Every year, I update my analysis of how to choose the best super fund in Australia. This year I have restructured it, and I think it is the most useful version yet.
The guide is no longer just a list of returns. It is built around a simple idea I think most people get backwards. Most people start with investment returns and asset allocation, comparing which fund topped last year’s table. That is the wrong starting point. The right starting point is structure, because the vehicle that holds your super determines how much control you have over your investments, how much tax you pay over time, and what your fees look like as your balance grows. Investment decisions can be revisited at any time within that structure. Get the structure right first, and everything else becomes far easier to get right too.
The full guide works through the four factors that should decide your structure, before you even think about asset allocation: transparency, tax effectiveness, cost, and flexibility. Only once those are settled does the guide turn to the investment decision itself, growth allocation, the Australian versus international split, and how your shares are constructed. Getting this order right matters more than people expect, because changing structure later can trigger tax consequences, while adjusting your investment option within a good structure costs you nothing.
Along the way, it covers some things most comparison sites will not tell you, including the lack of transparency around unlisted assets in some industry funds, why that matters more than it might seem, and how insurance can quietly get overlooked when people switch funds chasing a better return.
The guide also includes a free downloadable report with the current year’s fund comparisons and a step-by-step framework you can work through for your own circumstances.
You can read the full guide and download the report here: How to choose the best super fund in Australia.
Hi Stuart, thank-you for this comprehensive algorithm which provides food for thought for my 18 year-old son. As you say, small decisions compounded over 40 years can lead to big differences. I have one question regarding investment fees… you quote Vanguard as 0.21-0.23% but admin fees add another 0.33% on top of this! Do all funds charge similar for admin?
In most pooled funds, investment fees are charged as a percentage of the balance, so in dollar terms, they rise as your balance rises. However, administration fees tend to be structured differently. They are either a fixed dollar fee or a percentage fee that is capped. In Vanguard’s case, the maximum admin fee is capped at $990 per year. Therefore, since admin fees will become relatively immaterial over time (as the balance grows), it’s best to primarily focus on investment fees.
I understand that it’s difficult to compare apples with apples, but that cap assumes a balance of $300,000 which could take decades for an 18yo to reach.
Yes, absolutely. When a super balance is low, the factors that will have the greatest impact on building the balance are contributions and keeping fixed administration fees to a minimum, because investment returns have less influence in dollar terms. Therefore, someone just starting out may be better suited to a fund with low fixed administration fees, even if its percentage-based investment fee is slightly higher. A fund such as UniSuper may be more appropriate at that stage. However, as the balance grows, the reverse becomes true. Percentage-based fees become much more significant, as do differences in investment returns. At that point, switching to a fund such as Vanguard may become more attractive because minimising percentage-based fees and maximising investment returns have a much greater impact.
Thanks Stuart, is there a downside (tax or other) to switching later in life?
not a few switching from one pool product to another. Except for (insurance) which you need to be careful of, but it’s all in the report.
Hi Stuart, thanks for the comprehensive review of super options. I have been thinking of moving from an industry super fund to a wrap platform and that is the recommendation for me when following your flowcharts. But my main concern is current timing risk because I feel equity markets are overheated. I expect that industry super growth funds have not done as well as the equity markets because they have some exposure to unlisted infrastructure assets which might be a drag on returns when things are good but a good stabiliser when the market crashes. Have I got this right and can a wrap platform be used to manage the downside risks or is it just equity investing? Would I be switching at the wrong time?
Thanks for your kind feedback, Mark. You may be right that, if equity markets fall, a more diversified asset allocation could help cushion the impact on your portfolio. However, that is impossible to predict with any confidence and, in any event, it is a relatively short-term consideration. The central theme of my report is to encourage people to make decisions with a long-term perspective. Given that the risk you have identified is difficult to quantify and is unlikely to make a meaningful difference over a multi-decade period, I would not place too much weight on it.
Hi Stuart, my teenagers are about to enter workforce and start their 40+ years super journey. For them, would you recommend Vanguard High Growth with its simplicity or Member Direct with VDHD/DHHF (0.27vs 0.19% fee) (at the max 80% that AusSuper allows, rest in high growth option) ? AI seems to prefer a high growth pooled fund until balance grows to ~50k to lower the member direct fees impact. Then switching to member direct.
The answer ultimately depends on your preferences across four factors: cost, tax, transparency, and flexibility. That is why the report includes four separate flowcharts and 38 pages of analysis and supporting information.
Hopefully, this tool gives you enough information to make an informed decision. I am not able to provide any more personalised or specific advice beyond that.
Hi Stuart,
Thank you for sharing your valuable analysis of the Superannuation options and providing a simple structured flow chart decision making tool. One persistent gap I hear among Financial Advisors, is about the Index Share products many Industry Super Funds have that have extremely low fees. For example in Hostplus the fund I am with, there is an International Index pooled fund with a 0.03% fee, an Australian Index pooled fund with 0.02% fee, a High Growth Index fund (with Australian shares (41%), International shares (53%) and Emerging Markets (6%) at 0.03% fee. There are active share investment options e.g. International shares with 20% emerging markets and 80% international (with investment fee of 0.64%). My financial advisor recommended 20% in an active fund and 80% in the passive index option. However after your podcasts on the Australian Shares and International shares I have chosen to dial down my Australian share exposure to around 12-13%, International shares to around 81-82% and Emerging markets to around 5-6% but maintain 20% in active funds and 80% passive index funds through a mix of these available pooled funds. Whilst my balance is well over the $500,000, my US citizenship means I am reluctant to leave the Industry Funds for a Wrap Account because of how the US rules interpret these types of funds.
Could you spend some time one day assessing the pros and cons of using the Index Share pooled funds inside the Industry Super Funds. The fees are so incredibly low at around 0.02 to 0.05% that I really struggle see how a Wrap Account can compete and outperform with much higher fees, even if you can choose quality, value and equal weighted EFT funds that sometimes/often outperform the market cap index EFT funds. Does the outperformance offered by these funds really offer value over the very low fees of the Industry Super Fund Index Share funds despite the higher fee environment?
Thanks for the thoughtful comment. I’ve previously written about alternative rules-based index methodologies here: https://prosolution.com.au/alternative-rules-based-share-index-strategies/
It is a surprisingly difficult topic to discuss because whether an alternative index methodology is likely to outperform a traditional market-cap index depends heavily on the geographical market you are investing in and, importantly, the characteristics of that particular index.
For example, if a market-cap index is highly concentrated by sector, country or a small number of very large companies, or if parts of the index are trading at relatively expensive valuations, there may be more scope for an alternative methodology such as equal weighting, value, quality or another rules-based approach to add value.
I think a realistic expectation is that, in the right circumstances, these alternative index strategies might add perhaps 0.5% – 1% p.a. over very long periods. Of course, that will not occur consistently and there will be long periods when a traditional market-cap index performs better. There might be times when investing entirely in market cap indexing is, in fact, the best approach from a returns and fees perspective.
However, return is only part of the discussion. Alternative index methodologies can also reduce portfolio risk by improving diversification and reducing exposure to some of the concentration risks that naturally arise in market-cap-weighted indices.
The weighted average cost of our portfolios, which use a variety of indexing strategies, is around 0.30%. So really, we only need to be confident that this approach will produce excess returns of at least 0.30% p.a. We have high confidence that this will be the case.
Therefore, I wouldn’t assume that a wrap account will necessarily produce a higher net return simply because it provides access to more sophisticated portfolio construction. The case for using a wrap needs to be broader than that. It might include better diversification, greater control over asset allocation, tax management, investment selection and portfolio transparency.