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Super investing: Should you change your investment option?

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Although superannuation funds, on average, delivered strong returns for the 2017/2018 year, some Australians may be questioning how well their own super fund is performing and wondering what this performance means for their retirement plans.

If you are saving for retirement, low investment returns make it harder to achieve your retirement goals as your account grows more slowly. For those already in retirement, low returns may mean you are forced to reduce your income or eat into your savings more quickly.

If you believe your super fund is not performing as well as you hoped, or as well as other super funds, what can you do? Although you may feel overwhelmed with investigating such an issue, this article outlines four steps any super fund member can take to assess their super fund’s investment performance.

1. Is your super fund part of the problem?

The investment return for the median growth superannuation fund for 2017/2018 year was 9.2%. The worst-performing growth super fund delivered 6.5%, while the best-performing super fund delivered 12.5%, according to superannuation rating agency, Chant West. You would expect a similar result within a reasonable range for the ‘balanced’ or ‘growth’ investment option for all large super funds, which is where most members have their retirement savings. However, it’s still worth checking how your particular fund is performing. Super funds are regularly rated against their peers by ratings agencies, so check how your fund measures up.

For more information about investment returns and comparable fund performance, see the following SuperGuide articles:

2. Review your super account’s investment option

Around 80% of Australians with superannuation accounts have their money invested in the default option, which is where you are placed if you do not choose an investment option. Default options are usually ‘balanced’ or ‘growth’ investment options (see table below) and normally have around 60%-80% in growth assets such as shares and property.

Default options are designed as an appropriate investment strategy for a large number of members across the many years they will be saving for their retirement. However, it may not be the right option for your particular circumstances.

If you are unhappy with your super account’s investment return, it is important to understand how your money is invested. Most funds offer both pre-mixed options, and choices based on specific asset classes like Australian shares, property, cash or fixed interest. Some super funds also allow members to create a personalised investment portfolio.

Typical investment options are set out in the table below.

Pre-mixed investment options for large super funds

Option type Common option namesWhat they invest inPercentage of growth assets (e.g. Australian and International Shares)
High growthHigh Growth, Aggressive, Growth Plus, Shares PlusMainly ‘growth’ style assets, usually Australian and international shares91% – 100%
GrowthGrowth, High Growth, AssertiveMajority growth assets, with small amounts of cash and fixed interest77% – 90%
BalancedDefault, Balanced GrowthHigh allocation to shares, emphasis on long-term growth60%-76%
Conservative BalancedConservative Balanced, Moderate GrowthHigher allocations to fixed interest and cash than shares41%-59%
Capital StableConservative, Stable Growth, Capital GuardedHigh allocation to fixed interest and cash20%-40%
SecureCapital Guaranteed, Capital Secure, Cash EnhancedEmphasises fixed interest and cash, focussing on stability rather than growth0%-19%
Asset class options
Option nameWhat they invest in
Australian SharesCompanies listed on the Australian Securities Exchange
International SharesCompanies listed on global share markets
PropertyAustralian and overseas property
Fixed interestAustralian and international bonds and loans
CashShort-term market securities and short-term bonds
Member choice or DIY option
Member chooses and manages their own investment portfolioAvailable assets vary, but usually include companies on the ASX, exchange traded funds (ETFs) and term deposits

Source: Table compiled by author, and reflects typical options offered by many large super funds

3. Learn about the objective for your super’s investment option

Just as every super fund gives each investment option a different name, each investment option has a different objective. When reviewing your super account’s investment option, think about whether its investment objective and level of risk are appropriate for you. Two examples are:

Balanced option

  • Objective – To beat Consumer Price Index (inflation) by 4% over the medium to longer term
  • Likelihood of negative annual return – 5 years in 20-year period
  • Risk level – Medium to high

Conservative option

  • Objective – Deliver after tax return of inflation plus 1.75% over rolling 10-year periods
  • Likelihood of negative annual returns – 1 year in 20-year period
  • Risk level – Low to medium

For more information about risk, return and comparing investment options, see the following SuperGuide articles:

4. Compare investment performance against the objective

The next step is to review the performance of your investment option against the option’s investment objective. Super funds regularly report each option’s investment performance against its objective, which is usually expressed in terms of a ‘benchmark’. Investment performance is also tracked by the ratings agencies, which compare each investment option against a common benchmark and rank an options performance against similar investment options in other funds.

For tips on how to compare super funds, see the following SuperGuide articles:

Do you have options if you’re unhappy with your super fund’s performance?

Armed with the knowledge discovered by checking on the four elements above, you can work out whether the problem is your fund, or whether your super fund is performing on par with other super funds, or if investment markets generally are having a strong (or low) or positive (or negative) year. Fortunately (or unfortunately depending on how you look at it), in most cases ratings agencies believe investment markets are to blame for across-the-board poor returns, and likewise for strong returns.

Super funds generally are still performing well, despite some turbulence due to political developments and uncertainty about interest rates. If Australian and global share markets, and investor sentiment, are rising, a super fund’s returns are likely to be rising significantly, reflecting the amount of super assets allocated to share markets.

Likewise, if Australian and global share markets, and investor sentiment, are falling, a super fund’s returns are unlikely to be rising significantly, considering the amount of super assets allocated to share markets.

It’s worth remembering that if you have selected a lower risk investment option or an asset class like cash or fixed interest, returns will normally be lower than a higher-risk investment option. When it comes to investing, lower risk generally goes hand-in-hand with lower returns.

Although you can’t change the performance of investment markets, some super fund members may consider making the following types of decisions:

  • Accept more investment risk: For some fund members, achieving a higher return will only come through taking on more investment risk. You can do this by investing in more growth-style assets, or by selecting an investment objective involving a higher level of short and medium-term risk. For more information on understanding your risk profile, see SuperGuide article Super investing: What is your risk profile?
  • Change your investment option: Simply shifting your money out of the default option into another investment option within your existing fund could make a significant difference, depending on your investment option. An option with a different asset allocation may deliver a higher return, and may also carry greater risk. For more information on switching investment options, see SuperGuide article Super investing: How to change your investment option.
  • Change to a DIY portfolio: If you believe you can do better than your fund’s investment managers, consider moving some or all of your retirement savings into a DIY or member choice option and select your own investments. You can build a tailored portfolio using investments like direct shares, exchange traded funds (ETFs) or term deposits. The most active DIY option is to start a self-managed super fund, although setting up an SMSF means you take on compliance responsibility as well as investment control. For more information, see SuperGuide’s special section on SMSFs (Self-managed super funds).
  • Contribute more to super: For people still saving for their retirement, this is probably the easiest option. Adding some extra personal contributions in addition to those made by your employer can help offset lower investment returns. For more information, see SuperGuide’s special section on Making superannuation contributions.
  • Work a few years more: For those close to retirement, meagre investment returns may mean you need to stay in the workforce longer. Toiling away for a few more years is tough, but it may be the only option if your retirement pot still needs to grow. For more information, see SuperGuide’s special section on Planning for retirement.

For information on how much super you need for a comfortable retirement, see the following SuperGuide articles:

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