Seeing your investment portfolio ‘underperform’ can be a tough pill to swallow, especially in a year as dynamic as 2025. But what does underperformance really mean, and how should Australian investors respond?
What Does ‘Underperform’ Mean in 2025?
In the world of finance, ‘underperform’ is more than just a disappointing quarterly report—it’s a technical term. An investment is said to underperform when its returns lag behind a specified benchmark or the market as a whole. For example, if the S&P/ASX 200 returns 8% in a year, but your managed fund delivers only 5%, your fund has underperformed its benchmark by 3%.
Underperformance can be measured over different time frames (monthly, yearly, or over several years) and across asset classes—shares, ETFs, superannuation, or managed funds. In 2025, with the ASX experiencing increased volatility and a growing preference for passive investing, understanding underperformance is more important than ever for everyday Australians.
Why Do Investments Underperform?
There’s rarely a single culprit behind underperformance. Here are some common reasons Australian investments might lag in 2025:
- Market Cycles: Sectors like mining or technology may have periods of rapid growth, followed by slower years. If your portfolio is overweight in a lagging sector, you’ll likely underperform the broader market.
- Manager Decisions: Actively managed funds rely on the skill of fund managers. If they make poor stock selections or miss market trends, performance can lag. In 2025, increased scrutiny on active management fees and transparency is putting pressure on managers to justify their strategies.
- Higher Fees: The average Australian managed fund still charges higher fees than index funds or ETFs. These costs can eat into returns, especially during periods of market stagnation.
- Macro Events: Geopolitical tensions, interest rate changes by the RBA, or shifts in government policy (like the 2025 tweaks to superannuation tax concessions) can have outsized impacts on certain investments.
Sometimes, underperformance is a result of sticking to a disciplined investment approach—such as favouring defensive assets during a bull market. Other times, it’s a warning sign that a review is overdue.
How Should Australian Investors Respond to Underperformance?
It’s tempting to react emotionally to short-term underperformance, but wise investors take a measured approach. Here’s how to navigate it in 2025:
- Review Your Benchmarks: Make sure you’re comparing apples with apples. A diversified portfolio shouldn’t be expected to match the returns of a high-growth index every year.
- Assess Fees and Costs: With ASIC’s continued focus on transparency in 2025, now’s the time to scrutinise your fund’s fees. Switching to lower-cost options like ETFs could close the performance gap.
- Revisit Your Investment Goals: Are your investments still aligned with your risk tolerance and time horizon? Underperformance may simply reflect a more conservative approach.
- Stay the Course—But Stay Informed: Markets move in cycles. Chasing last year’s winners is rarely a winning strategy. Instead, consider regular portfolio reviews—perhaps annually or after major policy shifts, such as the 2025 changes to superannuation contribution caps.
- Don’t Ignore Persistent Underperformance: If a fund or asset has lagged for several years, investigate the underlying reasons. Is it a temporary blip, or a sign of structural issues?
For example, in 2025, some actively managed Australian equity funds have underperformed the ASX 200 for the third year running, even as low-cost ETFs have tracked the index more closely. Investors are increasingly voting with their feet, shifting billions into passive products.
Key Takeaways for 2025
- Short-term underperformance is common; focus on long-term objectives.
- Compare your investments to the right benchmarks, and be aware of fees.
- Use underperformance as a prompt for a portfolio health check, not a knee-jerk reaction.
- Watch for regulatory changes and macro events that could impact your holdings.
