshore Ramsay groups). But the rules around disclosure and valuation are fluid; or maybe suspicious is a better word.

And this is where the performance of the top performing fund Hostplus in Australia deserves a close look. Hostplus said it was pleased with the valuation of the unlisted assets. They trust their own judgment more than the “market” they say.

But as Chris Brycki puts it, “It’s like marking your own homework and bragging that you’re top of the class”. “There’s a lack of symmetrical information out there.”

Hostplus owns $12bn of unlisted assets, self-assessing assets, and Brycki reckons the fund would have fallen 2.8% for the year to June were it not for the *excellent* performance of these assets. “To get from a negative 2.8% return to a positive 1.6%, they would need a 22% return on an invisible personal asset.”

Listed markets are down, stocks and bonds are down, but it’s a balanced fund that produces positive returns amidst all the volatility.

Capers Canva

“It seems so unworthy.” A prime example of a valuation problem is Canva, one of the hottest investments of the last year or so, being covered in the financial media with glossy images of the founders of the Young Rich List, relentless coverage of the Aussie success story. Granted, this is a remarkable achievement – ​​at $40 billion, it is one of the most valuable private companies in the world – but like every hot game of the market, there are characteristics of bubbles and therefore extreme changes in value.

When Canva’s value dropped from its place – a great software product but too high on all the hype – some of its investors started to lower the value of their holdings. Blackbird investors for example marked a decline of 36%. Hostplus has $2.5 billion in Canva alone. at 40bn it is the most valuable private company in the world.

A generational challenge for Australian youth?

There is not enough visibility of super fund valuations, of course for a market of this size it is very important. Here is a market where there is little price competition. People retire regularly down to super funds, we are forced to own super funds and most people don’t think much about it, divert funds or demand to know from their fund managers what is going on with their investments.

And funds can decide their own valuation on unlisted assets, infrastructure assets. Whether and when they are marked up or down in value is up to the manager, not based on movements in the ASX or bond markets. Therefore, the temptation to ‘increase the price’ is very strong, because it relates to the performance and bonuses of the investment manager himself.

As far as Hostplus is concerned, the fund can get an external “independent valuation” on the asset but Hostplus’ trustees allow the fund to override the appraiser and place its own value on the investment.

So last year REITs (ASX-listed Real Estate Investment Trusts) were down 11% for the year but Hostplus increased the value of its property assets by 17%. Do they happen to have a better building?

What I think will happen now, says Brycki, is that over the next ten years there will be an intergenerational problem where people will exit their current super with higher valuations leaving younger super holders vulnerable to lagging valuations (falling valuations). of unlisted assets.

“They’re definitely not marking them to market”.

Washing

SuperRatings is a website dedicated to comparisons. Its executive director Kirby Rappell said: “Since the bottom of the GFC we haven’t seen a significant amount of volatility coming through, there has been a while, but we’ve seen extreme levels of volatility since COVID-19 hit and in terms of the menu for next year, we expect to see more. volatility.

“While the financial year 2022 has seen super funds post moderate declines, the benefits of diversification have shined. When we compare returns on the equity, bond, and listed property markets with balanced style portfolios among super funds, these results should convince members.

However, many Australians have chosen the high growth option, which means more exposure to the stock market, have suffered worse.

According to the senior investment research manager of super research firm Chant West, Mano Mohankumar: “During FY22, Australian stocks were down 6.8%, while international stocks were down 12.4% in terms of hedging. It was the same story for listed properties, with Australian and global REITs down 11.2% and 10.5%, respectively. That’s bad enough, but what made this year more challenging is that bonds didn’t play their usual cushioning role, with Australian bonds and international bonds down 10.5% and 9.3% respectively.”

Statistics from the Australian Association of Superannuation Funds Superannuation Assets totaled $3.4 trillion at the end of the March 2022 quarter. During the 12 months from March 2021 there was a 9.7 percent increase in total retirement assets.

At the end of the March 2022 quarter, 56 percent of the $2.2 trillion investment was invested in equities; with 24 per cent in Australian listed equities, 27 per cent in internationally listed equities and 5 per cent in unlisted equities.

However, Mohankumar said that diversification largely stemmed the losses of Australian super funds: “However, the median growth fund only fell 3.3%. That’s mainly because most of the super large funds are now investing well beyond this traditional asset sector.”

Industry research shows that funds with the highest exposure to the stock market have suffered the most in the financial year to date. Over the past 10 years, those with total exposure to near-asset growth have been approximately 20% higher than the more conservative balanced funds.

Rise in interest rates

The Reserve Bank has signaled that interest rates will continue to rise to curb inflationary growth which means that the stock market will be hit further.

According to Brycki, “Unfortunately a rate hike is something that doesn’t work well for the stock market, so people are pulling their money out.” If investors can earn higher returns on safer investments due to higher interest rates, the stock market looks less desirable as a result.

To conclude our first market proposition – when interest rates go up, the stock market goes down – a lot depends on interest rates. The outlook for next year is not very stark, unless you see that the central bank will quickly crush inflation and hold interest rates on hold.

Callum Foote is a journalist and editor of Revolving Doors for Michael West Media. He has studied the impact of undue corporate influence on Australian policy decisions and their impact on the public interest.

Michael West founded michaelwest.com.au to focus on journalism with a high public interest, in particular the increasing power of corporations over democracy. Previously a journalist and editor at Fairfax newspaper and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney School of Social and Political Sciences.

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