Millennials seduced by trendy super funds could retire poorer

Economy

The number of small, trendy superannuation funds launched in recent years that are particularly targeted at Millennials and those looking to invest more ethically is falling, as they fall by the wayside after failing to reach the required scale needed to be competitive with the performance of larger funds.

Private equity investors have backed a host of fintech entrepreneurs to launch funds looking to take market share from established industry giants.

Some recently launched super funds have failed to get traction with younger workersCredit: Supplied

While the marketing pitch of the new entrants differs, they tend to have one thing in common – convincing younger workers that larger funds are designed to look after their mums and dads, and that they “do not get” Millennials.

However, many of the newbies are finding it takes more to run a successful super fund than just social media promotion and fancy apps.

Some start-up funds – including those pitched at self-employed workers, those working in the gig economy, and those targeting Millennials – have closed shop after failing to achieve the scale in funds-under-management to make them viable.

The Australian Prudential Regulation Authority, which regulates super funds, has been saying for years that funds that are too small may operate in a way that is not in the best interests of their members. That is because, without scale, their fees may be uncompetitive, and they struggle to provide attractive returns.

Some newer fund offerings are keeping their fees low by investing the pool of money they hold into low-cost, index-tracking exchange-traded funds.

However, not all smaller, boutique funds are underperforming. Some funds gaining traction with younger workers are punching above their weight.

Future Super, which first opened its doors in 2014 and manages more than $1 billion through an “ethical lens”, and Spaceship, which invests about $1 billion of members’ cash with a focus on technology stocks, are swimming against the tide.

Future Super’s flagship Balanced Impact option produced an average annual compound return of 10.95 per cent for the three years to December 31, 2021, figures from fund researcher SuperRatings show. That compares to a return of 10.37 per cent for a typical balanced option over the same time period.

SpaceShip’s flagship GrowthX option, launched in 2017, produced a return of 19.1 per cent over the past three years, compared to 14 per cent return for a typical growth option over the same period.

Rainmaker executive director of research Alex Dunnin says newer funds need to offer something different to be able to attract members.

“This is what Future Super and Spaceship have in spades. The former is in-your-face climate action and ESG; the latter is an unabashed champion of investing into technology,” Dunnin says.

However, he says those thinking of joining one of the new breed of trendy funds need to be careful. They should instead consider selecting a fund brand they trust that has good returns and reasonable fees.

Actuary Michael Rice says younger workers should ask themselves whether professional financial advisers would be likely to recommend some of these smaller funds. He reckons that is unlikely, as they lack scale and do not have lengthy performance track records.

“Many large funds already provide things that these smaller funds say they are providing anyway,” Rice says.

There are large not-for-profit super funds that have returned more than 5 per cent a year, after inflation, for more than 30 years, he says.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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