Impact of Asset Allocation and Operational Structure on the Investment Performance of Australian Superannuation

Abstract

In the first paper, the lacklustre investment performance of Australian superannuation was attributed to the Retail sector. This second paper investigates potential explanations for this fact through an empirical attribution analysis of the impact of asset allocation, operational structure and scale on sectoral investment performance. Since 2004, relatively lower investment returns of the Retail sector have not been compensated by lower risk, due to unexpectedly higher return volatility. This fact can be explained by significant costs neglected in most academic theories. Using official asset allocation data available from the Australian Prudential Regulation Authority (APRA), for the three years to September 2016, the 2.7 percent per annum difference in measured investment performance between the Industry and Retail sector has been attributed 1.1 percent to asset allocation and 1.6 percent to operational structure and costs. The high cost of Retail funds (incurred but not reported) is consistent with the high incomes and profits reported annually by vertically integrated conglomerates from providing superannuation and related financial services. At March 2017 Retail assets of $577 billion, the 2.7 percent return deficit relative to Industry funds represents about $15.5 billion per annum in additional costs to Retail members. Empirically, but contrary to the theory of economic rationalism, the market approach to superannuation, based on competition and profit maximization of the Retail sector, has been detrimental to members.