Amateurs make off with the honours

Industry fund REST had the best performance over the past seven years. Its flagship Core Strategy investment option produced an average annualised return of 7.6 per cent. Photo: Andrew Quilty
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The self-managed superannuation fund sector is growing fast, with more than 500,000 funds and one million members.

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Many people like to have control over how their retirement nest egg is invested.

There is some evidence that trustees of DIY funds are able to do better than large funds, on average.

Their returns, at least as reported by trustees of DIY funds themselves, are impressive.

Over the five years to June 30 this year, trustees of DIY funds that are still in the accumulation phase report an average annualised return of 10.6 per cent.

On SuperRatings’ numbers, the typical balanced investment option run by the 50 largest superannuation funds produced an average annual return of 9.1 per cent over the same period.

The DIY fund returns are those as reported by a sample of DIY fund trustees to researcher CoreData rather than official, audited numbers and so should be treated with some caution.

Andrew Inwood, managing director of CoreData, says there is a tendency for DIY fund trustees to overestimate how well they have done. He also says there is a very wide spread of returns.

He says it should not be surprising that DIY funds performed better over five years given that most have a strong bias to the bigger listed Australian shares that pay good dividends.

However, Australian shares, including dividends, returned 5.7 per cent for the year to June 30.

That is substantially down on previous years, when Australian shares returned 17 per cent over the year to June 30, 2014 and almost 23 per cent in the year to June 30, 2013.

DIY funds are underinvested in global shares. Yet, over the past year to June 30, overseas shares, including dividends, returned 19 per cent over the year.

The typical balanced option has about 20 to 30 per cent of its money invested in global shares.

The millions of members of large funds enjoyed another good year of returns for the year ending June 30.

Despite the flare-up of the Greek debt crisis in the dying days of the financial year, which saw sharemarkets around the world tumble, the typical balanced investment option, where most people have their super, returned 9.6 per cent.

It would have been even higher, but the typical balanced investment option lost more than 2 percentage points over the month of June.

“Although market volatility in June prevented most funds from producing double-digit growth over the year, the 9.6 per cent return is still an impressive result,” says Jeff Bresnahan, the SuperRatings founder.

“This is the sixth consecutive [financial] year of positive results, with annual returns during this period averaging 9.2 per cent,” he says.

Strongly performing overseas shares were the main contributor to this year’s result. Balanced options, where most people still working have their super, have between 20 and 30 per cent allocation to international shares. Top performers

The typical balanced investment option has produced an average annual return over the past seven years to June 30, 2015 of just under 6 per cent.

Industry fund REST, which covers retail sector workers, but is open to anyone, has the best performance over the past seven years to June 30 this year. Its flagship Core Strategy investment option produced an average annualised return of 7.6 per cent.

Telstra’s Super Corp Plus Balanced option, the fund for Telstra employees, is second with an average annual return of 7.2 per cent over the seven years.

In third place is UniSuper’s accumulation balanced option with an average annual return of 7.1 per cent over the seven years. Its returns are remarkably consistent, coming in at the top of the league table over all time frames.

UniSuper is the not-for-profit fund for workers in the higher education and research sectors. The investment option has a bias towards quality Australian shares that pay tax-effective dividends. The long term

Although we have had six consecutive positive financial years, Warren Chant, co-founder of researcher Chant West, says fund members should not assume that the good run will last forever.

“[Super] really is a lifetime investment and there will be good times and bad times along the way,” Chant says.

“The returns of the past few years have been unusually good, but you shouldn’t start to think of them as normal,” he says. “You have always got to remember that superannuation is for the long term.”

As most people will eventually convert their super into income streams the investment period is longer than their working lives.

“What’s important is to know what your fund’s objectives are and whether they’re achieving them,” Chant says.

The typical return objective is to beat inflation over rolling five-year periods of 3.5 percentage points a year, on average, after fees and taxes.

Since the start of compulsory superannuation in 1992 the typical annualised return is 8.1 per cent.

Over that period inflation has averaged 2.6 per cent, so that the real return above inflation has averaged 5.5 per cent a year – above the return objectives of funds.

Of course, returns are only a part of the story, as most funds have risk objectives also. Typically, that will be not to produce more than one negative year every five years, on average.

Warren Chant says since 1992 there have been three negative years, though a further two years were only marginally positive.

As that is less than one year in seven, the risk objective has also been met, he says. Not-for-profit dominates

Not-for-profit funds, such as industry funds, tend to dominate the top end of the performance league tables.

Over the longer term, industry funds have outperformed “retail” funds – such as those run by the banks and insurers.

Chant West data shows over the 15 years to June 30 this year industry funds produced an average annual return of 6.9 per cent, compared with retail funds’ return of 5.8 per cent.

That is an outperformance by industry funds of 1.1 percentage points.

That may not seem like much. Recent research by AustralianSuper shows that over a working life, even a small difference in fees and charges is likely to make a huge difference to the size of a worker’s retirement payout.

A worker on average wages could have almost $100,000 less at the point of retirement by earning a return that is one percentage point lower.

A return of only half a percentage point less will cost the worker more than $50,000, or 10 per cent, of their super balance at the point of retirement.

Industry funds have higher allocations to so-called “alternative” investments.

These are unlisted assets that include private equity, unlisted property and unlisted infrastructure which have performed well.

“Over the longer term the asset allocation policies of industry funds have served them well,” Chant says.

“Those allocations to unlisted assets do mean slightly higher investment costs, but those extra costs have been more than justified by the better performance and lower volatility,” he says.

Industry funds have also been more prepared to shift away from their longer-term target asset allocations, Chant says.

They may, for example, decide to reduce some of their allocation to shares if they consider the shares to be overpriced.

“Retail funds have followed suit in recent years with a greater appetite for alternative assets and a more active approach to asset allocation which has seem them narrow the performance gap,” he says. DIY not for everyone

Self-managed super funds can be well suited to those with higher account balances who are prepared to put in the effort and shoulder the responsibility of running their own fund.

A DIY fund trustee is responsible for running the fund and that responsibility cannot be outsourced to someone else.

Each year the fund must lodge a tax return, report member contributions, regulatory information and pay an annual supervisory levy.

They are also required to have financial accounts and statements audited each year, prior to lodging a tax return.

DIY funds are more cost effective, the greater the amount of money in the funds.

The Australian Securities and Investments Commission said recently there would want to be good reasons for anyone starting a fund with less than $200,000.

In recent guidance to those advising on SMSFs, the regulator said that starting a balance of $200,000 or below is “unlikely to be in the client’s best interests”.

Large industry funds have costs of about 1 per cent, or less, of their members’ account balances, which is the benchmark.

Estimates vary, but a couple probably need around $500,000 between them to keep the costs down to the 1 per cent considered the benchmark for super fees.

Financial planner Olivia Maragna of Aspire Retire says a high-income couple maximising their salary sacrifice contributions could start with a lower amount, as it would be expected to build quickly.

Large funds are doing more to retain those of their members considered to be “at risk” of starting out on their own.

For example, many large funds allow members to buy direct shares and also exchange traded funds (ETFs), which track all manner of indices and prices and are listed on the Australian sharemarket.

ETFs cover overseas sharemarkets, commodities markets and fixed-income markets, among other markets.

According to researcher SuperRatings roughly 40 per cent of fund members are in a super fund that offers direct investments.

Because super funds bring scale to investing directly, the costs of making the investments, such as the brokerage on buying and selling shares, tend to be lower than outside of super.

That is even after allowing for the typical annual administration fee of about $200 to $300 for the direct investment service.

Life insurance is also usually cheaper if bought through a large super fund with automatic acceptance.

That is believed to be one of the main reasons why many DIY super fund trustees retain some of their super savings in a large fund.

As the Australian Securities and Investments Commission (ASIC) points out, DIY funds fall outside the government protections that are available to members of large superannuation funds, such as compensation in the event of theft or fraud.

Also, dispute resolution mechanisms, such as the Superannuation Complaints Tribunal, are not available to SMSFs.

As ASIC points out, the types of disputes and complaints that may arise for SMSF investors may be different from large funds.

Access to other complaints services which are free to consumers may be available to SMSF investors such as the Financial Ombudsman Service and the Credit and Investments Ombudsman, depending on the nature of the complaint. Action planSuper is all about the long term. A fund’s performance should only be judged over long periods of time.Even seemingly small differences in returns make a big difference to the size of the nest egg at the point of retirement.Performance is important, but also check on the insurance cover and whether the fund offers an adequate range of investments for your needs.Self-managed superannuation funds can be well suited to those prepared to put in the effort and shoulder the responsibility – but they are certainly not for everyone.

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