Passive VS Active Super Funds in Australia: Which Performs Better?

When it comes to managing your superannuation, one of the most common debates is whether to opt for passive or active super funds. Both strategies have their pros and cons, but does one outperform the other over time? And how do key asset allocations such as property, private equity (PE), infrastructure, credit, and alternatives impact overall returns?

 

In this post, I’ll break down the data comparing passive vs active super funds from top providers in Australia, focusing on the “balanced” segment, which typically involves 70-75% allocated toward growth assets. I’ll also dive into how asset allocation may impact returns and contribute to both short-term and long-term growth.

 

TL:DR

• ART (Australian Retirement Trust) consistently outperforms with their active strategy, likely due to strong expertise in property, credit, private equity (PE), infrastructure, and alternative assets.
• Short-term performance (1-5 years) strongly favors passive funds, driven by larger exposure to both domestic and international stocks.
• Long-term returns (10 years) show that active funds catch up. This highlights the importance of asset allocation. My hypothesis is that this is due to the higher allocation to property and infrastructure. However, private equity and alternatives show more mixed results.

Passive vs. Active Super Funds: The Performance Breakdown

Here’s a quick snapshot comparing passive vs active super funds over different time periods

• 1 Year: 9 out of 10 passive funds outperformed their active counterparts.
• 3 Years: 8 out of 9 passive funds outperformed their active counterparts.
• 5 Years: 5 out of 6 passive funds outperformed their active counterparts.
• 10 Years: 4 out of 5 active funds performed better!

 

Short-Term (1-5 Years): Passive Funds Lead the Way

In the short term, passive funds tend to outperform their active counterparts. But why is this the case?

1. Domestic & International stocks: Passive funds typically allocate a higher percentage to stocks, in particular international equities which have been performing strongly in recent years. This larger exposure provides them with an edge in the short run.
2. Asset allocation drag: Active funds, on the other hand, often allocate capital toward other assets like property, credit, infrastructure, PE and alternatives. While these assets may offer long-term benefits, they can be a drag on short-term returns. Their performance is also highly dependent on the skill of the fund manager to select the right deals.

 

Long-Term (10 Years): Active Funds Catch Up

Looking at the 10 years performance, we start to see a shift. Active funds with the ability to allocate more to property, infrastructure and credit tend to perform better in the long run. However, it’s important to note that this doesn’t always mean these funds are actually allocating more toward these assets. Additionally, while most funds have allocation towards PE and alternative assets, the ability to allocate higher did not correlate to the fund’s return. It is not too surprising given PE and alternatives can be more volatile and difficult to value.

 

The Verdict: Go Passive or Active?

• For short-term gains (1-5 years), passive funds are the clear winner. At present, their larger exposure to stocks and lower management costs help them outperform in the short run.
• For long-term growth (10 years), my hypothesis is that active funds that allocate wisely to infrastructure, property, and credit tend to outperform. The skill of the active fund manager in selecting the right deals and timing the market is key.

 

If you’re interested in a fee comparison I did previously, check it out here: Super Fund Fee Comparison

 

Thanks for reading, cheers!

 

 

Disclaimer:

Please note that the observations and conclusions in this post are based on my personal analysis of the data. This is not financial advice. The content provided here does not constitute professional, personal financial, or financial recommendations. You should conduct your own research and seek independent legal, financial, or taxation advice to understand how the information may apply to your unique circumstances.