An almost certain way to become highly depressed is to look at the returns of the big super funds' balanced portfolios over the five years to September. Almost all of the annual returns – even of the top 10 performers – failed to match inflation.
The median annual return of the hundreds of funds surveyed by superannuation researcher SuperRatings was an unquestionably lousy 0.9%. And the best-performing fund returned just 3.5% a year – which was way ahead of most of its top 10 peers.
But rather than becoming despondent about the miserable returns, a smart response is to treat this as a wakeup call to ensure you are in a top-quality, solidly performing and low-cost super fund. And if your fund doesn't measure up – particularly over the extreme tests of the past five years – the message is clear: dump it.
A key point to keep in mind when returns are so subdued to negative is that superannuation in itself is not an investment class – it is simply a means to hold investments in a highly tax-effective way. And the returns of the better super funds more or less reflect the carnage on investment markets with the GFC, followed by the European debt crisis, stagnating economies and extreme market volatility.
The great tax breaks from super mean that an identical investment portfolio outside super could do much worst than one in super, depending on an investor's tax rate. In turn, this puts the emphasis on individual members to ensure that the asset allocation of their superannuation portfolio – its diversification between mainly shares, bonds, property and cash of their portfolio – is right for them.
And rather than blaming the super system for what's gone wrong, blame the markets, possibly your own asset allocation and, in some cases, the poor management of your super fund.
It is particularly crucial in these tough markets to ensure your fund is really making the most of your money.
Here are our top strategies for picking the best super funds for your circumstances.
Look at the award-winners
One of the most straightforward ways to identify a top all-round super fund in terms of performance, fees and services is to look at the award-winners.
SuperRatings compared the returns of 460 super funds to this month name the $17 billion industry fund Sunsuper as its fund of the year, providing the best value for money in the accumulation and pension phases.
Eight of the nine other finalists were also public-offer industry funds – AustralianSuper, CareSuper, Catholic Super, HESTA Super, HOSTPLUS, Intrust Super, NGS Super and REST – with Australia's largest corporate fund, Telstra Super, the remaining finalist. (The $11 billion Telstra Super won the award as the top fund on an accumulation-only basis.)
Nathan McPhee, chief executive of superannuation fund researcher SuperRatings, says SunSuper has long been a front runner with its accumulation and pension products but its "one weakness" until recently has been the cost-effectiveness and flexibility of its insurance. "In the last few months, Sunsuper leapfrogged almost every other fund with its competitive cover. By addressing its weakness, the fund has pipped every one at the post".
Interestingly, McPhee says very little separates the top super funds – "they are very good across the board".
Know why experts like industry funds
Not surprisingly, professional superannuation analysts would readily acknowledge that industry funds, on average, have produced higher short, medium and long-term returns than their retail counterparts. And most would agree, at least privately, that a solidly performing, low-cost industry fund is probably the most appropriate choice for most fund members.
Superannuation fund researcher Chant West reports that the growth investment options of master trusts – which it classifies as funds having 61 to 80% of their portfolios in growth assets – have outperformed commercial master trusts over the short- and long -term. (In the 12 months to September, industry funds returned a negative 0.4% against a negative 2% return by master trusts. And in the 10 years to August, industry funds returned an annualised 5.7% against 4.3% by master trusts.)
These returns are after-tax and after investment management charges. But significantly, the returns for commercial master trusts recorded by Chant West do not include an adviser commissions where payable.
Despite the apparent clear advantage of industry funds in terms of performance, don't expect that this means the analysts' own retirement savings are only in industry funds. For instance, some superannuation analysts – including those who are loud advocates of industry funds – have their super in self-managed super funds plus a combination of industry funds, master trusts and superannuation platforms.
Cherry-pick the top funds
SmartCompany knows of a superannuation analyst who is a member of about half a dozen super funds. He picks the best features of different funds to put together what he believes is the best package for his circumstances. And, at the same time, he is effectively road-testing the funds.
A common message from large super funds is to consolidate all of your super savings into a single fund to save costs. While this suggestion may be appropriate for members with low balances, many members would gain comfort and increase their opportunities by spreading their super between funds.
Broadly speaking, the most-common duplicated costs for being in more than one fund are fix-dollar fund administration fees of perhaps $52-$70 a year or so for each fund. Most of the charges borne by a member are for investment management based on a percentage of your superannuation assets – so this cost doesn't change with the number of funds. (Keep a close watch, however, on any financial planning charges that may be incorporated in a commercial fund's fees.)
Perhaps, the main drawback of having multiple funds is the task of keeping track of their performance, costs and asset allocation. A fundamental principle of sound investment practice is to ensure that your overall investment portfolio is appropriately diversified for risk and returns.
McPhee is a member of two super funds, a retail master trust and an industry fund. He "makes the most" of the considerable investment flexibility of the master trust to invest in smaller companies, resources and infrastructure. "That's where my complex investing happens."
And McPhee directs his superannuation guarantee contributions into the default option of an industry fund which provides excellent death and income-protection insurance. And perhaps once a year, McPhee transfers some of the industry fund's balance into his retail fund.
