In the fast-moving world of Australian investing, ‘abnormal return’ is a phrase that’s getting more airtime than ever. But what does it actually mean, and why are so many 2025 investors keeping a close eye on it? Whether you’re a seasoned trader or just getting started, understanding abnormal return can help you cut through the noise and evaluate the true performance of your portfolio—especially as new policy changes and market trends reshape the landscape.
What Is Abnormal Return—and Why Does It Matter?
Abnormal return refers to the difference between an investment’s actual performance and its expected performance, based on market benchmarks. In plain English: it’s the extra (or missing) gain you get, compared to what you’d expect from the broader market or a specific risk profile.
For example, if the ASX 200 rises 5% over a quarter but your portfolio jumps 8%, your abnormal return is +3%. Conversely, if your shares lag behind the benchmark, your abnormal return is negative.
Abnormal return matters because it strips out general market movements, letting you see if your choices—such as stock picking, sector tilts, or timing—are truly adding value. In 2025, this is especially important as macroeconomic volatility, regulatory changes, and technological disruption create sharper market swings and more opportunities (and risks) to outperform or underperform the norm.
How Is Abnormal Return Calculated in 2025?
Calculating abnormal return is straightforward, but the devil is in the details. The most common formula is:
- Abnormal Return = Actual Return – Expected Return
The ‘expected return’ is usually determined by a benchmark index (like the ASX 200) or by using models such as the Capital Asset Pricing Model (CAPM), which accounts for risk factors. In 2025, with the RBA’s continued focus on inflation and the rise of ESG investing, some investors are also using sector-specific or sustainability-adjusted benchmarks to get a more accurate picture.
Let’s say you invest $10,000 in a tech ETF. Over six months, the ETF returns 12%. During the same period, the ASX 200 gains 7%. Here, your abnormal return is 5% (12% – 7%).
Key points to remember:
- Choose a benchmark relevant to your asset (broad index, sector, or even a bespoke ESG index).
- Account for dividends, franking credits, and fees—these can skew your real-world return, especially as fund fee structures evolve in 2025.
- Short-term abnormal returns can be driven by luck or timing, while sustained abnormal returns suggest genuine investment skill or unique insight.
2025 Market Trends: Why Abnormal Return Is More Relevant Than Ever
Several 2025 developments are making abnormal return a hot topic among Australian investors:
- Regulatory changes: ASIC’s focus on transparent benchmarking for super funds means more clarity (and scrutiny) around abnormal returns in retirement savings products.
- Active vs. Passive: The active management debate is heating up, as new data from the ASX shows a split: some active funds are delivering positive abnormal returns, but the majority still underperform after fees. This makes abnormal return an essential tool for picking winners.
- Tech disruption: The rise of AI-driven trading, thematic ETFs, and micro-investing platforms in 2025 is creating new sources of both outperformance and risk—making it even more important to measure abnormal returns and understand their drivers.
- Sustainability and ESG: As more investors demand responsible investing, new ESG benchmarks are emerging. Comparing your portfolio’s abnormal return to these new indices can reveal if you’re getting extra value—or paying too much for green credentials.
Real-World Example: Abnormal Return in Action
Consider a super fund that has promised to deliver above-market returns through a mix of Australian and global equities. In 2025, the ASX 200 returns 6.8%, while the global MSCI World Index posts 8.1%. The fund, after fees and taxes, returns 7.9%.
To calculate the fund’s abnormal return, you’d weigh its exposure to each index, adjust for risk, and subtract the expected blended benchmark return from its actual return. If the fund’s expected return (based on its mix) is 7.4%, its abnormal return is +0.5%—a sign of real (if modest) outperformance.
Abnormal return analysis is also becoming a staple in financial advice and robo-advisor platforms, helping investors spot trends, measure manager skill, and make smarter rebalancing decisions.
How to Use Abnormal Return in Your Investment Strategy
If you want to make abnormal return work for you in 2025, consider these tips:
- Benchmark wisely: Pick benchmarks that match your investment style and objectives.
- Look beyond the headline: A single strong quarter might be luck—look for a consistent track record of positive abnormal returns.
- Assess costs: With rising transparency in fund fees, subtract all costs to see if active managers are truly adding value after expenses.
- Ask for the data: Many platforms now provide abnormal return figures—use them to challenge fund managers or tweak your DIY portfolio.
