They say to never judge a book by its cover, but I’ve always found book cover art a fairly reliable clue to its contents.
But there’s one thing you should never do and that’s to judge a superannuation fund by its one-year return.
How do you compare the performances of super funds? Illustration: John Shakespeare
One-year returns grab the headlines partly because they’re simple but also because they’re volatile and that makes the story more exciting. For example, as reported last week, the average balanced option delivered 10.5 per cent in the 2017 financial year but only 2.8 per cent in the 2016 financial year, according to superannuation research company SuperRatings.
Most Australians are in a balanced option by default.
The super funds that make the top 10 in one year are not necessarily those that deliver the goods in the long run. There’s a lot of luck involved in investing in the short term.
The long-term results are rarely as exciting but this is what really counts. The best funds might be a few percentage points higher than average but even subtle differences of a few basis points add up over time, thanks to the magic of compound interest.
The tables (see bottom of page) show the top 10 super funds ranked by annualised returns during 10 years. Funds often prefer to cite a seven-year average to exclude the global financial crisis, which obviously makes them look better. The argument has merit if you regard the GFC as an anomaly, but I’ve gone with the 10-year returns because it’s relevant to look at how super funds perform in bad times as well as good.
Get the latest news and updates emailed straight to your inbox.
For example, the best-performing balanced option over 10 years is REST’s Core Strategy, but it was ranked only 19th in the 2016-17 financial year. REST is the not-for-profit fund for the retail industry, and has about 2 million members.
Investment is about a trade-off between risk and returns and investment through a superannuation fund is no different. Generally, the greater the likely returns, the higher the risk or volatility. Low-growth assets deliver steady returns, while high-growth assets are more likely to have good years and bad years.
SuperRatings defines the main investment options in super as: capital stable (20-40 per cent growth assets); conservative balanced (41-59 per cent); balanced (60-76 per cent); and growth (77-90 per cent). There’s also high growth (91-100 per cent) and secure (0-19 per cent) but these are less common.
Your super fund may have a plethora of options, with confusing names, but you can always look at the product disclosure statement to see the underlying investment mix. That means you can check whether your “sustainable future” option or “1980-1990 lifestage” option is a version of growth, balanced, conservative and so on. The younger you are, the more you’ll want to tilt towards growth as you have decades to ride out any volatility.
During the long term, capital stable funds are aiming to deliver inflation (CPI) plus 2 per cent, conservative balanced funds are targeting CPI plus 2.5 per cent, balanced funds are aiming for CPI plus 3 per cent, and growth funds have a more aggressive goal of CPI plus 4 per cent.
Inflation ran about 2.4 per cent during the past 10 years. The graph shows the annualised returns for the investment options and it’s notable that the performance is remarkably similar during 10 years. The GFC means only capital stable funds met their investment goal during the decade.
However, the past seven years had better investment returns and slightly lower inflation, and all investment options beat their investment goals in this period. Balanced super options have also outperformed their investment targets since the introduction of compulsory super in 1992.
The SuperRatings research looks at the 50 biggest funds (or the biggest 25 for some investment options). If you’re with a smaller fund, ask for your returns for variousperiods and then compare them with the average returns and the best in class.
But before you rush to change your fund or investment option, remember, one of the golden rules of investing is that you can’t predict performance based on past returns.
One thing worth looking for as a predictor of longer term performance is how well your super fund is prepared for the investment risk of climate change. This is not about politics, it’s about prudent financial management. Major regulators, including the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC), warn climate change is a serious financial risk.
The younger you are, the more important this is.
Looking at a sustainable investment option – with the right underlying investment mix for your risk profile – is one approach.
But you can also look at how the fund as a whole is managing the risk of climate change. The Asset Owners Disclosure Project ranks the 500 biggest asset owners in the world, mostly superannuation or pension funds, but also insurers and sovereign wealth funds, for how well they’re engaging with the issue of climate change, managing risk, and investing in low-carbon alternatives.
The 2017 report ranked Australian industry fund Local Government Super best in the world for this, while First State Super, the fund for NSW government employees, has improved from 12th in the world to third.
However, massive multi-industry fund AustralianSuper has slipped from seventh last year to 18th this year, losing its AAA rating. BT Financial Group has fallen seven places to 31st.
Again, it’s the long term that counts.
This Article Was Originally From *This Site*
Powered by WPeMatico