Su­per strate­gies

Low fees and as­tute as­set al­lo­ca­tion have given su­per bal­ances a huge boost over the years

Money Magazine Australia - - CONTENTS - STORY VITA PALESTRANT

You’ve prob­a­bly been on a win­ning streak with­out know­ing it. If your su­per’s been sit­ting in a de­fault in­vest­ment op­tion, you’ve been earn­ing great re­turns year after year – all of it com­pound­ing nicely. You’d have to think twice be­fore ditch­ing it for some­thing else.

For the past 25 years, the de­fault in­vest­ment op­tion, also called MySu­per, has de­liv­ered 5% a year above in­fla­tion, ac­cord­ing to Morn­ingstar. It’s a re­mark­able achieve­ment and demon­strates how well the prod­uct’s as­set al­lo­ca­tion and low fees have worked.

Michael Rice, CEO and founder of Rice Warner Ac­tu­ar­ies, says 5% a year above CPI over 25 years is ex­tra­or­di­nary growth. “Al­most all long-term in­vest­ment per­for­mance is based on as­set al­lo­ca­tion. If you have a di­ver­si­fied portfolio which is full of growth as­sets it will grow more than in­fla­tion and wages, so peo­ple get sig­nif­i­cant, real re­turns.”

MySu­per’s low fees have also paid off. Su­per fund trustees, who are re­quired by law to act in their mem­bers’ best in­ter­ests, have worked hard to bring fees down to below 1%.

“When you are get­ting down to an op­er­at­ing cost of 40 ba­sis points [0.4%] or 60 ba­sis points or even 70 ba­sis points, it’s a pretty low cost,” says An­thony Ser­han, man­ag­ing di­rec­tor, re­search strat­egy, Asia-Pa­cific, at re­searcher Morn­ingstar.

Rice says de­fault su­per, strength­ened by the in­dus­try re­forms in 2011, has been a great suc­cess story. He at­tributes this to the pre­scribed min­i­mum stan­dards to which MySu­per prod­ucts must ad­here to qual­ify for com­pul­sory em­ployer con­tri­bu­tions, in­clud­ing re­stric­tive fees.

While fund mem­bers can switch to other in­vest­ment op­tions, known as choice prod­ucts, most stay in MySu­per. But now the de­mo­graphic most open to dis­rup­tion, mil­len­ni­als, or the in­ter­net gen­er­a­tion, are be­ing tar­geted by new fin­tech play­ers.

Re­searchers are con­cerned their slick mar­ket­ing on so­cial me­dia and in­vest­ment hype will lure fi­nan­cially in­ex­pe­ri­enced mil­len­ni­als out of the pro­tec­tions af­forded them by MySu­per into trendy in­vest­ment choices that have high fees and no track record to speak of.

Rice says in­creas­ing reg­u­la­tion and scru­tiny of de­fault su­per has made choice prod­ucts a more at­trac­tive tar­get for busi­nesses seek­ing to profit from the su­per sys­tem. He says the new en­trants are spend­ing more on re­cruit­ing mem­bers than on de­liv­er­ing long-term value.

As an ex­am­ple, he cites Space­ship’s GrowthX op­tion. Its pitch to po­ten­tial mem­bers is: “We in­vest where the world is go­ing, not where it’s been.”

“I’m not try­ing to sin­gle them out be­cause there are all th­ese funds – about 35 of them – and they are much the same,” says Rice. “A fund like Space­ship comes along and says we’re go­ing to in­vest in all th­ese brand new star­tups but in re­al­ity while they don’t have that much money [in the fund] they’re in­vest­ing in much the same way as tra­di­tional funds and do­ing it more ex­pen­sively and per­haps with less in­vest­ment prow­ess.

“I have no prob­lem if a start-up comes along and says not only are we the same price as Aus­tralianSu­per, we’ve got th­ese great in­vest­ment strate­gies that are go­ing to make you at least the same amount of money as them, and de­liver all our com­mu­ni­ca­tion on your mo­bile, all the things young peo­ple might find in­ter­est­ing, but you can’t do that at the ex­pense of the value that they are go­ing to get on re­tire­ment.”

Rice Warner com­pared Aus­tralianSu­per’s de­fault op­tion with an in­vest­ment tar­get of CPI plus 4% a year with a tar­get of CPI plus 2.5%. For a 25-year-old on $75,000 a year the dif­fer­ence at re­tire­ment would be $296,400. A higher fee of 1.6% was used, which some star­tups have been charg­ing, and is an­other drag on re­turns.

Camp­bell Heggen, a lec­turer in fi­nan­cial plan­ning at Deakin Univer­sity, says: “One of the main con­cerns we’ve seen around the new en­trants is that be­cause they are start-ups they have lower scale, which means that the over­all ad­min­is­tra­tion and back of­fice costs have to be passed onto a smaller base of mem­bers.

“Their av­er­age an­nual fees are quite high com­pared to the more es­tab­lished larger funds, to what the larger funds can of­fer due to economies of scale. The con­cern is, are the mem­bers get­ting value for money? I think that is the big­gest con­cern.”

Crit­i­cism of Space­ship has had an im­pact. It re­cently an­nounced it had cut its fee to 0.99% and took a swipe at the in­dus­try, accusing it of be­ing dis­en­gaged from young mem­bers.

Heggen says there are les­sons to be learnt from the start-ups. “OK, so per­haps we have con­cerns around the high fees of some of th­ese en­trants and whether or not they have the ex­pe­ri­ence to of­fer the prod­uct they are try­ing to de­liver but they’ve ob­vi­ously cap­tured the mar­ket’s at­ten­tion and that says some­thing in it­self. Maybe we should be try­ing to look at why they are ex­pe­ri­enc­ing some ini­tial suc­cess and what that means in terms of how we could bet­ter en­gage with the broader mar­ket and the younger gen­er­a­tion in par­tic­u­lar.”

“One of the is­sues with su­per, par­tic­u­larly for younger peo­ple, is they don’t see the rel­e­vance of it be­cause it’s such a long time hori­zon and they don’t un­der­stand the ben­e­fits of sav­ing early and the long-term ben­e­fit of com­pound in­ter­est.”

Heggen says any­one think­ing of switch­ing out of MySu­per into a choice prod­uct should read the fine print care­fully. “If it’s charg­ing ex­ces­sively higher fees, and not of­fer­ing po­ten­tial for a higher re­turn, you must ques­tion the value of that par­tic­u­lar op­tion.”

Morn­ingstar’s Ser­han also rec­om­mends cau­tion. “Low cost isn’t al­ways best but pay­ing an ex­tra 0.5% or 1% a year for an op­tion just be­cause it looks nice prob­a­bly isn’t a great fi­nan­cial de­ci­sion. It’s best to go back to ba­sics.”

A re­cent sur­vey con­ducted by In­dus­try Su­per Aus­tralia found fees and per­for­mance were mem­bers’ two high­est pri­or­i­ties, with tech­nol­ogy among their low­est pri­or­i­ties.

Fi­nally, Rice be­lieves the same over­sight that ap­plies to MySu­per should ap­ply to choice prod­ucts. “It’s very im­por­tant to have reg­u­la­tory con­di­tions that stop peo­ple from be­ing ripped off, par­tic­u­larly be­cause su­per is com­pul­sory. If you’re forc­ing mem­bers to put money into su­per, there’s an onus on the gov­ern­ment to make sure the money is looked after.”

Many peo­ple, such as the Ac­tu­ar­ies In­sti­tute, think MySu­per’s “dash­board” re­quire­ment should also be ex­tended to choice in­vest­ment prod­ucts. The dash­board dis­tils key in­for­ma­tion: the in­vest­ment op­tion’s tar­get re­turns, ac­tual re­turns, level of in­vest­ment risk and fees, all pre­sented in a stan­dard­ised way so con­sumers can eas­ily com­pare prod­ucts.

Mean­while, if you’ve stayed in a de­fault fund through in­er­tia or dis­en­gage­ment or be­cause you haven’t had time to chase the lat­est hot in­vest­ment fad, don’t beat your­self up. Give your­self a pat on the back in­stead. The de­fault fund will have done you proud.

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