A new study shows how Australian super funds buck global trends, earning impressive returns for their members.
Private market assets such as infrastructure and real estate have a reputation for being harder to trade.
Economists worldwide warn these ‘alternative assets’ introduce an element of risk that could potentially destabilise pension and superannuation funds – especially during economic downturns.
In the United States, pension and endowment funds that have invested heavily in private markets have struggled to match market performance.
However, a new study by Dr Ummul Ruthbah and Mr Aditya Shankar from the Monash Centre for Financial Studies (MCFS) shows leading Australian super funds are using this strategy with impressive results.
“The International Monetary Fund Global Financial Stability Report (October 2024) warns that the shift towards private equity and private credit has introduced significant liquidity risks for pension and superannuation funds, because they cannot be converted into cash overnight,” Dr Ruthbah.
She also highlights a long-running debate in investment circles: Does active management—where fund managers actively buy, sell, and adjust portfolios—truly outperform passive strategies that simply track the market?
Given the increasing reliance of Australian super funds on private markets and active management, Dr Ruthbah and her team decided it was critical to investigate how these strategies have performed.
Bold investment strategy pays off with superior returns
To find out, the team analysed the performance of ten of our largest super funds—including AustralianSuper, HESTA, and Aware Super—from November 2005 to December 2024.
The research compared the funds’ returns against a low-cost, passively managed public market benchmark.
The findings were compelling. In stark contrast to the US, where public pension and endowment funds have struggled using similar strategies, MySuper portfolios consistently delivered higher risk-adjusted returns—known as positive alphas—compared to the benchmark.
Supply put, alphas measure how much better a fund performs than expected, after adjusting for the risks it takes relative to a benchmark.
“On average, the returns from the super fund sample group exceeded passive market benchmarks and the estimated alphas range between 0.57 and 1.63 per cent per annum, with an overall average of 1.11 per cent per annum,” Dr Ruthbah said.
‘Australian funds have defied this expectation’
The funds didn’t just outperform in isolated years; the study shows their success has been sustained across different market conditions and economic cycles.
For example, while Australian funds experienced sharp market drawdowns during the Global Financial Crisis (GFC) and COVID-19 and reduced alphas, they also recovered quickly. The 10-year rolling alpha is positive for all the funds during the study period.
By contrast, US pension funds following similar investment strategies struggled to generate positive alpha over the same period.
“Even over a rolling ten-year period, Australian funds consistently beat the public market benchmark,” Dr Ruthbah said. “This demonstrates resilience to market shocks.”
Dr Ruthbah said the findings challenge the widely held belief that active management and alternative investments may lead to weaker returns as they are expensive..
“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.”
The road ahead: Can Australian super funds sustain their winning streak?
With Australia’s superannuation pool now exceeding $4.1 trillion, the debate over the role and risks of alternative assets and active management remains a key issue for investors and policymakers.
And while Dr Ruthbah and Mr Shankar’s research confirms these kinds of investments have been a winning strategy for Australian super funds so far, the big question remains: what exactly is driving this success and can it be sustained?
Given the increased anticipation of recession in Australia and its trading partner economies, illiquid assets face greater challenges than they have before.
“Our research shows that investing in alternative assets and using active management has, to this point, delivered strong results for Australian super funds,” Dr Ruthbah said.
“But as markets evolve, whether this outperformance can be sustained in the long term remains uncertain.”
The next phase of the research will aim to pinpoint whether the outperformance stems from alternative assets, strategic active management, or a combination of both.
“Understanding the key drivers of this performance will help super funds refine their investment strategies, manage risks more effectively, and navigate the challenges of future market cycles,” Dr Ruthbah said.
