Which would you prefer: a 7% or 12% return on your super?

It seems like a simple enough question. If you had a balance investment option in your super, would you choose a 7% or 12% return? Yet, before you decide it’s a no-brainer, it’s worth probing a little deeper into what could cause this 5% variance, as the reporting returns are not standardised.

Let me explain.

Using the mortgage industry as an example, when you consider look at taking out a home loan, the lender will normally quote two interest rates. The first is the principal interest rate, which might be around 4.86%. However, right next to it will be the ‘principal and interest comparison rate’, which might be around 5.25%.

You might reasonably ask, what do home loan interest rates have in common with superannuation?

Well, home loan providers have historically been really great at disguising the real cost of a mortgage. Even today, they might advertise a very cheap interest rate, but then they load up the product with fees throughout the life the loan, or top and tail it with some expensive loan application or exit fees. A comparison rate was introduced as a way for loan applicants to quickly determine the total costs of a loan, by factoring in most of the fees and charges incurred during the life of the loan. Essentially, it allows lenders to easily make an informed, like-for-like comparison of the true costs of this financial product.

The issue with superannuation is there is no standardised reporting or common ground. Personally, I believe that for the ‘Mysuper’ option, standardised reporting is well overdue. The government introduced these low-cost, default investment products were introduced into the superannuation industry to enable consumers to easily select which investment option might be best for them, given a range of variables.

So, getting back to the 7% or 12% question; it is important that you understand the drivers for such discrepancies. It’s probably time that government decided to introduce changes to avoid the barely disguised tricks of superannuation funds, such as calling a product a ‘balance fund’, but investing the assets at a growth asset allocation (refer to our recent article, Could Your Hostplus Index Balanced Fund be a disappointment?). They might also provide a great return, but then hike up the administrative fee structure and other costs that might not be reflected in the net return reported.

So, similar to the mortgage industry, super funds get up to a number of shenanigans. For financial professionals and expert investors, these are often easily spotted, but to the majority of average, day-to-day investors, it is a bit of a minefield.

I feel that the idea of a comparison rate return is a sensible approach, as if super funds are over-inflating an investment option with risky assets, they would be required to standardise the returns. ASIC and/or APRA could set strict formulas between growth-based assets and defensive assets.

In addition, all funds would be required to adjust their reported return as if the asset allocation was a true balanced investment, which would be 50/50 between growth-based asset to defensive assets. This would mean that investors would have a fairer way to assess the true merits of a super fund, and also be able to have a sensible discussion on their overall net return.

Until this occurs, however, investors will continue to be bamboozled by the returns offered by super funds.

Before selecting an investment option or super fund, it’s important that you seek suitable advice from a qualified, practising financial planner and, of course, I recommend AJ Financial Planning. Contact us today.

Could your Hostplus Index Balanced Fund be a disappointment?

Around $2.5 billion has reportedly flowed into the industry super fund Hostplus in recent times. This influx of funds has largely been on the back of media commentators promoting Hostplus, in particular its Hostplus Index Balanced Fund.

My understanding is that the main thrust for this investment boost was on the back of lower fees and the merits of index investing.

We recently had a client who, after reading media commentary, wanted to move their funds from another industry super fund into the Hostplus Index Balanced Fund. Their existing fund’s fees were 0.19%, while the Hostplus Index Balanced Fund was reportedly charging a low-cost fee of 0.07%. But was switching funds the right decision?

Does the argument start and finish with fees and does index investing mean a better result? To get an overall picture, let’s compare the performance of the Hostplus Balanced Fund compared to the Hostplus Index Balanced Fund. As both are reportedly ‘balanced’ funds (refer to our article ‘Industry funds headed for an asset allocation disaster’ https://www.ajfp.com.au/2017/07/17/are-industry-super-funds-headed-for-an-asset-allocation-disaster/), if these products are true to label, then it should be a fair comparison.

At the time of writing this article, the Hostplus website reported the following performance returns, net of all investment and administration costs.

It is important to note that historical performance is no guarantee of future performance. However, over time it might given an indication of the level of competence of the fund’s managers and the soundness of their investment strategy. Unfortunately, 10-year figures were not available for the Indexed Balanced Fund and are therefore not included. But I believe seven years is a reasonable timeline to afford some sensible analysis.

If low fees are the only matrix for success, then why is this not reflected in the end result – net performance over the longer term for the investor?

In fact, over the shorter, three-year period the performance variance between the two funds was 2.71% p.a. So while investors saved 0.99% in fees, they potentially gave away 2.71% in returns. Assuming a super balance starting point of $100,000, if this variance continued at its present pace, over an investor’s working life it could result in a total loss of return of around $171,839.

In short, when considering investing in a superannuation fund, you need to factor in all the elements. At a minimum, these include the ongoing costs of the fund, and the net return on a like-for-like basis. There are plenty of low-cost super funds around, but very few actually produce a decent return. And while performance is difficult to gauge, competence and quality of management can sometimes be illustrated over the longer term.

Like all sound investment decisions, it is important to seek professional guidance from a practising financial planner. Contact AJ Financial Planning today for a chat.