September 2009
By Michael Laurence from
smartcompany.com.au
Low fees plus exposure to less volatile unlisted assets have cushioned industry super funds from the worst of the global financial crisis and helped secure their near dominance of the short list for super fund of the year, to be announced next month by SuperRatings.
Eight of the 10 finalists for the award are public-offer industry funds with the remainder being a public-sector fund and a corporate fund.
With their open membership, the short-list of industry funds for the fund of the year award provides an invaluable guide to anyone hunting for a top value fund in terms of performance, fees, insurance, member services and fund governance.
SMEs warned: touch your super early and face jail
Broadly, markedly higher fees and a much lower exposure to unlisted assets have handicapped the returns of commercial funds during the GFC and over the longer term.
Although industry funds have been revaluing downwards their unlisted assets, managing director of SuperRatings Jeff Bresnahan says the upturn in the listed markets suggests that there is not much more of a downwards revaluation of unlisted assets still to take place.
Bresnahan says it is clear why industry funds dominate the ranks of finalists for fund of the year: investment returns and low fees are the key drivers of retirement benefits. "It's not rocket science," he emphasises.
The industry fund finalists for fund of the year are, in alphabetical order, AustralianSuper, Catholic Super, First State Super, HESTA, HOSTPLUS, NGS Super, REST and Sunsuper.
QSuper is the sole finalist from among public-sector funds. And Telstra Super is the only corporate fund finalist. No retail or corporate master trust has made the final cut.
It should be stressed, however, that many employees have joined large corporate master trusts as part of a large employer group that often negotiates fees deals that may be similar to those available from industry funds.
Here are our top strategies to help you choose the best super fund for your circumstances:
1. Look at funds used by the experts
Superannuation fund researchers will only hint - at most - about what type of fund they personally favour for their own super. But it is clear from conversations over the years that industry funds tend to rank extremely highly among their personal favourites.
2. Favour long-term strong performers
Ideally, choose a fund that has produced long-term returns in the first or second quartile, suggests Warren Chant, principal of fund researcher and consultant Chant West.
"However, there are a number of funds that we rate highly that are currently not delivering second quartile returns," Chant adds, "as we haven't yet seen the full impact of the GFC on the valuations of unlisted assets of many other funds." (See strategy 12 for a longer discussion on this point.)
3. Compare like with like
A common error when comparing performance of funds is to compare portfolios with dissimilar asset allocations. A portfolio with, say, 80% of its assets in shares and property should produce very different returns to one with, say, 50% of its assets in these assets.
Tables produced by the super fund rating agencies provide a solid starting point for comparing fund performance but you should perhaps dig deeper by looking at the exact asset allocation of the funds on your short list.
4. Cherry-pick the best funds for you
There is a widespread push by much of the superannuation industry for members to consolidate their super savings into one super account. But wait. There are smart reasons why some fund members have their super spread between four or five funds - each fund picked for particular attributes or simply to spread the risks.
The extra cost of this cherry-picking approach to super is low. Generally, it just means paying administration fees to a number of funds instead of one. Industry super funds, for instance, typically charge administration fees of $50-$100 a year. It's hardly a fortune.
And with most funds, investment management costs are based on a percentage of your super balance and therefore do not increase no matter how many super funds you join. (It should be emphasised that a few large funds do reduce the percentage charged for investment management to members with larger balances.)
However, your super savings should be large enough to justify being a member of multiple funds - it's a waste of time and money given the duplicated administration fees if you only have, say, $50,000 or less in super.
The Australian Securities & Investments Commission (ASIC) encourages fund members with "little bits of super scattered around from various jobs that they are not really managing or tracking" to consolidate the money into a single fund.
But then ASIC adds: "'If you have several accounts as part of a well-thought-out, do-it-yourself diversification policy, and you have worked out that the benefits are worth the costs, you could be doing a smart thing."
It may suit your purposes, for instance, to split your super savings between large funds that:
Enable members to hold direct shares. Industry funds that give members the option of selecting shares from the S&P/ASX 200 index include AustralianSuper, CareSuper and legalsuper.
Allow members to choose from their own selection of fund managers. This option is available from only a few low-cost industry funds. Sunsuper members can choose from various external investment funds.
And HOSTPLUS gives members the option of making their choice from 11 fund managers. (The ability for members to choose fund managers is, of course, a typical feature of retail and wholesale master trusts.)
Have track records of excellent performance over, say, the past five years or longer and have investment procedures that you particularly admire. This performance may have been produced in a conventional balanced portfolio of 60-80% in growth assets with the remainder in bonds and cash.
Perhaps such a fund could hold the largest percentage of your super savings, depending upon your circumstances.
5. Compare funds on your short list - for free
Most fund researchers charge a fee to allow members to compare super funds performance and services in details. But here's a way to get such a comparison for nothing.
Fund researcher Chant West, for example, charges $55 to compare three super funds at a time using its superb AppleCheck service. Fortunately, super funds are increasingly offering AppleCheck on their websites for free. These funds include HOSTPLUS, First State Super and AustralianSuper.
AppleCheck covers the broad points you probably want to examine when comparing funds. These include: investment returns of popular investment options from one to five years; fees for investment management and administration; and insurance options and costs.
The service also looks at the quality of fund administration and member services (analysing the funds' help desks, member education, availability of financial planning, ability to make binding death benefit nominations and availability of transition-to-retirement pensions).
You can tick off the points that are of most importance to you, which would probably be headed by returns, fees and insurance.
Unfortunately at the time of writing, AppleCheck only provided returns to December 2008.
SuperRatings has a fund comparison service called RateMyFund, which some funds, including MTTA, provide free on their websites.
6. Don't pay for unused advice
Most retail funds have commissions for financial planning advice built into their fees - whether or not the advice is used by a member. If you are not using the advice, why pay for it?
The cost of unused in-built financial planning advice can act as a big handicap to fund returns.
Some retail funds give members the choice of opting out of being charged in-built commissions for investment advice.
7. Don't pay for unused investment choices
A fundamental difference between commercial master trusts and industry funds is the number of investment options. Master trusts generally have a huge variety of investment options whereas industry funds have only few. And the bottomline is straightforward: the more investment options, the higher the fees - whether or not you use even a few of them.
Between 80-90% of large fund members are in their funds' premixed default options and would rarely even think about making their own investment choices.
8. Identify top insurance deals
Consider super funds offering top insurance deals to members in your circumstances.
For instance, SuperRatings reports that netwealth, Catholic Super and NGS Super are generally providing among the best deals in death and total disability insurance at this time. And SuperRatings likes how REST Superannuation has revamped its death and total disability insurance so the amount of cover changes as members age and their insurance needs change.
In short, under REST's Life Stage approach to insurance, death cover begins with a lower level of coverage when members are young and then automatically increases as their obligations presumably increase - but then the level of cover reduces again as they reach the next stages of their lives.
9. Avoid medical checkups - if eligible
Members who join a new fund as an individual rather than as part of an employer group sometimes have to undergo medical assessments before being accepted for insurance cover. This can be a real trap that is often overlooked when members swap funds.
Fortunately, some industry and commercial super funds offer a reasonable level of cover to new members without insisting on medical assessments. For example, legalsuper offers new members up to age 45 $440,000 in death and permanent disability insurance without a medical assessment.
10. Avoid insurance danger zone
This can occur if you change super funds but perhaps because of an existing medical condition cannot gain death cover in the new fund (see strategy nine). One way to sidestep this insurance trap is to leave just enough of a balance in your old fund to maintain insurance cover while you try to gain cover with another fund of your choosing.
11. Take note of new super funds to watch
SuperRatings names its favourites among the best new super funds as - AMP Flexible Lifetime Super Easy (aimed at members under 50 who have under $100,000 in super as well as the self-employed, there are no adviser commissions, very competitive fees and a simple online approach); Individuum (fully web-based, easy to understand, competitive fees, solid investments, good insurance offerings and aimed at younger members); and Suncorp WealthSmart (10 funds rationalised into one to simplify super for members and improve value for money).
12. Be aware but not unduly concerned about unlisted assets issue
A debate currently being conducted in superannuation is the possible effect on some industry funds of the downwards revaluation of their unlisted assets. Members should make themselves informed on the issue - especially when looking for a possible new fund or evaluating their existing one.
The valuations of unlisted assets - which include unlisted property, unlisted infrastructure and private equity - didn't move downwards nearly as rapidly as listed assets during the GFC as discussed earlier in this feature.
"Industry Funds typically have a much higher weighting to unlisted assets than retail funds - 28% versus 9% based on Chant West's strategic asset allocation survey for June 2009," says Warren Chant of Chant West.
"Unlisted assets have been an excellent source of returns for industry funds", says Chant. But he believes the maximum exposure to unlisted assets should be no more than 25% or 30%, as they are not liquid and can be difficult to sell if the fund needs cash to pay members' benefits.
"Members need to be aware that while listed assets fall quickly in response to market conditions," Chant says, "there is a time lag for unlisted assets to respond to changing conditions."
While listed markets had fallen from November 2007, the valuations of unlisted assets generally only began to fall in the December quarter of 2008. Since that time, most industry funds have shown downward revaluations of 10-20% in their unlisted assets, and there may be more to come, warns Chant.
He says that while members of most funds should not be unduly concerned about the issue of unlisted assets, they should ask their funds:
How much exposure does your fund's default investment option - used by about 90% of fund members - have to unlisted assets? This can range from 2% to 70% in the case of industry funds, and from 0% to 23% for retail master trusts.
"A lower allocation to unlisted assets means of course, that you will be less affected by any further downward valuations," says Chant.
How often are your unlisted assets valued? "In the current environment it is not good enough to simply value each asset once a year," says Chant. "Major assets need to be valued at least quarterly in the current environment."
To what extent have your fund's unlisted assets been re-valued downwards in the last 12 months? "Any funds that haven't reduced the value of their unlisted assets by 10-12% in the 12 months to June 30 are likely to experience more falls in values during the coming months," according to Chant.
This article first appeared on SmartCompany.com.au, Australia’s premier site for business advice, news, forums and blogs.
