Australia’s best super funds: 2009

Low fees plus exposure to less volatile unlisted assets have cushioned industry super funds from the worst of the global financial crisis and helped secure their near dominance of the short list for super fund of the year, to be announced next month by SuperRatings.

Eight of the 10 finalists for the award are public-offer industry funds with the remainder being a public-sector fund and a corporate fund.

With their open membership, the short-list of industry funds for the fund of the year award provides an invaluable guide to anyone hunting for a top value fund in terms of performance, fees, insurance, member services and fund governance.

Broadly, markedly higher fees and a much lower exposure to unlisted assets have handicapped the returns of commercial funds during the GFC and over the longer term. Although industry funds have been revaluing downwards their unlisted assets, managing director of SuperRatings Jeff Bresnahan says the upturn in the listed markets suggests that there is not much more of a downwards revaluation of unlisted assets still to take place.

Bresnahan says it is clear why industry funds dominate the ranks of finalists for fund of the year: investment returns and low fees are the key drivers of retirement benefits. “It’s not rocket science,” he emphasises.

The industry fund finalists for fund of the year are, in alphabetical order, AustralianSuper, Catholic Super, First State Super, HESTA, HOSTPLUS, NGS Super, REST and Sunsuper. QSuper is the sole finalist from among public-sector funds. And Telstra Super is the only corporate fund finalist. No retail or corporate master trust has made the final cut.

It should be stressed, however, that many employees have joined large corporate master trusts as part of a large employer group that often negotiates fees deals that may be similar to those available from industry funds.

Here are our top strategies to help you choose the best super fund for your circumstances:

1. Look at funds used by the experts

Superannuation fund researchers will only hint – at most – about what type of fund they personally favour for their own super. But it is clear from conversations over the years that industry funds tend to rank extremely highly among their personal favourites.

2. Favour long-term strong performers

Ideally, choose a fund that has produced long-term returns in the first or second quartile, suggests Warren Chant, principal of fund researcher and consultant Chant West.

“However, there are a number of funds that we rate highly that are currently not delivering second quartile returns,” Chant adds, “as we haven’t yet seen the full impact of the GFC on the valuations of unlisted assets of many other funds.” (See strategy 12 for a longer discussion on this point.)

3. Compare like with like

A common error when comparing performance of funds is to compare portfolios with dissimilar asset allocations. A portfolio with, say, 80% of its assets in shares and property should produce very different returns to one with, say, 50% of its assets in these assets.

Tables produced by the super fund rating agencies provide a solid starting point for comparing fund performance but you should perhaps dig deeper by looking at the exact asset allocation of the funds on your short list.

4. Cherry-pick the best funds for you

There is a widespread push by much of the superannuation industry for members to consolidate their super savings into one super account. But wait. There are smart reasons why some fund members have their super spread between four or five funds – each fund picked for particular attributes or simply to spread the risks.

The extra cost of this cherry-picking approach to super is low. Generally, it just means paying administration fees to a number of funds instead of one. Industry super funds, for instance, typically charge administration fees of $50-$100 a year. It’s hardly a fortune.

And with most funds, investment management costs are based on a percentage of your super balance and therefore do not increase no matter how many super funds you join. (It should be emphasised that a few large funds do reduce the percentage charged for investment management to members with larger balances.)

However, your super savings should be large enough to justify being a member of multiple funds – it’s a waste of time and money given the duplicated administration fees if you only have, say, $50,000 or less in super.

The Australian Securities & Investments Commission (ASIC) encourages fund members with “little bits of super scattered around from various jobs that they are not really managing or tracking” to consolidate the money into a single fund.

But then ASIC adds: “‘If you have several accounts as part of a well-thought-out, do-it-yourself diversification policy, and you have worked out that the benefits are worth the costs, you could be doing a smart thing.”

It may suit your purposes, for instance, to split your super savings between large funds that:

• Enable members to hold direct shares. Industry funds that give members the option of selecting shares from the S&P/ASX 200 index include AustralianSuper, CareSuper and legalsuper.
• Allow members to choose from their own selection of fund managers. This option is available from only a few low-cost industry funds. Sunsuper members can choose from various external investment funds. And HOSTPLUS gives members the option of making their choice from 11 fund managers. (The ability for members to choose fund managers is, of course, a typical feature of retail and wholesale master trusts.)
• Have track records of excellent performance over, say, the past five years or longer and have investment procedures that you particularly admire. This performance may have been produced in a conventional balanced portfolio of 60-80% in growth assets with the remainder in bonds and cash. Perhaps such a fund could hold the largest percentage of your super savings, depending upon your circumstances.