The way the super industry tends to invest your money can be compared to tag wrestling, which more often than not involves third parties executing investment strategies on their behalf. While super funds make direct investment choices (such as shopping centres or other assets), most pick asset consultants and investment managers to pick stocks for them.
But regardless of how they invest your money, what unites all super funds are the underlying principles of investing and the foundations on which they operate.
For starters, superannuation exists to help Australians build long-term wealth.
One of the biggest incentives for super investing is the tax treatment.
While compulsory super guarantee (SG) contributions paid by your employer are taxed at 15% - not your marginal tax rate - investment earnings and withdrawals are tax-free once you reach preservation age (typically age 60).
So too are non-concessional contributions (money that’s already been taxed) with members currently entitled to make a (non-concessional) contribution of up to $360,000 (under the bring-forward rule) over three financial years or a standard $120,000 annual cap.
Know your fund
For the uninitiated, there are two main types of super funds, industry (aka not-for-profit) funds and (bank owned) retail funds.
The distinction is critical as the former tend to outperform their retail counterparts.
Much of this is attributed to their higher (20% and growing) exposure to unlisted infrastructure, unlisted property and private equity, versus retail funds which typically have less than 5% exposure.
Unless you nominate otherwise, you’re most likely in a ‘default super fund’.
Depending on the level of risk you’ve nominated, your default fund will have a pre-mix of investments around conservative, balanced or growth options.
Most people tend to have a balanced MySuper default product with between 60-70% invested in shares and property (aka risk or growth assets) and the rest in more defensive assets, like cash and fixed interest.
While they vary between funds, the indicative asset allocation range of a typical balanced default fund includes equities (15-75%), cash (0-65%), fixed interest (0-65%), real estate (0-20%), infrastructure (0-25%), commodities (0-15%), alternative assets – including unlisted property and private equity (0-25%).
As stripped-down, and lower cost super solutions, MySuper options were supposed to be easy no-frills (super) products for employers to offer their employees.
Basic features and a simple fee structure also make it easier for members to make meaningful peer-to-peer comparisons using ratings tables between MySuper products.
If you’re unclear what type of super fund you have, you owe it to yourself to find out, and preferably before you join. Equally important, if you do have a default fund, understand what it offers, and any other investment choices available.
Despite the market’s preoccupation with MySuper default super fund products, it’s important to remember that most super funds now offer more than a dozen-plus investment options.
If you want greater investment diversity than typically available via a default fund, you should either contemplate making these decisions yourself or choose investment options beyond the default My Super product.
Diversity helps offset volatility
What underscores the value diversity brings to a balanced fund is the defensive element associated with constructing a portfolio of non-correlated assets (with price movements that don’t impact each other).
For example, when growth assets underperform, they’re typically offset by more defensive asset classes thereby smoothing out overall performance and minimising negative returns.
Without exception, all funds recognise that getting members as close to their retirement savings objectives as possible means having a good (minimum 30-40%) allocation to risk assets like equities or property.
But given that super is a long-term investment, much of the risk/return element means getting fund members to feel comfortable with market volatility.
While shares consistently outperform other asset classes over time, volatility can make for a bumpy ride along the way, especially right now with tariffs, the Middle East wars and the threat of stagflation adding to economic uncertainty.
However, unbeknownst to super fund members like you, you’re effectively ‘averaging’ into your super via your SG contributions.
Rather than worrying about when markets fall, regular [compulsory employer] contributions to your super - which increase to 11.5% from 1 July – mean you’re constantly acquiring more units and thereby reaping the benefits of compounding returns as markets recover over time.
Given that markets don’t go up in a straight line, the axiom around ‘time in the market’ remains as valid as ever – even with Donald Trump in the White House.
While members can and do switch funds or investment options based on a knee-jerk reaction to headlines, they’re often worse off in the long run.
The bigger challenge for super funds is communicating performance to their members in a meaningful manner and getting them to understand market dynamics.
While most members stay in a default fund their entire lives, those over 55 – who might have 30-plus investing years ahead of them - may wish to consider ‘sequencing risk’ and gradually reverse the exposure to riskier into more defensive assets.
The fee impact on net returns
When assessing performance over the long-term, it’s also worthwhile not to overlook the impact fees can have on your super fund balance.
While total annual fees include administration and investment fees – typically referred to as a management expense ratio (MER), the latter (charged as a percentage of funds under management), tend to be the most significant component.
As such, they (investment fees) have a much greater impact on the net performance of your overall fund.
While it’s helpful to understand the total fees charged by a fund, there’s no clear correlation between fees and performance.
Investments are more than just about fees and it’s critical to think about the overall performance net of fees.
The average MER is between 0.8% and 1.2%.
That means someone paying 1% MER on a $100,000 super fund balance pays $1000 in fees annually.
While it may not sound excessive, paying more than the industry average does eat away at your long-term returns.
For example, previous research by an industry fund, Hostplus, estimates that total annual fees of 2% of your account balance, rather than 1%, could reduce your final return by up to 20% over 30 years.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
