The task of trying to select the best super funds is filled with traps for uninformed consumers. Take the potential minefield for anyone who focuses solely on trying to hunt down the best performance or extremely low fees but fails to compare premiums for fund-provided insurance.
“The differential between the highest price insurance and the lowest will probably wipe out any fee gain or any return gain you might have,” warns Jason Clarke, chief executive of superannuation fund researcher SuperRatings.
Australia’s best super funds provide members with a combination of strong, long-term performance; highly competitive fees; quality, well-priced insurance; sufficient investment options for a member’s needs; and access to simple, low-cost advice. It’s a whole package.
SuperRatings last night named AustralianSuper as its super fund of the year, saying that the fund offers the best overall value for money in the accumulation and pension phases. And CareSuper was named as the fund providing the best value in the accumulation phase.
Seven of the 10 finalists for fund of the year were low-cost, industry funds that are open to the general public – AustralianSuper, CareSuper, Catholic Super, First State Super, HOSTPLUS, REST and SunSuper. Two were public-sector funds, ESSSuper and GESB Super, and the remainder was a corporate plan, Telstra Super.
Here are our 14 top strategies to pick the best super fund for your circumstances:
Professional superannuation analysts would have long understood the main attributes of industry funds – lower fees and generally stronger long-term performance than retail funds. But that doesn’t mean the analysts personal money is investing exclusively in industry funds, far from it.
“The number of different funds that our 25 staff contributes to is quite extraordinary,” says Clarke. “It’s an even spread [between different types of funds].
“There are people who research funds for a living,” he emphasises, “who still will choose a poor performing fund or an expensive fund for emotive reasons.”
“You can tell from their assets allocation which funds are likely to perform well in certain conditions yet human behaviour will still lead people to choose funds that aren’t always that competitive. Such funds may have features that someone wants but do not necessarily provide value.”
It can be a costly mistake to assume that last year’s best-performing funds will consistently outperform in the future.
Try to understand the reasons for past out-performance. A fund might, for instance, have a particularly high exposure to shares which paid off when markets rebounded – or it might have been just lucky.
Especially as super is a whole-of-life investment, you should look at how the fund has performed over the long-term.
And you should satisfy yourself that a fund’s asset allocation is satisfactory for your needs – ideally with a record of delivering highly competitive returns while remaining within your tolerance to risk. (Most members settle for a balanced fund with 70% of its portfolio in growth assets.)
But, of course, even a fund’s outstanding long-term performance in the past doesn’t mean its members will avoid future shocks.
The MTAA Super Fund is almost every superannuation observer’s idea of the ultimate super shocker in terms of a sudden turndown in performance.
For year after year until the aftermath of the global financial crisis, MTAA Super’s balanced portfolio ranked as the best or near best performer. For instance in 2006-07, its balanced fund returned a breathtaking 18.7%.
But following the GFC, its performance sunk harder and faster than most other funds – thanks to its extremely high exposure to unlisted alternative asset, including infrastructure and private equity funds, which have been severely devalued.
Over the three years to June 30, MTAA Super was the second worst performer among the 49 funds surveyed by SuperRatings – losing an annualised 8.3% over that period. And, not surprisingly, the fund has been hit by members pulling out their money.
“We have superannuation analysts [working for SuperRatings] who have left MTAA Super over the past six months,” says Clarke, “because they can’t handle what’s going on.”
“And we have had people who have joined over the past six months and put in big rollovers because they think the fund has bottomed-out,” he says.” And they think the fund has devalued most of its assets as low as possible, and believe the fund’s returns are going to bounce back significantly.”
“So there are two sets of people who know what they are doing and are taking completely diverse approaches.”
Despite all of the bleak recent news for MTAA Super, there is a more positive side. Over the 10 years to June this year, the fund returned an annualised 5.1% – against the median return of 4.51%.
Research by SuperRatings shows that the average fund fees charged as a percentage of a member’s assets are 1.5% a year, based on a $50,000 balanced portfolio. But First State Super, for instance, charges just .4%.
And as Clarke says, “Anything less than .5% is as cheap as chips.”
The bottom-line is that high fees act as a handicap on your returns. And the size of their fees is one of the reasons why retail funds have not been able to match industry funds for long-term performance.
“I reckon that once you reach fees of 1%, you are in a premium offering,” says Clarke, “and you should get services and features to match.”
Fund members have responded positively when retail funds introduce low fees on products considered desirable. For example, Clarke points to the strong support for BT Super for Life. Its fees are “cheap compared to retail” and the fund has performed well.
BT Super for Life has attracted 175,000 members in just four years; Virgin Super, by comparison, has been going a year long but has only 25,000 members.
Another innovative retail fund AMP Flexible Lifetime Super provides members with a choice of low cost investment options, says Clarke, while allowing them to increase investment and insurance features in return for higher fees. The fund has also proved popular.
Don’t blindly follow the general message from the superannuation industry to consolidate your super savings into one fund. Depending upon the circumstances, it might be in your interests to spread the money around among the best of the best for certain features.
And there can be a good case for simply spreading the risks by diversifying between a few funds.
The only duplicated costs for being in more than one fund are fix-dollar membership fees of perhaps $70 a year or so for each fund. Most of a fund’s annual fees are charged for investment management and are based on a percentage of your superannuation assets – so the cost doesn’t change with the number of funds.
There are a couple of caveats here. First, being in more than one fund probably isn’t financially feasible if you only have a low balance. Second, you don’t want so many funds that keeping track on them becomes hard work.
“I don’t have any problem with multiple accounts,” says Clarke, who personally follows a multi-fund strategy. “Obviously, you don’t want a ridiculous number. But you could expect some people to get their insurance from one fund, hold their cash in another, and hold other asset class investments in other funds – if they are picking the best.”
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