It's that time of the year when everyone should be checking their superannuation affairs - is your asset allocation what it should be?, what are the fees?, do you have the right level of insurance coverage? and what are the actual investments within the fund?
The Australian Financial Review clearly believes it's that time with their lead story over the weekend - Time to Sack Your Super Manager? The article, written by Barrie Dunstan, highlights that many superannuation investors will be looking at negative returns for the first time since 2002. It has been a fantastic run of returns since then but the history of how share markets have performed tells us that there was going to have to be a break in the run at some point and it seems 2007-08 has been that break. Some fund managers may have fluked timing when this pull back was going to occur but the research suggests that very few active investors can accurately time markets. As a consequence, there really should be no surprises with the rotten share market performance since November both here and overseas. However, I guess many superannuation investors are not actively involved in the investment world and it may not immediately translate to them that the falls in share market values being reported in newspapers and on television will actually mean a fall in superannuation returns.
So what should a superannuation investor do when they get their next statement or log on to their account via the web for the first time in a while?
Our first suggestion is that you should check your asset allocation. If your portfolio has fallen and you are uncomfortable with this fall it may be that you are better suited to a more defensive asset allocation - more cash and fixed interest (term deposit) style investments and less share investments. However, you also need to keep in mind the long term nature of investments in superannuation. It is a very long term investment, for many not just until retirement but well into retirement and even continuing on after your death. Not until you actually draw down from superannuation do you start realising any losses in your portfolio. The reality of how markets work tells us that share markets will bounce back with growth assets averaging around 6 to 7% above inflation (9 to 10% at current levels of inflation.) So be careful not to react in a knee jerk fashion and reduce growth asset exposure before weighing up the long tem nature of the investment. The key determinant should really be how much you need to have invested once you finish your income earning capabilities so as to draw an income to sustain your cost of living.
Unfortunately, understanding the asset allocation of your superannuation fund is not necessarily a simple task. A little trap that angers us is the misuse of "alternative" assets within the supposed defensive allocation of some fund managers. Many of these alternatives involve a lot more risk compared to investing in cash or traditional fixed interest securities such as government and corporate bonds. If you know that alternative asset strategies are being used it would be worth finding out more details from your superannuation fund.
Once you have dealt with the asset allocation of your fund, next step is to consider the fees that are being charged. Check the administration fees and investment management fees on the account. Unfortunately this does not provide the whole story. The AFR article provided a really interesting summary of the "sneaky trailing commissions" on a range of super funds provided to them by Super Ratings ranging from Nil to 0.66%. At least these come out of the investment management and administration fees that you are paying. A greater problem for some are the hidden hedge fund fees particularly from what are known as the Fund of Hedge Funds found in many superannuation investments. The AFR article provided an example whereby a gross return of 20% is whittled down to 11.7% in the hands of the investor. The total fees being 8.3% of which only 2.3% would be typically disclosed. i.e. 6 of the 8.3% of fees remain undisclosed.
This example suggests you should be checking with your superannuation provider as to whether there are any hidden fees that are not being disclosed, especially if you know, or suspect, that hedge funds are being used within a fund. A bit of a clue to this is the use of the term alternative asset class in the listing of asset allocation.
A third matter to consider is the amount and quality of insurance coverage you are paying for through your fund. This is a relatively complex issue beyond the scope of this blog but put simply, if your personal situation has changed over the year through increased / decreased levels of debt or other family / personal changes than it is worth considering whether your insurance coverage is still appropriate.
The final issue is consideration of returns. We believe that care should be taken not to solely base a decision on changing a superannuation account on investment returns. You can't do much about past returns and research suggests that they are not a good indicator of future returns as fund manager performance does not persist.
More important is to base your decision on whether the funds are being invested for the future taking into account the reality of how markets work. Take a look at our pages on Building Investment Portfolios and Our Research Based Approach for more details on this topic. The same fundamentals are applicable to superannuation investments.
In conclusion, now is a good time to be re-thinking your superannuation investment keeping in mind asset allocation, fees, insurance coverage and investment philosophy of your current fund and any alternative fund.