The industry-wide drive towards passive investing is increasing short-term member benefit but harming super funds and the future of Australia’s economy.
While super funds have embraced ETFs in a move that has driven greater diversification into tech and higher-growth investment opportunities, they’re failing to provide opportunities for the next generation of companies currently in the small-cap space.
“This is having a negative impact on Australian small cap shares not in the ETF indices, which are losing billions of dollars of potential investment to large cap and overseas companies,” said Stoic Venture Capital partner Dr Geoff Waring.
“The trend of mergers between more superannuation funds will deepen this impact.”
Dr Waring warned that the use of exchange-traded funds is “undermining the establishment and growth of early-stage startups” in a move that could hit Australia’s economic future, and that industry funds could be earning more through longer-term venture capital investment than short-term public equity markets.
“Less investment into smaller, younger Australian companies will have the corollary effect of harming the future development of our economy and the provision of new employment opportunities,” Dr Waring said.
“It ignores the higher returns selected venture capital managers could bring to the superannuation industry.”
A number of commentators have made similar warnings around the new Your Future, Your Super reforms, which they believe will drive super funds deeper into passive investment territory while harming their ability to invest in Australia’s future, including through infrastructure and venture capital.
“We fear that the drive to be within 0.50 per cent of an index benchmark will result in an ‘averageness’ mindset that might blunt enthusiasm for adopting points of difference which may be truly beneficial to members over the longer term,” said JANA principal consultant Matthew Griffith.
“Index relative approaches (which is what the government appears focused on) in our experience inevitably results in only one thing: index relatively mediocrity. This is not in members’ best interests.”