Is your super fund underperforming? It could be time to change. Here are 18 tips to help you chose the best superannuation fund in uncertain times. By MICHAEL LAURENCE
By Michael Laurence
Is your super fund underperforming? It could be time to change. Here are 18 tips to help you chose the best superannuation fund in uncertain times.
The super fund of the year award will be presented in Melbourne next month by fund researcher SuperRatings. My pick as by far the most likely winner is one of the low-cost, no-frills industry funds that have produced superior medium-to-long-term performance.
Despite a horror 2007-08 on investment markets, with almost all balanced and growth super funds producing negative returns, the industry-fund sector has delivered after-tax and after-cost returns that are still markedly superior to most of its commercial rivals.
This outperformance by industry funds has been maintained for at least the past eight years because of their willingness to invest in alternative unlisted assets, that have been somewhat shielded from the intense volatility of listed shares, particularly over the past year. And their asset consultants have generally been more successful in reading investment markets, and moving in and out of cash and overseas shares at just the right times.
Further, their low fees have magnified this success in real returns to members.
In choosing from its 10 finalists, SuperRatings selects the fund that it believes provides the best value for money on the basis of performance, fees, insurance, member services, member education, fund governance, and the availability of limited or full financial planning if required.
Jason Clarke, chief operating officer of SuperRatings, says that not much separates Australia’s very best super funds, including their net performance over an extended period.
On the face of it, a member seeking the best-value fund in terms of performance, low cost and fundamental features will almost definitely end up choosing an industry fund. Such a person will be willing to accept, in most cases, limited investment choice – generally the ability to invest in each of the main asset classes of Australian and international shares, property, bonds and cash plus a range of pre-mixed, diversified portfolios to suit different levels of risk.
However, it should be emphasised that commercial master trusts offering the complete works, including 100-plus investment options, will suit many members and their financial planners – but these almost inevitably come at a cost.
And there are a few commercial master trusts open to the general public that offer knock-out value with fees that are not much higher than industry funds.
For instance, fund researcher SelectingSuper names the best value of what it calls premium-choice funds as Colonial First State’s FirstChoice Wholesale Personal Fund, which has total fees of less than 1% of a member’s super savings and 110 investment options. And there are no adviser fees because the investor is dealing directly with Colonial First State. Minimum investment is $100,000.
The Colonial First State fund is excellent value for members who want the complete works at a low cost.
Further, many members have already joined big corporate master trusts as part of a large employee group have typically negotiated deals that may be extremely close to industry funds. Public-sector or government fund members have the best fee deals as a sector, but these funds are not open to the public.
Here are our top strategies to help you choose the best diversified super fund for your circumstances.
1. Stick to top performers
Don’t have any patience with underperformers. Each year that your fund underperforms could be viewed as an erosion of your retirement lifestyle.
Warren Chant, principal of fund researcher Chant West Financial Services, is emphatic on this point: “Your fund should have really good performance over three to five years. Make sure it is first quartile [over this period].”
Chant West’s report Multi-Manager Quarterly shows that the upper-quartile funds with exposure to growth assets of 61% to 80% of their portfolios returned between 9.9% and 11.1% for the five years to 31 July, according to its survey. Something like 80% of members have their super in funds with these asset allocations. (The fees are after tax and after investment management fees.)
The funds in this select group are: Catholic Super, 11.1%; BUSS (Q) Balanced Growth, 11%; Sunsuper Growth, 10.6%; ARIA PSS, 10.6%; cBus Core Strategy, 10.6%; HOSTPLUS Balanced, 10.5%; AustralianSuper Balanced, 10.5%; ARIA CSS, 10.4% Intrust Super Balanced, 10.2%; AGEST Balanced, 10.1%; and REST Diversified, 9.9%.
Unlike other fund researchers, Chant West does not include the extremely high-performing MTAA Balanced Fund, with its large exposure to alternative assets in this category of balanced/growth funds. In the five years to July, this MTAA fund produced 12.5% return. (For more on this fund, see point 16 below.)
With the exception of ARIA, all of the upper quartile performers over five years – identified in the Chant West survey – are industry funds. And membership in all except ARIA, a government fund, is open to the public.
Warren Chant’s comments about sticking to funds with first quartile performance are intended by him only as a general guide; of course funds that perform extremely competitively do, of course, slip in and out of the upper quartile from time to time. And his comment refers to members who use the pre-mixed portfolios such as balanced or growth.
2. Know the true penalty of underperformance
Jason Clarke of SuperRatings points out that the gap between the best and worst performing balanced funds in his firm’s survey is 5.56% a year over the 10 years. This would mean a staggering difference in the total 10-year return of about 68%. Don’t be apathetic towards your super. (SuperRatings defines a balanced portfolio as one with 60% to 76% in growth assets.)
3. Understand why industry funds have been outperformers
Chant mainly attributes the outperformance of industry funds over commercial master trusts to a combination of features:
- Industry funds have been solid supporters of alternative unlisted assets, including infrastructure, private equity and direct property, whereas the commercial master trusts have favoured listed investments. “While listed markets in shares, property, bonds and other credit instruments have been savaged by the US sub-prime crisis, illiquid [unlisted] assets have been largely immune,” Chant says. This alone has given industry funds a substantial performance advance.
- Industry funds were underweight in international shares and overweight in Australian shares and property from 2002 to 2006 when the Australian market really outperformed.
- Industry funds built up cash as the bull market was in its final stages.
4. Compare like with like
A common error is for fund members to compare the performance of funds that have dissimilar allocations between investment sectors. A fund that has, say, 90% of its assets in shares is likely to produce different performance from one with, say, 50% of its assets in shares.
Tables produced by the super rating agencies divide funds into different categories of asset allocations. For instance, Chant West groups performances into portfolios with exposure to a single asset category, such as Australian shares or Australian bonds. It then categories pre-set portfolios into categories that include all-growth (100% in growth assets that typically comprise mainly shares and property), high-growth (81% to 100% growth), growth (61% to 80% growth), balanced (41% to 60% growth) and conservative growth (21% to 40% growth).
Some rating agencies not only group the portfolios into different categories but also give the actual asset allocations for each super fund listed.
Try to understand the level of risks involved that may have led to a particular fund’s outperformance. The higher the percentage of growth assets, the higher the risk.
5. Look at the funds used by experts
Superannuation fund researchers won’t say what types of funds they personally favour as their research covers all types of super funds. Clarke comments: “Generally, fund rating houses have been more fully aware of the value of industry funds than many others.”
6. Get a red-hot insurance deal
Usually the smartest way to obtain death, disability and income-protection insurance is through your super fund. A big super fund uses its buying power to negotiate some great group premiums for members.
Clarke identities some of the funds offering excellent deals in death and disability insurance for members aged 31 to 40 as NGS Super, legalsuper, MAP Super, CLUB SUPER, HOSTPLUS And VICSuper. And BT Business Super offers some highly-competitive premiums to younger members.
7. Sidestep medical assessments
Members who join a fund as individuals, as opposed to part of an employee group, sometimes have to undergo medical assessments before being accepted for insurance cover. This can cause concern for those with medical conditions.
But there’s no need to feel neglected. Some industry and commercial funds offer good levels of initial cover to new members without requiring medical assessments. For instance, legalsuper provides up to $440,000 in life and disability insurance without a medical assessment.
8. Don’t pay for unused advice
High total fees – including administrative fees and investment management fees – are a tremendous handicap to a fund’s real performance.
Most retail funds have financial planning advice built into their fees – whether or not an adviser provides the member with regular advice. Clarke says he regularly hears anecdotes about how members find on their statements that trail commissions are being paid to strangers to them, namely unused financial planners.
Certainly, many fund members value financial planning advice and have used it to really improve their financial positions.
Clarke says some retail funds give members the choice of opting out of being charged commissions for advice. He believes that it should be a matter of the member agreeing or “opting in” to being charged for advice.
If you are not receiving assistance from a financial planner, why pay for it?
9. Understand the fee gap
A Chant West survey of fund fees earlier this year underlined the big gap in fees that a member might be paying. It surveyed the 14 biggest retail master trusts in terms of funds under management or contribution inflows; the eight main corporate master trusts; eight industry funds each with assets over $7 billion; and five of the largest public-sector accumulation funds. This was something of a landmark survey.
In short, expect to pay much more for your super in a retail super master trust. As shown in the chart below, this is no matter whether your super balance is $25,000 or $300,000. Particularly for a member with a low balance, the extra cost payable for being in a retail fund, rather than a heavyweight corporate master trust as part of a large employee group or an industry fund, is staggeringly high.
And significantly, Chant’s survey does not incorporate adviser commissions into the fees given for retail master trusts.
Source: Chant West Financial Services. In-built adviser fees that can often apply to retail funds are not included in the Chant West figures
10. Don’t get caught in low-free trap
Some super funds have extremely low fees, expressed as a percentage of the account balance. But don’t make the mistake of going into a cheap fund with a record of poor performance.
In terms of returns, focus on the performance figures listed by the funds and the rating agencies that are expressed after the deduction of fees and taxes. However, don’t overlook our earlier warning about getting caught up in a high-cost fund.
11. Don’t pay for unused investment choices
A basic difference between industry funds and retail master trusts is the number of investment options. Industry funds have limited investment choices whereas retail master trusts have scores. The more investment options – as a rule of thumb – the higher the costs.
As mentioned earlier, about 80% of members are in their fund’s pre-mixed investment options choices.
12. Check availability of limited advice
A key free service being offered by some funds is simple financial planning regarding superannuation matters. This is really valuable to members who don’t want a regular, fee or commission-based, relationship with a planner and simply want a straightforward question answered over the phone.
Typically, a member probably has one of these types of queries only once or twice a year.
As Jason Clarke explains, this limited assistance is often tagged one-issue advice, covering such matters as a member’s investment options and insurance requirements that may not necessarily require an adviser to understand the member’s full circumstances.
Limited advice can deal with members’ queries that a call centre cannot answer because of licensing requirements.
Some funds such as CARE Super and Catholic Super charge for limited advice, which is usually deducted from members’ accounts. And some funds – such as Telstra Super, Asset Super, HESTA and Vision Super – provide limited advice at no charge.
“This area of advice is becoming critical for funds to execute efficiently and economically,” Clarke says. “I think all funds will provide this style of limited advice within three years.”
13. Compare funds on your short list – at no cost
Most fund researchers have services that enable members to compare a short-list of funds for a fee. But here’s some insider knowledge; there’s a way to obtain access to these comparisons at no charge.
Fund researcher Chant West, for instance, usually charges a $55 fee for its excellent service called AppleCheck that enables the public to compare in detail the key features of three super funds at a time.
AppleCheck covers each of the main points that you should examine when comparing funds; investment returns from one to five years, fees for investment management and administration, insurance options and costs, investment options, and the quality of fund administration and member services (analysing the funds’ help desks, member education, availability of financial planning, and availability of transition-to-retirement pensions).
You can tick off the various points that are most important to you, which should include, of course, net performance, fees and insurance.
SuperRatings has two fund comparison services called RateMyFund and RateMyPension. These are available at no charge on several fund websites, including the MTTA Super Fund’s site.
14. Don’t have any patience with mistakes
Fund administrators can sometimes make breathtaking errors that should not be tolerated by members. For instance, I know of one industry fund that when notified that a self-employed member wanted to claim tax deductions for $100,000 of the member’s contributions in a financial year actually deducted the sum from his balance. The member is making arrangements to dump this fund.
15. Educate yourself about super
This is must before selecting a super fund. SelectingSuper’s website, for instance, is packed with information from the fundamental to the complex. This is perhaps the best site for no-cost education about super and about what members should look for when evaluating a fund.
16. Check fund websites
Call up the websites of funds on your shortlist. Are they easy to use? Do the sites provide quality, easy-to-read information?
Some fund websites superficially look good, but become tough work if you are looking for something in particular.
On the other hand, fund websites can be among the best sources for explanations of, for example, why salary-sacrificed contributions make much sense and how the highly popular transition-to-retirement pensions operate.
17. Cherry-pick the best super funds for you
Some super members hold their super in four or five different funds, each selected for its special attributes. The aim is to pick a selection of the best of the best.
Your total super savings should be large enough to warrant the exercise. Forget this approach if you have just, say, $10,000 in super, but if you have hundreds of thousands it may worth considering.
As Jason Clarke of SuperRatings explains, the only extra cost of adopting this cherry-picking, multi-fund approach is usually just paying administration fees to a number of funds instead of only one. Industry funds, for instance, typically charge between $50 and $100 a year in administration fees.
The actual cost of investment management in most cases is based on a percentage of your super savings and therefore will not increase no matter how many super funds you use.
Here is a possible split to think about:
- A quarter of your super savings in a fund that offers members the ability to gain large exposures to unlisted alternative assets such as infrastructure and direct property.
The standout here, based on past performance, is MTTA Super. Its strategic, long-term portfolio of what it terms its balanced portfolio is designed to have almost half of its assets in unlisted investments such as airports, tollways, power stations, timber, power generators and private equity. The rest of the portfolio is generally in Australian and overseas shares.
In the five years to 31 July, Chant West reports that the MTTA Balanced Fund – which it classifies as high growth because of its unconventional portfolio – returned a highly impressive 12.5% a year while the MTTA Growth fund returned 13.8%, making it the top-performing diversified fund. Unlisted portfolios can provide a powerful buffer against sharemarket volatility.
- A quarter of your super savings in a fund that provides members with the ability to hold direct shares – without having to go to set up a DIY super fund or using a selected wrap account platform or selected commercial master trust. Large industry super funds that provide members with the option of selecting shares from the S&P/ASX200 index are AustralianSuper, CARE Super and legalsuper.
- A quarter of your savings in a low-cost industry fund offering a limited choice of fund managers. Sunsuper, for instance, lets members choose from a range of managers including Maple-Brown Abbott, AMP Capital Investors, Lazard Asset Management and State Street Global Advisors. And HOSTPLUS allows members to select their choice of 11 fund managers. (Of course, it should be emphasised that the ability to choose fund managers is a standard feature of retail and wholesale master trusts.)
- A quarter of your super in a fund that has produced exceptional performance over three to five years (or longer) with a more or less conventional balanced portfolio of 60% to 80% in growth assets with the remainder in bonds and cash.
18. Diversify your super
Clarke agrees that one of the real benefits of investing in multiple super funds is diversification to reduce risk. When comparing funds, it is worth checking that you are considering funds that are being advised by a range of asset consultants.
Footnote: The mention of particular super funds in this article is not a recommendation but intended to show the options that available. An investor’s personal circumstances, including tolerance to risk, and expectations for returns, are among the crucial considerations, as is any professional advice received.