Fit cats and fat cats: Which are the best and worst super funds?

Reading time: 5 minutes

In this video Tracey Spicer talks to Chris Brycki from Stockspot about their annual Fat Cat Funds Report which assesses the best and worst performing super funds.

Transcript

Tracey Spicer

For most Australians, superannuation is our largest personal investment, but when was the last time you looked at your returns or your fees? Too often we blindly trust the fund manager without looking at the fine print. For eight years, Stockspot has compared the best and worst super funds. To talk about the latest Fat Cat Funds Report. Best name ever. We’re joined by Chris Brycki from Stockspot. Hi, Chris. How are you going?

Chris Brycki

Hi. Very well, Tracey.

Tracey Spicer

Chris, how many funds did you compare and using what criteria?

Chris Brycki

Well, this year we compared 100 super entities and in those entities, they were about 600 different funds. And by funds I mean their different options people can choose. And what we compared was their performance over five years because that’s a reasonable  time frame to assess a fund. And we looked at their performance after fees.

And then we categorised all of these funds into similar funds. So, for instance, we looked at all of the high growth super funds, the growth super funds, the balanced funds and the moderate funds. Because it’s really important that you compare apples to apples.

Tracey Spicer

And what are the kind of differences between what you call a fit cat fund and a fat cat fund?

Chris Brycki

Well, there’s enormous differences, sadly. So even the people in the same category of super, and a lot of Aussies are in a growth fund or a balanced fund. The difference between the best performing funds in Australia and the worst, could be 5% or 6% per annum. So that could be 30% or 40%  over five years, which obviously makes an enormous difference to the balance you have over that period of time.

So, I mean, it really shows how important it is for people to really drill down and have a look at this and make sure they’re not in one of these fat cat funds. And the fat cats were the ones who underperformed consistently over five years.

Tracey Spicer

How much does past performance indicate future performance though?

Chris Brycki

Well, past performance, not so much, but actually past fees is a great indicator of future performance. So investing is a strange phenomenon, Tracey, because in most areas of our life, the more that we pay, the more that you get. You expect that you pay more in fees or you pay more for something at the shops, you get better quality. But when it comes to investments, the returns everyone earns are pretty similar before fees and therefore any fees that you pay come out of your returns and actually harm your performance.

So what this research has really discovered is that all of the funds that perform poorly tend to have one thing in common, which is high fees, and the funds that tend to perform well tend to have low fees in common. And this is really the message I’ve been trying to share with people for eight years now, that when it comes to investing, you want to keep your fees really, really low because every dollar you save is a dollar that ends up in your retirement and the dollar that can compound for years and years and help you have more money in retirement.

Tracey Spicer

Exactly right. Is there any way of quantifying the amount of difference and extra say 1% in fees makes over a long time?

Chris Brycki

Well, for someone in their 30s, you know, just a 1% difference in fees. So the difference between paying 2%, which unbelievably is what some of these fat cat funds still charge, and 1% could easily be about $200,000 just for the average Australian. So there’s a huge difference.

And obviously $200,000 in retirement can can help you afford a lot more travel or it can allow you to buy something that you might want to buy. So it gives people a lot more freedom and flexibility in retirement. And it doesn’t take a lot of time for someone to sit down and check their fund and make sure they haven’t been advised into a poor fund or just defaulted into a poor fund.

Tracey Spicer

It’s an awful lot of money, isn’t it? Can you give us some examples of fat cat funds and fit cat funds? I actually saw AMP popped up quite a few times in your in your report.

Chris Brycki

Well, yeah, it probably shouldn’t surprise people that a business like AMP ends up there. Funnily enough, we had to look at its share price when we first did this report and compared it to today. And the share price has fallen 70% over the last eight years. So clearly the market has voted with its feet and customers are leaving as well. And they’ve had a lot of cultural issues as well within the business. But yeah unfortunately, every year for eight years, AMP has been in the top three fat cat funds.

So it’s had the largest number of poor performing funds. AMP also has, I’m sure, some good performing funds. But what these poor performing funds have in common is they tend to be very complicated. They tend to run very complex strategies or require a lot of fund managers making a lot of decisions. And then because of the need to employ all of these fund managers, they tend to charge high fees.

And what’s unfortunate is that still, after doing this for eight years, so many people are stuck in these funds. I think I had the false view that if I publish this, then everyone would get up and make a decision and leave all of these funds. But it’s sad to look back and actually the same funds that are in this report eight years ago haven’t really changed. And there’s still too many Australians that are stuck in them.

Tracey Spicer

Extraordinary. What are some of the bouquets as well the brickbats, the better performing funds with the lower fees?

Chris Brycki

Well, the better performing funds tend to change year to year, which is interesting and kind of shows that the performance of different strategies does vary year to year. But what they always have in common is they tend to have fees of less than 1%, or often a lot lower. We tend to find more often than not, the non-profit, the industry funds tend to find their way into the top list more often.

So this year it was UniSuper, which was a super fund for educators I think historically, performed the best. It had the most good performing funds. Interestingly IOOF, which is actually a for profit, came in second, but they’ve done a lot of streamlining of their business recently and invested in lower costs, and that seems to be doing well for them. And then AustralianSuper, which is one of the larger industry funds, I believe the largest came in third. So, yeah, we often find those those low cost industry funds up the top.

Tracey Spicer

So what can we do if we found ourselves stuck in a fat cat fund?

Chris Brycki

Well, I think I mean, it’s really important to do something. So, you know, I can’t give sort of personal advice. And there are things you may want to consider like there’s tax implications or insurance implications. So it’s not a matter of suddenly just making a decision. Consider all of those things as well. But the evidence and research, and it’s not just ours, there’s been a lot of research globally that shows that when it comes to investing, every dollar you save is an extra dollar that you earn.

And actually more complicated strategies don’t do better than more simple strategies. And the philosophy of the business I run now is that boring is brilliant when it comes to investing. You actually want your investments to be really boring and simple because that usually means they have lower fees and you’re going to have more of the return for yourself.

So, I mean, our tips are find a fund that’s charging under 1%, and ideally well under 1%. There’s a lot that are charging 0.5% or 0.75% per year these days that are worth looking at. And then just make sure you have the right mix of investments for your age, basically. So if you’re in your 20s or 30s and have 40, 50, 60 years before you need to draw down on your super, put a few more growth assets in there, you want more shares and property. Whereas if you’re in your 50s and 60s and approaching retirement or actually entering retirement, you want a bit more defensiveness in there. So more bonds and cash.

Tracey Spicer

Very sensible advice. Thanks so much, Chris.

Chris Brycki

My pleasure.