How to judge your super fund’s performance
When I ask people what their retirement dreams are, the answers tend to be simple. Most of us just want to have enough saved to live a comfortable life doing more of the things that we enjoy.
But for many of us, particularly women who take significant time out of their careers to care for others, the idea of living a comfortable retirement can seem more like a stretch target than a certainty.
It’s why if I were to hand you a crystal ball right now to help you make a decision about where to invest your super, my guess is that there’s one question you’re likely to ask first:
‘Which fund will have the highest returns, and grow my money the most, between now and when I retire?’.
Or perhaps, you’d ask:
‘Which fund that invests ethically and broadly in-line with my values will have the highest returns between now and when I retire?’.
Of course none of us, sadly, have a crystal ball.
So when it comes to making a decision about choosing a super fund, or any investment fund, we need to know what we should be considering with the information we have available now, to make a good decision about the potential performance of a fund in the future.
This information is important because small differences in the average performance of a fund, could add up to hundreds of thousands of dollars difference in retirement outcomes later in life.
It’s not overly complex to make a sensible decision about how a fund may perform. There are a few key factors to consider. But sadly most of us have never been taught a framework for evaluating potential performance.
It’s why the Banking Royal Commission found that many Australians are invested in poor performing super funds charging excessively high fees. And it’s why there is now such a strong focus on educating people about investment fees.
There is even a school of thought that simply choosing the fund with the lowest fees is likely to lead to the best performance. The world renowned investor Warren Buffet has famously instructed that when he passes away he wants the bulk of his money left in trust to be invested in low cost index funds. And in Australia, the Barefoot investor has sold millions of books showing every-day Australians how they can ‘save’ money by paying lower fees on everything from home loans to investment products.
But are fees really the golden panacea when it comes to making a decision about the future performance of an investment fund?
Well the answer is yes, and no.
I should premise the rest of this article with the disclaimer that I am the Co-Founder of a superannuation fund that charges below average fees for a ‘balanced ‘ product’, but has never been focused on offering the lowest fee product on the market as the best strategy for driving returns to our members.
I also believe that when it comes to financial information and resources, you should interrogate anything you read, and come to your own conclusions.
My view on why it is problematic to focus solely on fees to evaluate the potential performance of any form of investment fund, is that it’s a short-cut designed to get people out of the worst performing funds, but it’s not necessarily a good one for choosing the best performing funds.
And I certainly think that the average Australian is smart enough to be given a more sophisticated framework to work with.
What the data shows about fees and performance
There’s certainly a strong correlation between the worst performing super funds and the high fees they charge. For instance, a 2019 report produced by Stockspot showed that the ten worst performing funds charge their average member over 2% in fees, well above the average fees charged by the best performing funds. The same research showed that the top performing super funds generally have below average fees.
Yet, when we dig into the data further to determine if lower fees necessarily means higher returns, the water gets a little murkier.
For instance, research released last year by Superguide, based on independent superannuation data provided by Super Ratings, considered ten year performance history and showed that the top performing funds were not those with the lowest fees. For instance, the funds with the lowest, second lowest and third lowest fees, ranked 42nd, 107th and 61st out of 177 funds in terms of net returns to members over the ten year period. On the other hand, the fund that provided the highest net return to members after fees over the 10 year period, ranked 107 out of 177 funds in terms of fees.
Moreover, the research found that over the past ten years, the fund that actually provided the highest returns for members, charged over double the fees for someone with a balance of $50,000 compared to the lowest fee fund that only ranked 42nd in returns after fees.
In other words, choosing the cheapest fund available may prevent you from getting ripped off, but it’s unlikely to answer that question you asked that crystal ball: which fund will perform the best? And it’s certainly unlikely to answer the question of which fund will perform best based on your specific needs and risk profile.
That’s because there are a number of reasons that fees vary between funds, this includes that it typically costs more to have money invested in higher growth assets compared to having more money invested in more conservative investments, so funds often (but not always) charge a higher fee for options with more ‘growth’ focused investments.
So how do you evaluate which funds are likely to perform best?
To answer this question, I’m going to quote the sensible and unbiased advice on the Australian Government’s Money Smart website.
‘Compare your fund’s investment performance over at least five years. Consider the impact of fees and tax. Compare like with like. For example, only compare a balanced option with another balanced option, and try to use the same time period.’ – Money Smart, 2020.
Now I’ll break this down for you to show you how you can use this guidance to make an informed investment decision. Let’s start with the last part of this guidance, and talk about risk vs returns and why we need to compare ‘like for like’ products.
Understanding Risk Vs. Performance
When looking at performance it’s important to consider the risk profile of your investment. That’s because funds that typically target higher returns, also carry higher risk in years where the market performs poorly.
Investment options, in order of how much they are invested in ‘growth assets’ can include:
– Investment mix: around 85% in shares or property, and 15% in fixed interest or cash. Or 100% in shares or property for a ‘high growth’ option
– Returns: Aims for higher average returns over the long term. This also means higher risk of losses in bad years than would generally be experienced with lower risk options.
– Investment mix: around 70% in shares or property, and 30% in fixed interest and cash. Or 50% in shares and property for a ‘moderate’ option.
– Returns: Aims for reasonable returns over the long term, but with less risk of losses in bad years. Those losses usually occur less frequently than in the growth option.
– Investment mix: around 30% in shares and property, and 70% in fixed interest and cash.
– Returns: Aims to reduce the risk of loss and therefore accepts a lower return over the long term. There is less chance of having a bad year than in the Growth or Balanced options.
– Investment mix: 100% in deposits with Australian deposit-taking institutions or in a ‘capital guaranteed’ life insurance policy.
– Returns: Aims to guarantee your capital and accumulated earnings cannot be reduced by losses on investments.
Now here’s the tricky part. You can’t always rely on the name of a fund’s investment option to determine if it truly fits into the categories above and there can be significant variance. This is important and I will give you an example of why:
Imagine that there are two funds with the name ‘Balanced’ in the title, yet Option A has 50% invested in growth assets like shares or property and Option B has 80%. In years when the market conditions are good, Option B is likely to outperform Option A, but in years where the market turns downwards Option A is likely to outperform B. Over the long term, it’s likely that Option B will outperform Option A, but it also carries more risk with it. Because Option B has more money invested in growth investments and will likely outperform over the long term, this may also impact considerations around comparing fees between the two funds.
The lesson here is, to check on the information available on the super fund’s website, or read the PDS, to understand the true investment mix of each of the available investment options.
Similarly, you may also be interested in ‘ethical options’ and again here it is important to consider like-for-like products as there is no specification around what is and isn’t considered ‘responsible’, ‘ethical’ or even ‘green’, so make certain that you understand exactly where your money is invested if this is important to you.
You can read more about choosing the right investment option for you on the Australian Government Money Smart Website.
Once you know what investment option is right for you, and you understand how to find ‘like-for-like’ products to compare, then it’s time to check out how they are performing.
There are a few ways that you can compare the performance of various funds once you have selected some like-for-like investment options. You can take a look at each fund’s PDS which will list the target return for each investment option. You can then compare the target return with how these options have performed over the past 1 year, 3 year, and 5 year time horizons. This information should be reported by your super fund as the net return after variable fees and taxes have been taken out. You’ll usually find this information on the super fund’s website. It is also provided in the Annual Statement provided by your fund after the end of each financial year. Just be careful that you are comparing the correct like-for-like options.
Of course, it’s important to remember that past-performance is not always an indicator of future performance, so try to look at more than one indicator of performance.
Understanding how fees fit in
Take a look at the fees that the fund is charging, and ask yourself if those fees appear to be reasonable and justified based on the performance of the fund and the other services the fund provides.
If you’re in a super fund that is charging higher fees than comparable like-for-like options, and performing worse, it may be something you want to consider.
A note on ethics and performance
Ethical funds are one type of fund that tend to demonstrate that lower fees don’t necessarily equal higher returns. There is typically a cost associated with investing ethically, as undertaking the screening of ethical companies is an additional cost.
However, the average ethical investment option (when they are actually well screened ethical products, and not only ethical by name) are generally outperforming the market over the short, medium and longer term.
A final note on choosing the right super fund
Just remember, that there are other considerations outside of performance to consider when choosing the right superannuation fund or investment option for you, this may include ethical decisions about where your money is invested, as well as decisions around your risk profile and the type of insurances and other services being offered by the fund.
However, taking the time to consider how a fund may perform will support most of us to make a sensible decision about building our retirement savings over the long term, whatever our dreams of retirement may be.
This blog is published by Verve Superannuation Pty Ltd (ABN 65 628 675 169, AFS Representative No. 001268903), which is a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956, AFSL 238184), as the Sub-Promoter of Verve Super.
Verve Superannuation Pty Ltd and True Oak Investments Ltd are not licensed to provide personal financial advice. The information contained in this blog, including any financial guidance, is general in nature. You should consider seeking independent legal, financial, taxation or other advice to ensure that your financial decisions are suited to your unique circumstances.
You should read the Product Disclosure Statement, Additional Information Booklet, Insurance Guide, Target Market Determination and Financial Services Guide before making a decision to acquire, hold or continue to hold an interest in Verve Super. When considering financial returns, past performance is not indicative of future performance.