The way the super industry tends to invest your money can be compared to a team sport, which more often than not involves third parties to execute investment strategies on their behalf. While super funds do make direct investment choices on their own (such as shopping centres or other assets), most pick asset consultants and investment managers to do their stock-picking for them.
But regardless of how they invest your money, what unites all super funds are the underlying principles of investing and the foundations on which they operate. For starters, the very reason why superannuation exists is to help all Australians build long-term wealth.
One of the biggest incentives for investing via super is the tax treatment. While compulsory super guarantee (SG) contributions paid by your employer are taxed at 15%, investment earnings and withdrawals are tax-free once your reach preservation age (typically age 60). So too are what’s called non-concessional contributions (money that’s already been taxed) with members currently entitled to make a (non-concessional) contribution of up to $300,000 (under the bring-forward rule) over three financial years (e.g. 2018/2019, 2019/2020 and 2020/2021).
Know your fund
For the uninitiated, there are two main types of super funds, industry (also known as not-for-profit or profit-to-member) funds and (bank-owned) retail funds. The distinction is important as the former tend to outperform their retail counterparts. Much of this is attributed to their higher (20%) exposure to unlisted infrastructure, unlisted property and private equity, versus retail funds which typically have less than 5% exposure.
Unless you nominated otherwise, you’re most likely in what’s called a ‘default super fund’. Depending on the level of risk you’ve nominated, your default fund will have a pre-mix of investments around either conservative, balanced or growth options.
Most people tend to have a balanced MySuper default product with between 60-70% invested in shares and property (growth assets) and the rest in more defensive assets, like cash and fixed interest. While they vary between funds, the indicative asset allocation range of a typical balanced default fund includes, equities (25-55%), cash (0-25%), fixed interest (5-35%), real estate (0-20%), infrastructure (0-20%), commodities (0-15%), alternative assets – including unlisted property and private equity (0-25%).
As stripped-down, and lower cost super solutions, MySuper options were supposed to be easier no-frills super products for employers to offer their employees. Basic features and a simple fee structure, also made it easier for members to make meaningful peer-to-peer comparisons using rating tables between MySuper products.
If you’re unclear as to what type of super fund you have, Platon Chris director (Superannuation Advisory) with KPMG says you owe it yourself to find out, and preferably before you join. Equally important, adds Chris if you do have a default fund, understand what it offers, and any other (investment) choices that are available.
Despite the market’s preoccupation with MySuper default super fund products, Alex Dunnin executive director of research with Rainmaker reminds investors that most super funds offer more than a dozen-plus investment options. Dunnin suggests those members wanting greater investment diversity than typically available via a default fund, should either contemplate making these decisions themselves or choose investment options beyond the default MySuper product.
Diversity helps offset volatility
What underscores the value that diversity brings to a balanced fund, explains Chris is the defensive element associated with constructing a portfolio with non-correlated assets (with price movements that don’t impact each other). For example, when growth assets underperform, they’re typically offset by more defensive assets classes – hence smoothing out overall performance and minimising the risk of negative returns.
Without exception, all funds recognise that getting members as close to their retirement savings objectives as possible, means having a good (minimum 30-40%) allocation to risk assets like equities or property. But given that super is a long-term investment, much of the risk/return element, explains Chris means getting fund members to feel comfortable with market volatility.
While shares consistently outperform other assets classes over time, volatility can make for a bumpy ride along the way. Nevertheless, unbeknown the members, Chris says they’re effectively ‘averaging’ into their super via their SG contributions. Rather than worrying when markets fall, he encourages investors to recognise it as an opportunity to acquire more units (via SG contributions), hence reaping the benefits of compounding returns as markets recover over time.
Given that markets don’t go up in a straight line, Chris says the axiom around ‘time in the market’ remains as valid as ever. Similarly, while members can and do switch funds or investment options based on a knee-jerk reaction to headlines, he reminds them they’re often worse off in the long run.
“The bigger challenge for super funds is communicating performance to their members in a meaningful manner, and getting them to understand market dynamics,” says Chris. “While most members stay in a default fund their entire lives, those over 55 may wish to consider ‘sequencing risk’ and gradually reverse the exposure to riskier into more defensive assets.”
The fee-impact on net returns
When assessing performance over the long-term, it’s also important not to overlook the impact fees can have on your super fund balance. While total annual fees include administration and investment fees – typically referred to as a management expense ratio (MER) – Chris says the latter (charged as a percentage of funds under management), tend to be the most significant component. As such, they (investment fees) have a much greater impact on the net performance of your overall fund.
While it’s important to understand total fees charged by a fund, Chris reminds investors there’s no clear correlation between fees and performance. “Investments are more than just about fees and it’s important to think about overall performance net of fees,” advises Chris.
The average MER is between 0.8% and 1.2%. That means someone paying 1% MER on a $100,000 super fund balance is paying $1,000 in fees annually. While it may not sound excessive, paying more than the industry average does eat away at your long-term returns. For example, David Elia CEO with industry fund Hostplus estimates that total annual fees of 2% of your account balance, rather than 1%, could reduce your final return by up to 20% over 30 years.
You can learn more about the impact of fees and returns with SuperGuide’s fees and returns calculator.
Learn more about superannuation basics in the following SuperGuide articles:
- How to teach your kids about super
- 10 points to check on your annual super fund statement
- How to read a super fund PDS
- Super tips and strategies for all ages
- How super works: A beginners guide to superannuation
- The easy way to find and consolidate your lost super
- How to compare super funds in 7 easy steps
- Super for beginners: How superannuation is taxed