Episode Details

Despite the share market volatility as a result of Covid-19, all major industry super funds produced a positive investment return over the past financial year. Whilst that might seem entirely good news, there are some concerns for which industry super fund members should be aware of.

Let’s start with the good news first

I have compared the largest 8 Australian industry super funds. According to data collated by our research provider, Lonsec (SuperRatings), Cbus produced the best returns in the 2019/20 financial year. However, AustralianSuper produced the best long term (10 years) return, although there not a big difference between the top 3 funds (Hostplus, UniSuper and AustralianSuper). I have compared the investment options with similar levels of growth assets – but more on this below.

Of course, longer term returns are what is most important. It is not always possible or even desirable to produce the best returns each and every year. Sometimes a fund has to take too much risk to do so.

Investment returns are important for marketing

There is no better marketing than achieving the highest investment return as it attracts a lot of new superannuation members.

I was very interested to read this article in the Australian Financial Review about Hostplus’ balanced option. For the financial year up until May 2020, it had lost 3.5%. However, as timing would have it, on 29 June 2020, the Fund decided to revalue its unlisted property 6.8% higher. This resulted in halving its its Balance options loss to -1.74% for the financial year. How convenient. I discuss my concerns with respect to transparency and accountability below.

There are a number of ways a super fund can window-dress its returns including revaluing unlisted assets and changing the asset allocation i.e. being more or less aggressive than the desired allocation of the investment option.

Fees vary substantially between funds

If your super balance is relatively low, fees (and contributions) matter more than investment returns. However, as your balance grows (and certainly if your balance is above $250,000), investment returns become the most important factor.

Out of the selected funds, First State Super (FSS) charges the highest fees for its balanced option at 0.95%, whereas UniSuper is much cheaper at 0.53%. That is, UniSuper’s fees are nearly half as much as FSS, and that is likely to have a substantial impact on your balance over time.

Importantly, you do not have to pay higher fees in order to generate higher investment returns. You will note that UniSuper is the most inexpensive fund with close to the highest returns while for FSS, the reverse is true. The less you pay, the more you receive.

Concern 1: Some funds invest more aggressively it appears

Pre-mixed investment options allow you to invest your super in a way that is commensurate with your risk appetite. If you are conservative, then you must select a conservative investment option. However, if you are aggressive, then a ‘growth’ or ‘high growth’ investment option might suit you. And if you are in between, like most people, a ‘balanced’ investment option is the way to go.

However, most ‘balanced’ options are not really that balanced. Instead, their asset allocation is closer to growth. The reason for this is they are chasing higher investment returns, to make their fund appear more attractive.

You might be surprised