Matter of choice...the fund you choose is a critical decision. Photo: Erin Jonasson
Don't ruin your retirement by leaving your money in a lagging super fund, writes Annette Sampson.
Inertia is costing super fund members tens of thousands of dollars in lost earnings and future retirement benefits.
While most employees have the right to choose where their money is invested, or at least choose an appropriate investment option within their fund, the vast majority don't exercise that right.
This is creating a lucky-dip universe where those fortunate enough to land in a good fund do well but others unknowingly remain in underperforming funds that can severely limit their lifestyle when they reach retirement.
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Research for Money by SuperRatings shows that the median return for super funds generally quoted in news reports disguises the fact that some funds perform much better than the average - and some much worse.
Despite the Howard government's introduction of fund choice, about 80 per cent of super money remains invested with employers' default funds. Much of this money is in the default option of that fund - typically a balanced portfolio, which SuperRatings defines as being one that has 60 per cent to 76 per cent of its investments in so-called growth assets such as shares and property.
Over the 12 months to March 31, the median balanced fund returned a solid 5.1 per cent - largely thanks to the post-GFC recovery in global sharemarkets.
But if you were unlucky enough to be in the worst performer on SuperRatings's database, you would have lost 1.9 per cent over the year.
By contrast, the best performer returned 8.2 per cent - more than 10 percentage points better than the laggard and three percentage points better than the median.
MASSIVE DIFFERENCE
Of course, super isn't a short-term game and the fact that your fund may not have done well over a particular 12-month period generally isn't cause to run screaming in the opposite direction.
The managing director of SuperRatings, Jeff Bresnahan, says different funds do well at different points in the market cycle and he would generally recommend investors judge theirs over five years to seven years to gain a clearer picture of how well they do under a wider range of conditions.
But even over these longer periods the differences can be substantial.
Over the past five years, SuperRatings says the best-performing fund has returned 5.3 per cent a year while the worst has lost 0.9 per cent. Over the past 10 years, the best performer has returned 7.3 per cent a year, versus 2.8 per cent for the bottom-of-the-pack fund.
To put this into perspective, it says someone who invested $100,000 in both funds five years ago would now have $125,696 if they had been in the top performer; $95,582 in the worst. Five years is not a long time in terms of retirement savings but even over this sort of period, being in the wrong fund could have cost up to $30,000.
Over the past 10 years, SuperRatings says, $100,000 would have grown to $201,924 in the best fund and $131,549 in the worst. That's a difference of about $70,000 and while the top fund gave investors a healthy return, the bottom fund merely kept pace with inflation - lagging the performance of even the median cash fund.
Bresnahan says the past 10 years have been a good test of how funds cope with a full range of market conditions. ''We had the tech bubble and crash, then the rally in mainstream shares, the GFC and the mini rally following it,'' he says. ''If your fund has underperformed by a big margin over 10 years you'd have to consider whether it warrants sacking it.''
Bresnahan says that over five years, a five-percentage-point annual difference in returns generates a difference in outcomes of just under 30 per cent; over seven years, the difference is almost 40 per cent.
''That's where apathy costs [investors] big time, because we don't penalise managers who get it wrong.''
AVOID THE DUDS
The chief executive of the Australian Institute of Superannuation Trustees, Fiona Reynolds, says even a 1 per cent difference in returns can make a huge difference over your working life. She says inertia is costing some fund members dearly and the government is trying to address this problem through its proposed super reforms.
These include the introduction of a new low-cost default fund to be known as MySuper, having the regulator put out information so consumers can more easily compare funds and streamlining the administration of funds and making it easier for consumers to transfer between them.
However, Reynolds fears many consumers will remain unengaged with their super until their account balances grow to a size where they realise this is serious money.
The principal of Mercer, Russell Mason, says it is disappointing to compare financial homework with all the work people put into researching a new-car purchase. ''If only they put the same effort into selecting their super fund,'' he says. ''It would have a far greater effect on their situation.''
However, Mason warns that simply opting for the best-performing fund without knowing why it has done well can be dangerous - particularly if you use shorter-term performance results.
''One of the warning signs [that a fund might be a dud] is if it is performing well outside the range of other funds - either on the downside or the upside,'' he says.
''If 90 per cent of funds returned 7 [per cent] to 12 per cent last year and yours returned 3 per cent or 20 per cent, it should ring alarm bells. We have seen examples of extraordinary performance that comes about because of high risk and leaves investors very exposed if circumstances change.''
DON'T RELY ON LABELS
Mason warns that even within a definition such as ''balanced'' there can be legitimate reasons why one fund will do better than another. He says there is a big difference between having 60 per cent of your fund in growth assets and having 75 per cent. If two funds have the same official weighting, one might use more passive investments such as index funds while the other may have more illiquid assets such as infrastructure and private equity, or be more inclined to use more active fund managers.
''The vast majority of members have a poor understanding of what they're invested in,'' Mason says. ''Many hear 'balanced' and think it means a 50:50 mix of defensive and more risky investments.''
The head of investment consulting at Mercer, Graeme Mather, says a joint effort by the Association of Superannuation Funds of Australia and the Financial Services Council to produce a standard risk measure should help consumers better understand the risk-return trade-off. He says the move will require funds to estimate the number of negative years that investors can expect in every 20 years and they will then be rated on a scale of one to seven using that information.
While that doesn't address other risks in super funds, such as liquidity risk or the risk that the people running the fund will have problems, Mason says it should at least help consumers understand why a fund with a 10 per cent return but a low-risk rating may actually be a better prospect than one that has returned 12 per cent or 15 per cent by taking on much more risk.
AGE MATTERS
Reynolds says consumers should also be aware that if a fund is doing its job properly, it should tailor its investment strategy to its membership. This may mean a fund with a largely young membership will have different returns to one with mainly older members but both could be doing a good job.
''It's about what works for members rather than just how [the fund] compares to someone else,'' she says. ''There has been too much following the rest of the industry.''
Mather says one legacy of the GFC has been increased volatility in investment returns - though it has also created opportunities. SuperRatings'a figures show the effect of the GFC has by no means worked its way out of the system, with median fund returns over the past three and five years lagging, or barely in line with, inflation.
Over the past three years, the median balanced fund has returned just 1.3 per cent a year while the return over five years is a marginally better 2.5 per cent. ''People might look at that and say they'd have been better with their money in a bank account but most people wouldn't save for retirement without super,'' Reynolds says. ''The returns still don't look too good at the moment but for many people, retirement is still a long way off and over that time they'll be better off in the compulsory system.''
Set for double-digit returns
SuperRatings's figures show funds are on track for a double-digit return this financial year, which will come as good news to fund members still smarting from the losses incurred during the GFC.
The managing director of SuperRatings, Jeff Bresnahan says while the markets are still volatile and returns will swing up and down from month to month, the median balanced fund returned 9.53 per cent in the nine months to March 30 and could top 10 per cent if investment conditions remain positive.
Australian shares are the biggest driver of fund returns but Bresnahan says the good news is that funds haven't just been riding on the market's coat-tails.
He says the median Australian share option has outperformed the broader sharemarket over one-, three-, five- and 10-year periods, even after fees and taxes. He says balanced funds have benefited from this.
The two top-performing balanced funds - Catholic Super's balanced option and Local Super's growth option - both returned 8 per cent or more through the year to March 31 (though Local Super's conservative option did better with 8.5 per cent) and the top Australian share fund, NGS Super, produced a 10 per cent return. See tables page 6.
Bresnahan says capital stable funds have benefited from a flight to US, German and Australian bonds. International shares have also contributed to some funds' profits, though the rising Australian dollar has taken the edge off those returns for funds that don't hedge their currency exposure.
The SuperRatings tables show the top international share options have recorded stellar returns in the past year - as high as 11.1 per cent - though the GFC still has most funds in the red over the past three to five years.
However, the extent to which funds benefited from the recovery in overseas markets has depended on their currency hedging. SuperRatings says the MSCI World Index's return over the past 12 months was 12.36 per cent, after hedging against a rising Australian dollar. But the unhedged version of the index returned 4.25 per cent.
Bresnahan says most funds in the SuperRatings survey partially hedge their currency exposure, typically 26 per cent to 50 per cent of international portfolios.
The head of investment consulting for Mercer, Graeme Mather, says many funds have reduced their level of hedging to about 35 per cent to take advantage of a potential winding back of the Aussie dollar. This has taken gloss off returns but may pay off if the dollar depreciates.
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