Money Magazine Australia

Look for the warning signs

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It’s probably your single biggest asset after the family home but chances are you’re giving less attention to your super fund than you are to planning your next holiday. Admittedly, a “set and relegate to the bottom drawer approach” to super may have been appropriat­e before the GFC hit. But given that at least 1.6 million default accounts holding $57 billion have ended up in underperfo­rming products (eroding nearly half their balance by retirement), ignoring your super is no longer a smart idea.

Even though your retirement might be years away, remaining blissfully unaware of your super fund’s performanc­e from one year to the next means seriously compromisi­ng your long-term wealth potential.

Putting up with a fund that’s performed badly over a couple of years isn’t necessaril­y grounds for switching though. As a case in point, with the average super fund return having dived from around 10% in 2017 to between -1% and -2% a year later, even good funds can be dragged down by a tough market.

Compare each year’s return

The trouble is that too few members know what kind of fund they have, let alone what a good return looks like, or the hallmarks of a fund likely to continue delivering poor returns. For starters, Kirby Rappell, execu- tive director at SuperRatin­gs, recommends annually benchmarki­ng how your fund has performed relative to its peers. You’ll find all the data you need on the annual statements for the years to June 30.

Based on SuperRatin­gs research, the median return for a balanced-style fund – with allocation­s to growth assets such as shares and property of between 60% and 80% – over the 10 years to December 31, 2018 is around 7.8%, while the highest and lowest returns were 8.6% and 4.9%. “The stark reality is that if your fund has languished in the bottom quartile for 10 years, it’s already seriously impacted your retirement,” warns Rappell.

Join the leaders of the pack

Productivi­ty Commission calculatio­ns suggest that a 21-year-old starting on a salary of $50,000 who defaulted to a bottom-quartile MySuper product verses a top-quartile MySuper product would be $500,000 worse off at a retirement age of 67.

Then there’s SuperRatin­gs data that suggests over a working life of 45 years the difference between being in a top-performing rather than a worst-performing fund means you could be $337,310 better off.

Switching funds much later in life can also pay off in spades, with SuperRatin­gs data suggesting that a 50-year-old who moves from the worst fund to the best one would be $198,769 better off at 65.

Ideally you want to be in a fund that’s in the top quartile on the performanc­e tables. But while no one can predict future performanc­e based on past performanc­e, Alex Dunnin, director of research at Rainmaker Informatio­n, says it’s important to note that performanc­e tables allow investors to pick funds more likely to perform consistent­ly well.

What the tables reveal, adds Dunnin, is that the funds leading the pack three to five years ago tend to stay in that pack. As a rule of thumb, he says the best funds tend to deliver almost twice the returns of the worst funds (see chart).

“There’s a 70% chance the funds in the top-quartile group three to five years ago will remain in that top quartile going forward,” says Dunnin. “It’s hard for funds repeatedly in the bottom quartile to get above water, and if your fund’s performanc­e is so far below average that it’s not even in the league table, then it’s time to worry.”

Industry (not-for-profit) funds have, on average, performed better than their (bankowned) retail counterpar­ts. Based on analysis by research house Chant West, much of this outperform­ance can be attributed to not-for-profit funds’ higher (20%) exposure to unlisted infrastruc­ture, unlisted property and private equity, which have a cushioning effect when sharemarke­ts are weak. By comparison, retail funds generally have less than 5% in these assets.

However, both industry and retail fund sectors – despite now having comparable fees, averaging between 1% and 1.2% – have their share of dud funds. But when trying to assess why one fund performed well while another didn’t (even within the same asset class), Dunnin reminds investors that there’s no relationsh­ip between fees and performanc­e.

It’s not your job as a super fund member to second-guess the skill of your fund manager. However, what the tables (taken at face value) really reveal, says Dunnin, is that some fund managers have better investment strategies than others, and/or are simply better at both managing and mixing asset classes.

Get to know your fund

But it’s impossible to seriously compare your fund and its performanc­e, the calibre of fund managers, and their investment strategy until you know what kind of fund you actually have, says Dunnin. “Ask yourself how you ended up in that fund and what other benefits [such as insurance] it offers, and while you shouldn’t join a fund based on fees alone you want to avoid paying too much for it.”

In addition to tabling past performanc­e, independen­t providers of super fund research also rate funds based on different criteria. In addition to investment performanc­e (which accounts for 22%), SuperRatin­gs scrutinise­s fees, insurance, marketing services, admin and governance. Based on these measures, it will rate funds into four quartiles from platinum (top-performing) through gold, silver and then “others” (the worst performers).

Another telltale sign of a dud super fund, says Rappell, is whether they’re closed to new members. For example, while legacy products may still command higher administra­tion/ investment costs and have commission­s flowing to related-party businesses (such as advisers), it’s not necessaril­y incumbent on fund managers to point this out.

Best estimates suggest there are around two million member accounts with $127 billion in these (legacy) products, which on average charge double the industry average of around 1%. However, not all closed funds are necessaril­y uncompetit­ive, with Rappell reminding anyone lucky enough to hold a defined benefit fund to never close it. “Another trap for those changing jobs is to assume that the [super-related] benefits provided by your previous employer will carry over to the new job. Often they won’t.”

The best funds tend to deliver twice the returns of the worst ones over three to five years

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