Despite a tumultuous year in share markets, superannuation returns for the financial year ended 30 June 2023 were above average. This is mainly due to a strong finish as international share markets rose by over 12% between mid-March 2023 to end of June 2023.
The best industry super fund was…
The table below sets out investment returns for the largest 8 industry funds based on Balanced investment options (which is defined as having 60% to 76% of your balance invested in growth assets). The table is sorted by 1-year returns for the financial year ended June 2023. I have highlighted the top return for the other periods in yellow.
Here’s the table for Growth investment options i.e., the investment option with the highest allocation to share markets.
Valuation of unlisted assets are not transparent
Over the past few years, I have written about how opaque industry super fund investments are. That is, there is virtually no reporting about what assets they invest in and how they are valued. Independent statutory body, the Financial Regulator Assessment Authority stated that the regulator had taken a reactive and immature approach to scrutinising the super funds’ valuation processes, putting Australians’ retirement savings at risk. The regulator has warned super funds that it will tighten its regulation of the valuation of unlisted assets.
The table below sets out how much super funds have written down commercial office tower investments (as published in by the financial press), for the reasons I wrote about in May here. As you can see, the write-downs vary significantly. This might be reasonable, as individual assets can perform differently, but it is impossible for me, as a financial advisory professional, to make an assessment as virtually no information is disclosed by the super funds.
In short, it is impossible to assess what industry super funds invest in and the inherent risk in their portfolios due to the lack of information i.e., there’s zero information.
The Albanese government has been winding back disclosure obligations
Last year, the Albanese government proposed two important changes to industry super fund disclosure rules.
Firstly, it was successful in removing the obligation for super funds to provide an itemised list of what they spend their marketing budget on and payments to unions. Industry super funds now do not need to disclose these details to members, only the aggregate amount spent. Apart from member education, I fail to see how advertising on TV or sponsoring union events helps boost existing members retirement savings. Surely members are entitled to know what super funds do with their money.
Secondly, the Albanese government wants to abolish the requirement for industry super funds to disclose political donations. Electoral Commission data confirms that super funds have donated over $85 million to political entities and associates over the past five years. As far as I could ascertain, this proposed change has received a lot of opposition from Greens, the Coalition, and independents, and I believe it hasn’t become law yet.
In summary, the ALP is seeking to weaken disclosure obligations and oversight, not improve them. I’m not suggesting anything untoward is going on. However, we know that problems thrive in the dark. Transparency and accountability are the best antidotes to avoid potential problems, especially given the importance of the $3.5 trillion super industry. The super industry must maintain complete independence from stakeholders with vested interests such as employers, political parties, unions, interest groups and so forth. Unfortunately, that is not currently the case.
Advantages of high-growth investment options
High growth investment options invest a greater proportion of your balance in listed share markets. There are two main advantages of this.
Firstly, the more you invest in listed markets the less exposure you have to unlisted investment assets and therefore the more confident you can be in their funds underlying performance.
Secondly, in the long run, growth assets such as listed shares have generated much higher returns than defensive assets such as bonds. Therefore, if you are a long-term investor (i.e., you are 50 years old or younger and therefore 10+ years away from being able to access super), then it is very likely you will be well rewarded for adopting an asset allocation that is likely to maximise your returns i.e., invest more in share markets.
The traditional wisdom in financial planning is to have a diversified asset allocation which gives you exposure to many asset classes and seeks to reduce portfolio volatility. Whilst doing this might reduce your volatility, it also it reduces your returns too. Therefore, if you can make friends with a higher level of volatility e.g., your super balance might rise and fall a lot from month to month, then in the long run, you will be much better off (1% to 2% p.a.) investing a greater proportion of your balance in shares.
There are two main exceptions to this. Firstly, if you don’t have the risk appetite for high volatility e.g., you lose sleep at night, then don’t invest in high growth. Secondly, for some people capital preservation is more important than investment returns e.g., if they are close to, or in retirement.
High percentage-based fees hurt those with balances over $500,000
The economic challenge that industry super funds face is that they have millions of members with relatively low balances. As such, they need to charge fees on a percentage basis, because members with low balances cannot afford to pay higher fixed fees. Consequently, members with high balances end up subsidising lower-balance members because they pay the lion’s share of investment costs.
Most industry super funds charge two fees. Firstly, an admin fee which usually comprises of a fixed weekly fee plus a percentage fee that is sometimes capped. Admin fees usually range between $200 and $1,000 p.a. in total.
Secondly, an investment fee which is almost always a percentage of your balance. The table below sets out the investment fees charged by the top-performing funds.
If you have a high super balance e.g., more than $500,000, you must aim to minimise percentage fees because in dollar terms, they can be substantial. For example, if you have $500,000 in super then 0.80% p.a. in investment fees equates to $4,000 p.a. As your super balances grows, you’ll pay more fees each year.
By comparison, our client portfolios are invested in low-cost funds and cost less than 0.30% p.a. (and have delivered historical returns greater than the average of the top 8 industry super funds listed above). This fee structure advantages people with higher super balances e.g., someone with $1 million in super will save over $5,000 p.a. in investment fees each year.
Fees are guaranteed. Investment returns are not.
UniSuper is the best fund
Overall, I think UniSuper is the best industry super fund because (1) its past returns have been very strong, (2) it invests the least amount in unlisted assets e.g., 94% of its high growth option is invested in listed shares, and (3) it has the lowest percentage-based investment fee.
However, of course, you must seek personalised financial advice before switching super funds as there may be many other important matters to consider which I haven’t discussed in this blog, such as insurances.
