Choosing a super investment option

In this video interview Mano Mohankumar, Senior investment research manager at Chant West, shares some insights on how super funds performed in 2019, the outlook for 2020, and what to consider when choosing a super investment option.

You can read a transcript below the video.

Transcript

Which asset types performed well in 2019, and over the long-term?

The 2019 calendar year was a tremendous year for super funds. The key drivers of investment performance were listed shares. So growth funds on average have about 50% invested in listed shares. And Australian shares delivered about 24%. International shares were even stronger, returning about 27.5%.

You would have also benefited greatly if you had an exposure to international listed infrastructure. We returned about 24%. Listed property also returned about 20%. In fact, every asset class was in positive territory. I guess you could say the only drag on performance was cash, which only returned about 1.5%.

Superannuation is a long-term game. Your money’s in the system past retirement as well. Most people don’t access all their super as a lump sum at age 65. So, you’re in it for the long haul. So certainly by all means look at how your fund has done over the last year. But how your funds performed over the longer term is far more important.

So if we were to say, look at the last 10 or 15 year timeframes, the ones that have performed really well, are those that have had a high allocation or meaningful allocation to unlisted assets.

What is the outlook for 2020?

I’m not going to predict returns, but investment markets have had a tremendous run since the GFC low point in early 2009. So growth funds since that time have returned 160%. And over the last 10 years, they returned about 8% per annum on average. Now, growth funds aren’t designed to return that. They’re designed to beat inflation by about 3.5% per annum, which really translates more to sort of 5.5% to 6%.

So the returns we’ve seen over the last decade aren’t normal. So we expect more challenging times ahead because markets have done so well. Most asset classes are fully valued or close to fully valued. Additionally, there’s a fair bit of uncertainty around the global economic backdrop. So challenging times ahead, but the good news is on average, your portfolios have more resilience built into them than compared to say 12 years ago.

We’d like to remind members that timing the market, or attempting to time the market, is a risky proposition. As an example, after a period of sharemarket weakness, if you move into a cash portfolio or a lower risk portfolio, not only do you lock in your losses but you also potentially miss out on any subsequent rebound.

What factors do you consider when rating a super fund’s investment capability?

When we rate a funds investment capability we do take into consideration past investment performance, but it only has a 15% weighting. We place far more emphasis on looking at a fund’s investment portfolio structure, people and processes and that includes investment governance.

And going back to portfolio structure, what we’re looking for is a fund’s best ideas. We want to make sure that they’re actually making it into the portfolios rather than the portfolio focusing on low fees, which means you can’t get a lot of the best ideas into the portfolios.

When we’re talking about best investment ideas, we’re talking about your high conviction ideas, getting into those portfolios, whether it be active managers within particular asset classes, but we’re also referring to unlisted assets and alternative assets which tend to be more expensive than traditional asset classes.

What are important considerations when choosing an investment option?

When choosing an appropriate investment option, we’d obviously say, look, if you’re unsure, it’s always useful seeing a financial advisor who can look at your overall financial position. However, if you like to go out there and make a decision on your own, you need to take into consideration your age. That’s the number one thing.

As an example, if you’re a younger member, your investment horizon is long. So you don’t have to worry about periods of sharemarket weakness. So to the younger members, we’d say, remain patient. Don’t get distracted by short term noise, but at the same time we recognise that for older members your tolerance for seeing your balance go backwards isn’t as high.

So if you’re an older member, we’d say, if you’re approaching say 10 years away from retirement, definitely start thinking about seeing an advisor. You know you’ve also had a period where markets have done extremely well. So you may think, I’m comfortable with the balance because your account balance is another key factor. So age, account balance and your risk tolerance are three key factors.

But in any decision you make, you have to remember that most people don’t actually take all their money out at age 65. Your money is going to be in the super system in the pension phase for a lot longer. So when we talk about risk, most people think of the likelihood of losing money. But another key risk is you outliving your savings. So, there are a number of different factors to take into consideration.