Password to performance

The big and boring super funds give members the chance to manage their own money

There are a couple of lessons to be learned from the recent correction. The first is that most fund managers didn’t do much. And that’s a fact of life for anyone in big super funds. It’s not a criticism; it is simply reality. Big funds are too big to do anything material to respond to significant market events like the one we have seen this year.

Yes, it has been the best buying opportunity in a decade, and just maybe some of the funds have rushed money into the market when they could have taken their time, but by and large they have not responded to the “corona crash”, and here is the proof. It is the performance of the major managed funds over the past three months:

As you can see, on any level, big funds have performed bang in line with the market, less their fees. In other words, they did nothing. And anyone whose super is invested in the big multibillion-dollar funds should understand this and understand how the big end of town is looking after their money.

Again, it’s not a criticism; it’s actually an important feature of big funds: most big funds are collecting and administering your money, not managing it any more. They used to – performance used to matter – but the focus has moved from achieving and competing on performance to administering your funds brilliantly, at the lowest cost possible. And rather than outperforming, which is nice when it happens, the main performance focus is on avoiding significant underperformance that would draw negative attention and lose members. Performance is no longer the point of difference for the big funds, which is why they emphasise low fees instead. Above all, it’s about providing no reason for their unthinking members to think about moving. But don’t dismay. It’s okay. They are doing no wrong and it’s not their fault, for a few reasons.

For one thing, they’re too big to move big licks of money, billions, in and out of the small Australian stockmarket or illiquid international markets in any size in short time periods. There is no way they could duck and weave meaningfully through events like the corona crash.

Secondly, they would get crucified if they did. Taking radical bets against the markets is not their job. Come a crash the different asset classes they administer will wear whatever the market delivers. It’s the way it’s designed. It’s normal.

Thirdly, these institutions don’t allow autonomy within their structures. No one in the big-fund industry is allowed the discretion to stuff it up.

Disappointed that no one is managing your money for performance? You shouldn’t be. Before you pull your money out of your professionally administered, big, compliant fund and hand it to a hedge fund manager driving a Lamborghini, let me tell you the good news. You can stay in your fund and, these days, manage it yourself. It is one of the greatest developments in the past decade. It’s called “your big fund’s website”.

Over the past few years most big funds have spent a lot of money giving you new websites that provide previously unimaginable levels of functionality. All you need to do as a big fund member is find your latest letter or email with your account number on it, find out your password and log in to the website. Once in, and once you’ve discovered that you have three insurance policies you didn’t know about that are draining your funds every month, and you’ve seen the annual administration costs, and you’ve realised their performance against benchmarks is no more or less than “average less fees”, the next job is to find the page that allows you to set your own asset allocation.

If any of this is too hard, most funds have fabulous customer service (they can afford it) and they will direct you to the page that allows you to choose between options like balanced, high growth, conservative, stable and others. It used to be that you didn’t have a choice at all. It used to be that you could only change this setting once a year. It used to be that you could change it once a quarter. Now most funds allow you to change it whenever you want.

Drill down and you will see the asset allocation that sits behind each “option” you can choose from. Here are the AustralianSuper options and their respective asset allocations as an example, showing the weightings in each asset class behind each pre-mixed option:

As a younger investor with a focus on growth, you would normally be drawn to the high-growth option. The high-growth option would have exposed 70.6% of your super to the equity markets over the corona crash. When the Australian equity market fell 38% from top to bottom and the US fell 35%, a back-of-the-envelope calculation suggests that this option would have dropped about 25% in value from top to bottom.

The stable option, on the other hand, with only 23% exposed to equities, would have dropped about 8%. That’s from top to bottom. But as we stand at the moment, after the recent bounce, with the Australian market down 23% and the US down 13%, the high-growth option would only have lost about 11% and the stable option about 4%.

You can see why the big funds don’t bother doing much. If the worst the market can deliver in the biggest correction in a decade is an 11% drop in their most aggressive option, what’s there to worry about? Members will understand that. Sure, Bobby Axelrod, from Billions, might have been able to time things a bit better and get that 11% down to maybe 5%, but given the liquidity issues involved, even if he had no committees to hold him up and total autonomy to do what he wanted, he was never going to make much difference. And while we work with the luxury of hindsight, his attempts to save 6% were, win or lose, risking something far more valuable, which is member confidence.

Most super fund beneficiaries don’t want Bobby Axelrod. If they do they can pull out easily enough, run their own selfmanaged super fund and seek him out. For the rest of the members, average returns less fees come with some big benefits: all your weekends and evenings not worrying about money at reasonable costs. The 24/7 transparency and peace in the knowledge that these businesses are highly regulated and run by boring committees means they are not going to stuff it up.

Oh, and if you really want to, as a member you still manage your asset allocation yourself, and in so doing protect yourself from disaster, or expose yourself to opportunity, if you really want to. All you need is a password.

Marcus Padley is a stockbroker with MTIS Pty Ltd and the author of the daily sharemarket newsletter Marcus Today. For a free trial go to marcustoday.com.au.