“If super funds can’t do better than that, which the majority can’t, why on earth are they wasting member money on analysts, asset consultants and active funds.”
The Productivity Commission’s final report in January recommended selecting a shortlist of 10 “best in show” funds to act as defaults.
When a worker does not choose a fund, their contributions are directed to a default option.
This part of the industry is worth $600 billion, with much of the money going to industry funds because default fund selection is tied to industrial agreements.
The commission found industry funds were better performers than bank-owned retail funds.
The majority of super money is actively managed.
Active or passive investing?
But Mr Brycki is a proponent of passive investing. Passive investment strategies make use of index funds, which track an index such as the ASX200. They have low fees because they don’t employ fund managers to pick stocks.
The Commission’s model does not preclude an organisation like Vanguard competing for “best in show”.
Mr Brycki said a second option other than using an index fund would be to run a tender process so funds could vie for default status, an idea the commission previously rejected.
A 2018 study by Standard & Poor’s found that 80.2 per cent of Australian fund managers had done worse than an index fund over the past 15 years.
“The Nevada state pension fund does it very well,” Mr Brycki said.
“It manages US$41 billion yet it only employs one person, who invests in index funds. His strategy is to do as little as possible, usually nothing. The same strategy would give default super fund members great results but it would be harder to justify the thousands of people employed by these large super funds.”
The Australian Institute of Superannuation Trustees (AIST) said index funds were preoccupied with highly liquid assets, principally equities and bonds. Yet it was diversification and active management that had driven strong returns for non-profit funds, including industry funds.
“An investment portfolio of only indexed funds would miss that opportunity to invest in attractive asset classes and would also rule out any responsible investment overlay on the portfolio,” AIST chief executive Eva Scheerlinck said.
Moreover, many funds did hold index funds as part of their overall portfolio, she said.
“The views of the very experienced asset consultants advising many profit-to-member super funds is that an index-fund-only strategy will not result over the long term in as strong an outcome for members both in absolute returns or returns net of fees.”
Super funds will object to Mr Brycki’s underlying premise, which is that only cash and bonds are truly defensive assets.
Many categorise a portion of their infrastructure and property holdings as defensive assets.
These differences in definition mean what constitutes a growth, balanced or conservative fund varies against the sector.
Mr Brycki would argue that most industry funds run portfolios that are actually much riskier than they purport to be, which inflates their returns.
There are calls for uniform definitions and a greater emphasis on risk-adjusted returns.
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