Cherry-pick the best that big super funds have to offer and potential cut volatility at the same time, reports MICHAEL LAURENCE.
By Michael Laurence
The sharemarket’s continuing extreme volatility will have many investors choosing more investments that, based on past returns, perform strongly without the extreme ups and downs of listed equities. One possible answer is to boost your exposure to unlisted assets.
Among the best-performing large super funds in the past few years have been those with holdings in unlisted alternative assets – such as infrastructure, private equity and direct property.
For instance, the large Western Australian fund Westscheme returned a highly impressive 22.6% in 2006-07 with its so-called target-return portfolio that comprises mostly unlisted direct property, infrastructure, timber and private equity. Westscheme is a public-offer industry fund. (All returns quoted in this article are after investment management fees and taxes.)
And Westscheme’s so-called Trustees’ Selection, a diversified portfolio, returned 18.8% in 2006-07 to rank as the second-highest performer for balanced portfolios offered by super funds surveyed by the fund rating agency SuperRatings. (SuperRatings categorised portfolios with 60-76% of investments in growth assets as balanced.)
The Trustees’ Selection portfolio, in short, holds about 42.5% of its investments in mainly unlisted alternative assets with the remainder in a more conventional diversified portfolio of Australian and overseas listed shares, plus some cash and bonds.
Some other funds also give members an opportunity for large exposures to alternative assets, include MTAA Super and Statewide – either as part of a balanced or diversified portfolio, or as a single asset class.
Instead of establishing a self-managed fund or putting all of their money in one large super fund, some astute investors are saving for their retirement by cherry-picking their way through the best that they believe the big super funds have to offer.
These members, typically with high total balances, might be members of, say, four public-offer super funds, each with different investment options, flexibility, fees and insurance features.
Jason Clarke, chief operating officer of SuperRatings, for instance, is enthusiastic about such an innovative approach to superannuation investing, provided it is appropriate for a member’s personal circumstances. This strategy, if properly used, can be like have a de facto self-managed super fund.
Members who join, say, four different funds will not significantly increase their costs. With almost all funds, the investment management fees are a percentage of the amount invested so, in broad terms, the only extra costs of being a member of multiple funds are having to pay $50 to $100 a year in administrative fees for each fund.
A few funds reduce investment management fees for members with large balances, and this is a point worth checking when doing the number-crunching.
Clarke says members with very small balances should not ignore the frequent warnings about the cost burden of being members of multiple funds. But for those with bigger balances, the extra fees may be worth it.
Investors who are willing to put in the time can search for the funds offering the best insurance deals in terms of price and terms.
Clarke says several large public-offer funds, for example, provide death and income-protection insurance, within strict payout limits, to members who have not undergone medical assessments.
And some funds, including a number of commercial funds, offer provide extremely competitive insurance premium rates.
Choice of investment managers
Certainly, commercial master trusts allow members to choose their own selection of fund managers within a set range. But did you know that this is also possible with some public-offer industry funds?
Sunsuper, for example, allows members to choose from 12 fund managers, including the share funds of Maple-Brown Abbott and AMP Capital Investors. And HOSTPLUS allows members to choose from a lineup of 11 fund managers.
One of the frustrating aspects of being a member of a large super fund is seeing what you regard as buying opportunities for particular shares yet being unable to buy them. However, some large public-offer industry funds provide members with an option to choose their own share portfolios. AustralianSuper, Care Super and legalsuper allow members to pick their own stocks from the S&P/ASX 200 index while Cbus Super allows members to stock-pick from the S&P/ASX 100 index.
Split between funds
Investors, might, for instance, invest a third of their total super savings in one fund’s alternative unlisted assets, say a third in a fund allowing members to choose their own share portfolios, another third with a fund offering a limit choice of fund managers, and the remainder in a fund providing death and income-protection insurance without a medical assessment, or particularly good premium deals. Alternatively, an investor might choose to put some of their savings in a very low-cost fund such as First State Super.
Many members will find, of course, that one or two funds might provide sufficient investment options to suit their circumstances.
Investors considering this multiple-fund strategy will really need to do their homework, says Jason Clarke of SuperRatings. This can mean much trawling through fund websites. Look at the websites of the various fund rating agencies: SuperRatings, Chant West, and SelectingSuper. Chant West offers a great service, AppleCheck, that compares three funds at a time for a small fee – comparing such factors as past performance, investment management fees, insurance, and member services.
Here’s a tip: many of the large super funds, including First State Super, make AppleCheck available on their websites for free.
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, expectations for returns, are among the crucial considerations as is any professional advice received.