A recent study by Dr Ummul Ruthbah and Aditya Shankar from the Monash Centre for Financial Studies has revealed that Australian superannuation funds have defied global trends, earning impressive returns by leveraging alternative assets and active management strategies.
Unlike many pension funds worldwide that have faced challenges with private equity and private credit, the study showed that Australian super funds have consistently outperformed market benchmarks over a sustained period.
The growing use of private market assets, such as infrastructure and real estate, has been a point of concern among regulators and economists, who warn of potential liquidity risks that could destabilise pension and superannuation funds during economic downturns.
The International Monetary Fund’s latest Global Financial Stability Report also highlighted these concerns, citing that the shift towards private equity and credit has introduced risks, particularly as these assets cannot be easily converted into cash.
However, according to Ruthbah’s and Shankar’s research, Australian super funds have shown resilience, with funds like AustralianSuper, HESTA, and Aware Super among those demonstrating the success of an investment approach reliant on both alternative assets and active management.
The study, which examined the performance of 10 of Australia’s largest super funds from November 2005 to December 2024, found that these funds consistently generated positive alpha compared to a low-cost, passively managed public market benchmark.
In fact, the study revealed that Australian funds produced an annual alpha ranging from 0.57 per cent to 1.53 per cent, with an overall average of 1.11 per cent – in stark contrast to the experience of similar funds in the US.
“Our research shows that investing in alternative assets and using active management has, to this point, delivered strong results for Australian super funds,” Ruthbah said.
Delving further into the study reveals Cbus and Hostplus as the top performers, followed by AustralianSuper and CareSuper, while TelstraSuper and Rest ranked at the lower end.
Interestingly, the study also found that even during periods of market stress, such as the Global Financial Crisis and the COVID-19 pandemic, Australian super funds demonstrated a strong ability to recover swiftly.
“This demonstrates resilience to market shocks,” Ruthbah said.
Acknowledging that these findings challenge the widely held belief that active management and alternative investments may lead to weaker returns, the researcher conceded the success of Australian funds requires further investigation particularly as markets evolve.
“Many commentators argue that alternative investments have underperformed globally and that super funds should stick to traditional asset classes like equities, bonds and fixed income,” she said.
“Yet, Australian funds have defied this expectation. Their success suggests there are unique factors at play – ones we need to better understand.”
Ruthbah noted that understanding the key drivers of this performance could help super funds refine their investment strategies, manage risks more effectively and navigate the challenges of future market cycles.
Superannuation funds defended their growing exposure to private markets earlier this month amid rising concerns about the asset class’s dominance, particularly as public markets continue to shrink.
The debate intensified in February with the release of an ASIC discussion paper, which chair Joe Longo said aims to "understand how the growing dominance of superannuation in Australia’s economy is influencing our markets".
But it’s not just ASIC taking a closer look at funds’ private market exposure, with APRA also raising alarms about the need for more robust risk management practices, particularly in asset valuation governance and liquidity management, as holdings in unlisted assets, now nearing $500 billion, grow.
In a pointed rebuttal to regulators’ concerns, super fund leaders are standing firm in their belief that private markets offer far more than just higher returns – they provide stability and control that are critical in a volatile economic environment.
Speaking at an event in Melbourne in early April, John Pearce, chief investment officer at UniSuper, made it clear that for funds like his, private markets are an indispensable tool for achieving long-term goals, particularly when it comes to managing risk.
“We understand opacity, we understand illiquidity, we understand pricing, so these factors are all taken into account when we actually price the asset,” Pearce said at the time.
HESTA’s chief investment officer, Sonya Sawtell-Rickson, echoed similar sentiments, defending the governance structures available in private markets.
Speaking alongside Pearce, she argued that transparency in private markets is often superior to that of public markets.
“You can actually get better insights, better governance, you can have board appointments … so I feel we often have better transparency,” Sawtell-Rickson said.
