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The super wars: Vanguard versus AustralianSuper

Vanguard recently received a superannuation licence, which will give it the ability to go head-to-head with the large superannuation funds. The 'Vanguard Super' offering will launch later in the year with details yet to be confirmed, but you’d expect it to look a lot like the new Vanguard Personal Investor product. The big question: Will it really be able to compete with the likes of AustralianSuper?

Vanguard is a global monolith with over $10 trillion of assets globally, but homegrown AustralianSuper is pretty sizable on the global stage with over $250 billion in assets. So let’s take a look at the AustralianSuper Plan's Balanced Option versus Vanguard’s Personal Investor Growth Index Fund (as a proxy for the super product) to see how they compare.

Objectives

An investment strategy’s stated objectives can often prove a bit confusing, although understanding what each strategy aims to do is crucial when working out if a product is suitable for your needs.

Asset Allocations—Listed and Unlisted Assets

Bottom line? We can see that these two strategies are suited to a similar type of investor. But let’s take a look at the asset allocations to be sure. The table below shows that the asset allocations are broadly comparable and are both categorised by Morningstar as multisector growth. Asset-allocation definitions can often be quite contentious, and AustralianSuper has categorised the growth/defensive split closer to 70% growth assets and 30% defensive assets on its website. But like anything to do with investing, it is better to be roughly right than precisely wrong, and these two strategies are roughly comparable from an asset-allocation perspective, enabling us to confidently compare the performance of each strategy.

Asset Allocation and Morningstar Category Comparison

Figures have been rounded to whole numbers and adjusted to sum to 100. Source: Morningstar Investor; AustralianSuper website – as at 31 July 2022 *Other – unlisted infrastructure exposure.

One area where these strategies are very different is their holdings of listed and unlisted assets. AustralianSuper has around 28% of its portfolio in unlisted property, infrastructure, and private equity (see table below). These assets are not listed on the Australian Securities Exchange or other global exchanges, often making it more challenging to know exactly what you are holding and at what price. From an investment merit perspective, there’s nothing wrong with unlisted assets; in fact, returns have been favourable over the years for AustralianSuper. What’s key to understand is that unlisted asset valuations tend to move around a little less than listed asset valuations. This means that the ups and downs of markets will impact the returns less than a fund with only listed assets. Unlisted assets tend to go up less in up markets and down less in down markets—generally because they are not revalued every day.

AustralianSuper Balanced Option’s Allocation to
Private Equity, Infrastructure, and Unlisted Property

Source: AustralianSuper website – as at 31 July 2022.

The flip side is liquidity—that is, how easy it is to convert assets into ready cash. Stock exchanges (think the ASX or the New York Stock Exchange) are designed so that a lot of buyers and sellers can come together and exchange assets quickly and easily. As unlisted assets are not transacted on these exchanges, the sales process can be more protracted. Liquidity is important when a large number of members decide to sell out of the AustralianSuper Balanced Option (like we saw when COVID Early Release occurred), the Option needs to be able to sell assets to provide ready cash to these members. Given the majority of AustralianSuper’s Balanced Option is liquid, liquidity shouldn’t be an issue, and we saw AustralianSuper manage Early Release and other periods of market stress well from a liquidity perspective.

It's also worth pointing out that during periods of market stress, liquidity on global listed exchanges can come at a price. During the coronavirus selloff of March 2020, Vanguard increased the cost of exiting the Balanced Fund to 0.39% from 0.10%. This cost reflected market conditions, and the increase was important to protect the investors who remained invested in the fund. Panicking and selling out of liquid or illiquid investments during periods of stress is seldom advisable.

Can You Beat the Market?

Another important difference between the two strategies is their investment approach. Vanguard’s strategy is not designed to "beat the market"—the fund simply tries to generate a return in line with some large indexes (think the S&P/ASX 300 Index). Vanguard’s track record, when it comes to providing investors the return of an index, is impressive. Over long time periods, markets have delivered solid results, but don’t expect anything more than market returns from this strategy. AustralianSuper, on the other hand, tries to beat the market. Beating the market is tough, but to date, it has been very successful across a number of assets. It is generally harder to beat the market at this sort of scale—AustralianSuper’s size is $250 billion—but if you want to try, this strategy is more suited to your values. The obvious risk is that returns may end up lower than the market and quite often trying to beat the market involves higher fees (as we see below).

How Much Will It Cost?

Investment fees can’t be ignored—a higher fee burden makes outperformance more challenging. And this next table shows that Vanguard is true-to-label in delivering a low-cost investment option compared with AustralianSuper. As we said, trying to beat the market comes with a price tag.

Investment-Related Fees and Costs

Source: Morningstar, AustralianSuper, Vanguard

Administration fees and costs are the other big focus when it comes to comparing options. The value proposition can vary—members value different services, including access to an investment option; ongoing reporting; insurance; and investor education and support. In the case of AustralianSuper: An investor with $50,000 will pay $102 each year (or 0.20% per year) to be a member of AustralianSuper. Now the details of Vanguard Super are yet to be announced, but let’s look at Vanguard Personal Investor—if you invest in Vanguard’s funds, there is no cost for administration. A side note, though: Vanguard will earn 0.50% each year from any cash parked in the cash account.

Performance

We all know that past performance is not a guide to future performance, although as far as declaring ‘success’, long-term returns and results are an important yardstick. And ultimately net returns are what are most important to investors. So, how did the options stack up? AustralianSuper has it over Vanguard in terms of net returns over the long term, although AustralianSuper’s higher allocation to growth assets would help. But, in reality, the returns from both strategies are strong—beating the Morningstar benchmark and the category average over 10 years.

Performance Returns as at 31 August 2022

Source: Morningstar Investor; *Morningstar AUS Growth Tgt Alloc NR AUD.

Who Is Winning the War?

AustralianSuper and Vanguard are investment powerhouses, and both offerings are compelling. It is important to understand the nuances between them and select the one most appropriate for your needs. We eagerly await the details of Vanguard Super so that we can make a more fulsome comparison. Safe to say, though, Vanguard is really throwing down the gauntlet to the industry. Vanguard’s Personal Investor interface and setup process is seamless, and the arrival of Vanguard Super feels very much "game-on" in the super wars. Hopefully, the end beneficiaries will be the investors.

 

Annika Bradley is Morningstar Australasia's Director of Manager Research ratings. Firstlinks is owned by Morningstar. This article is general information and does not consider the circumstances of any investor. This article was originally published by Morningstar.

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32 Comments
Stevo
October 16, 2022

Looks to me that AustralianSuper is the better performer. The disclaimer that the retail funds made the Libs legislate “past return is not an indication of future returns” is rubbish. Good past returns indicate a company is set up well for success and has a better chance in getting a better result than the shameful performers.

Chris Murray
October 19, 2022

Just got my statement, $4,200 in fees for 500k ? Australians are getting ripped off with high fees. Bring on vanguard and lets see what they can do.

SMSF Trustee
October 19, 2022

Chris, what was that fee for? If it's for active management of a growth oriented portfolio and includes all the accounting and auditing your fund gets done, then 0.84% is pretty decent really.
If you're in index funds already then it's probably a bit steep. But just having a whinge without elaboration isn't very helpful.

Billy Boy
November 10, 2022

Industry funds do not need my help and I reluctantly provide it now. BUT, ASICs meek and mild insistence that John Wood mumble warnings about "past returns" actually preceded the Libs being elected in 2014

Scott Tully
October 16, 2022

If Vanguard is successful in raising assets from Australian superannuation members, it won't be at the expense of AustralianSuper.

How will Vanguard achieve success? Primarily the organisation will need to build and leverage their brand to convince people to take action and switch from their existing SG arrangements. This is a tough ask given the inertia and low care factor when it comes to superannuation, and the workplace award structure which directs flows to specific funds. Vanguard will need to commit substantial dollars to promoting the offer and do so over a multi year period. If the commitment isn't there, Vangard won't succeed.

Conversely, unless AustralianSuper has a massively brand damaging event (eg data loss, disastrous investment performance unique to AS), the fund will continue to attract significant flows for the foreseeable future. Having a long performance track record and strong momentum of flows will ensure AustralianSuper remains one of the dominant super funds. It is unlikely that Vanguard's success (or otherwise) will bother it.

Michael Sandy
October 16, 2022

I read in the Fin Review or was it The Age that circa 40% of the ASX's valuation is under threat because of the cost of adapting to global warming.
In terms of wealth preservation, does this create a significant extra layer of risk which even diversified entities as described above can't easily mitigate..?

Mike West
October 16, 2022

Dont know what you mean , investment advisers are there to give you the best returns v risk for the portfolio long term without the short term noise from minority groups about global warming/cooling weather events . Otherwise they would not invest in woodside , bhp ,coal stocks that have given massive long term returns to both super funds and the Australian tax department .

Margit
October 15, 2022

Australia's whole social security system needs reform. It should be a system for Australians managed by Australians, compulsory, and intra-generationally supportive. We are a long way from it.
I have investments in Vanguard, but definitely not superannuation.

Greg
October 15, 2022

I don’t think AS has too much to worry about. 

Darin
October 14, 2022

Well, I wish Vanguard would just get on with it and introduce the thing. Been waiting a while now to see what will be offered. I'm signed up to the emails but little info yet.

Phil R - Qld
October 13, 2022

Yes, fees are important, but as someone who has been in the industry for 40 years had investment in both Aust Super and Vanguard, been a keen follower and advocator of Vanguard, since I visited their Philadelphia headquarters 22 years ago, I would not discount the local product too quickly. The quality and more importantly the diversity of Australian Super's portfolio is first class.

Annika Bradley
October 15, 2022

Hi Phil - thanks for your comment. I agree that AustralianSuper's portfolio is high quality and they are also able to access investments (think Sydney airport, Perth aiport, some of the toll roads) that are no longer able to be accessed through the listed markets. Their access to "private market" assets is compelling and a key differentiator.

S2H
October 16, 2022

Thanks Phil. I am a big fan of Australian Super and Vanguard, and use both products, so it is interesting to get a take from someone in the industry. Apart from the returns and the unlisted asset Annika has mentioned, I can say the communication from Australian Super is superior to the offering of Vanguard. Australian Super has a great looking site (and phone app) and does annual member briefings which all of their senior executive attend. I find Mark Delaney's market update particular interesting. Pretty handy perk of membership IMO.

Phil Pogson
November 07, 2022

Except that those private markets are hard to independently value. AustralianSuper might just be marking its own homework

Glenn
October 12, 2022

The investment returns for these Super funds are appaling. You'd think they can get better returns than just average. People can do much, much better by taking control of their own Super funds (And no, I'm not talking about SMSF's) For some reason most people seem to be comfortable in allowing their Super fund to lose money when share markets fall. Super funds are yet to provide their members with "Solutions" to be able to protect their Super in times of extreme volatility. And, there should only ever be a yearly fee of between $65 and $100 per annum, per member account. Also, get rid of the % of "funds under management fee" it's not necessary and total non essential expense for the Super fund members. That's it !

Chris
October 13, 2022

Glenn, there is simply no basis for your comment that "Investment returns for these Super Funds are appaling".
Just under 10% pa returns for 10 years in a low interest environment is nothing to be sneezed at. You are taking a lot more risk to achieve an investment return above that. You can't expect a higher return and in the same comment talk about protecting the money in times of extreme volatility.

Glenn
October 17, 2022

Hi Chris, Thanks for your comments, but it's a "fact". I'm actually doing it week in, week out. If you are comfortable with ordinary returns then I'm comfortable with that. Most people are just too lazy to look for better solutions and when presented with a better solution they fail take "Action". Are you and action taker? Many people have lost thousands of dollars in their Super in 2022 alone. Think of the Retiree who has $500,000 invested in the Australian Super Growth Fund portfolio that has reduced in value by around 9.16% for the first half of the year. That would leave an account balance of roughly $454,200 AND they are drawing a retirement income stream of $40,000 per annum. That would mean the balance is around $434,000 at the end of June, 2022. Now, what's actually happening is that the retiree is taking money out of a "depleting" asset base, which means their capital value is going to reduce. Agree? Stay with me here, this is where it can get worse. If that happens for the second half of 2022, then the same will occur, only the asset base will be lower to begin with in 2023. Trust me, I know my stuff and successfully navigated through the Global Financial Crisis back in 2008 with no losses and will successfully navigate through this crisis "that is brewing" and could turn quiet nasty. My suggestion is that people should separate "Product" from "Advice" in other words, do it yourself. By the way "You Can" invest in volatile times into growth investments and protect your capital value if you know the right strategies - You can judge a good Super fund or good Financial Planner in these challenging economic times. They are the ones who can protect on the downside and outperform in the good times. Go and mark their "Report Card" and see how they stack up at the moment.

Dudley
October 18, 2022

"invest in volatile times into growth investments and protect your capital value if you know the right strategies":

Is that BuyRight or BuyWrite or something else?

Dean
October 15, 2022

I agree Glenn. Why don't super funds sell out their investments just before the market crashes, and buy again just before it goes up again? It's so obvious really, and any idiot can do it. There's plenty of free information in the media to help. But even better, why waste time on superannuation at all? Much more easy money can be made on cryptocurrency or horse racing. It was so obvious Giga Kick would win the Everest, and Durston the Caulfield Cup. How can so many punters get it so wrong? They must be fund managers! Unfortunately I was busy and didn't get a bet on. But no bother, it's pretty obvious who will win the Melbourne Cup too and I'll clean up on that. I'll tell you my hot tip on 2nd Nov.

Ramani
October 12, 2022

Vanguard has literally been in the vanguard of low cost passive investment as a pioneer. In choosing suitable long term products and services we should unbundle jingoism from intrinsic value. By emotively subsidising local providers we are pushing ourselves down the performance spiral. The world is more connected than we think.

Dean
October 12, 2022

I suspect most 80/20 funds will outperform most 70/30 funds, no matter who the providers are. Amazing that Aust Super get away with labelling an 80/20 product "Balanced". "Balanced" is generally defined as 60/40 by investment professionals, however most consumers assume "Balanced" means 50/50. Vanguard actually uses 50/50 for their "Balanced" funds.

Annika Bradley
October 15, 2022

Hi Dean - thanks for taking a look at this article! It is so important to look beyond the label when it comes to asset allocation. There are many funds that are not "50/50" but are labelled "balanced". I compared some of them and provided a bit of context here:
https://www.morningstar.com.au/insights/personal-finance/227348/ignore-asset-allocation-at-your-peril

Angus McLeod
October 12, 2022

Vanguard has promise but we need to see their fees. Not employing unlisted infrastructure assets could prove to be a mistake, as matching asset and liability duration is vital. Vanguard’s IT is based on legacy systems that don’t allow scalability. Their customer service may also be stretched. Time will tell.

Neil
October 12, 2022

Not sure if the figure quoted for Australian Super fee for Balanced option is correct. Latest info from Aus Super shows fee for Balanced option ending 30 June 2021 was 0.63% and for year ending June 2022 was 0.72%. This makes Vanguard a clear winner in the Fees department. Members received an email recently advising fees have increased so would appreciate if this could be checked to ensure accuracy of stated fees.

Andrew
October 12, 2022

Agree - the fee shown on the website for a $50,000 balance is 0.86% ( Admin , Investments & Transaction costs) A major difference from Vanguard.

Angus McLeod
October 13, 2022

Vanguard have not announced their Super fees yet so it's too early to make a judgement.

Annika Bradley
October 15, 2022

Hi Andrew and Neil

Fees are such an important focus - thanks for highlighting this. The comparison table above is focused on the investment offerings and not the adminstration offerings (as Angus notes below - we are still not clear on what the Vanguard offering will entail exactly). In the table for AustralianSuper, if you take the 0.49% (investment fees), add it to the 0.20% (transaction costs) and then take the 0.20% of administration (referenced in the paragraph below) - you arrive at 0.89% per year which is consistent with the PDS. Link here: https://www.australiansuper.com/-/media/australian-super/files/tools-and-advice/forms-and-fact-sheets/superannuation/product-disclosure-statements/pds.pdf

Given AustralianSuper's investment offering invest in a lot of "private market" assets and also use some active management in listed markets (both are generally more expensive than Vanguard's passive approach) you'd expect higher investment fees. Fees are important to consider and it is also really important to consider what the performance returns are (after fees).

Sharon M. Wilcox
October 12, 2022

Australian’s should try to support local jobs and tax paying companies. Although Vanguard has offices in Australia and probably pays some tax, they (like many foreign companies) will employ every legal technique to syphon out profits and increase costs to the local business. Furthermore, how do we know exactly where client data is stored and accessed? I would rather stick with the Australian option for services that are vital in our national interest, and benefit our local market.

Monolithargy
October 12, 2022

Support your concept - but if Australian service options continue to gouge with fees without giving us a better return - why? It's my money and I want the best return and value on investment. I'm not buying a Made in Australia t-shirt here - this literally determines my retirement future/life. And fees alone over time make a massive impact on what that looks like. IMO Australian Super fund Providers have become fat and lazy in a trapped market - bring on some competition that motivates this segment and benefits the average investor I say.

BarelyThere
October 12, 2022

Agree with Mono. Just because a company is 'Australian' doesn't make it more or less likely that it will store data in an insecure environment. I think Australian Super does a good job, but I've also noticed that the fees it charges members don't seem to have been dropping in line with overall margin compression in the industry. Time for some more loe fee competition.

Harold Rein
October 12, 2022

Choosing cheaper cars left us with no automotive industry, cheaper medical supplies left us nothing in a pandemic, cheaper telcos with Optus, the list goes on as vital industries squeezed out as we consumers look for the best deal, and collectively end up with no jobs. I think the point is that it doesn’t have to always be about cost.

Fred Nurk
October 12, 2022

IMO we desperately need some serious competition in the public super offerings. Some of the smaller ones in the H series have resorted to mixing figures in their misleading graphs to attrack contributions. Some of the ones I have dealt with don't know what the term cyber security means. Its amazing that a skilled accounting firm hasn't offered a standardised package for all the data/accounting work for the whole industry.

 

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