Comparing superannuation - is yours out of balance?

As a financial adviser, I’m regularly asked “which is the best superannuation fund?”  Considering that many see superannuation as a significant financial investment given most contribute almost 10% of their annual income, it’s not surprising that people want to invest with a reputable fund providing steady savings growth.  This usually prompts a comparison between their current fund and others which, in my experience, focuses on two things; performance and fees.  Should be a simple exercise right?  It’s not.

Performance

We’ve all heard the adage “past performance is not an indicator of future performance”, but it’s one of the only measures we’ve got.  Comparing performance is tricky given it’s critical that results are compared over the same time period. Markets move quickly and returns can vary significantly when you change the reporting period by as little as a few days.  Some super funds publish their performance daily, others monthly and some yearly, so make sure you line up the dates or the comparison will be useless. 

Apples with apples

Just as important as using the same timeframe is the need to compare like-for-like investment strategies.  Investors are unlikely to say bank shares are a “better” investment than term deposits even though bank shares will probably return more over time. Importantly, the risks are so vastly different it’s not a fair comparison.  The same goes with superannuation, a high growth investment option has a completely different level of risk to a conservative option so the returns are expected to be different.  This means that we can’t isolate performance as a measure to decide which fund is better or worse but rather look at performance relative to the degree of risk taken. This is where things start to get tricky. 

What’s in a name

Super funds will generally label their investment options to indicate varying risk levels, for example “conservative”, “balanced” or “high growth”.  Given the lack of industry-wide rules around what constitutes a certain risk profile, this is problematic as there have been instances where despite two investments having the same “name”, they have significantly different risk levels.    

A quick google search of some large industry super funds reveals a staggering variance in the exposure to growth assets and risk, in their common balanced investment options. 

Balanced Investment Option  Exposure to Growth Assets*
Rest Super 57%
QSuper 65%
Australian Super 79%
Sunsuper 87%
Host Plus 90%

*Growth assets include Australian international shares, property, infrastructure, private equity and growth alternatives. Asset allocations current as published on each super funds's website as at 24/01/19.

Exposure to growth assets isn’t necessarily a good or bad thing.  When markets are rising, investment options with greater exposure to growth assets should perform better, likewise when markets are falling, those same investment options have a greater risk of loss.  It’s important to consider this when comparing funds.      

Explaining this further, investment “risk” is accepted as the probability of a loss within a period of time (say 12 months).  Investments with a lower likelihood of loss (i.e. less risk) such as a bank account or bonds, are also less likely to grow in value over time.  Conversely, investments with a higher likelihood of loss (i.e. more risk) such as shares or property, are also more likely to grow in value over time.  This means that for an investment strategy to achieve a higher return, there needs to be a greater exposure to assets with the potential to increase in value over time, and therefore take on more risk of loss in the short term. 

Timing matters

Another important factor is identifying how frequently the investments in your super fund are valued.  Investments listed on a public exchange (e.g. shares) are valued almost daily, meaning that the prevailing share price reflects the latest information.  Conversely, some investments aren’t listed on an exchange (i.e. unlisted) but are subject to periodic valuations, usually half yearly or yearly.  This means that their returns are averaged over time and don’t have the same peaks and troughs of daily-valued investments.  Unfortunately, many super funds are yet to disclose the amount of unlisted assets in their investment options and this can make comparing returns difficult, particularly over shorter time frames.

Fees

After performance, I’ve found the second most common comparison point is fees.  The commonly held perception is that the lower the fees the better.  This would be true if all other variables were equal, the problem is that they’re not. 

What are you really paying for

As with performance the same goes with fees, it’s important to make sure you are comparing like-for-like and including the total costs, not just the headline administration fee.  For example, funds with a low administration fees may have higher insurance costs.  When comparing funds consider some of the more significant costs:

  • Administration fees;
  • Investment fees;
  • Insurance premiums;
  • Switching / exit fees; and
  • Advice fees.

It’s good practice to periodically review the costs of your superannuation account to ensure they represent good value for the products and services you are receiving, however don’t focus on price by itself to dictate your superannuation strategy.  The ultimate objective of superannuation is to provide a financial benefit when you stop work.  While costs will absolutely have an impact on your savings amount, so too will the investment returns you earn, the insurance payout you may receive, and the advice you get regarding contribution strategies and tax optimisation. 

Consider what’s most important to you

There are several other factors when comparing super funds, such as extra benefits, choice of investments, administration service and reporting, and the importance of each of these will vary amongst individuals.  Identifying the features most important to you and taking care to thoroughly research your options is important to making an informed decision.  Alternatively a financial adviser can work through the variables and help you decide on the best option which is suited and tailored to your situation.

Superannuation is complicated, but important.  For many Australians it will be their most significant financial asset. We regularly maintain our homes and cars so why aren’t we periodically checking our superannuation? 

Hamish Landreth, a Certified Financial Adviser®, has been helping his clients navigate their finances for over 10 years.  If you don’t want to go it alone and would like help reviewing your superannuation strategy you can contact Hamish at Prosperity Advisers on 07 3839 1755 or hlandreth@prosperity.com.au.