Which is the best super fund? Which fund will provide you with the best rate of return, and how do you decide between the thousands of options on offer?
In this post we are going to look at the recent results form a group of major superannaution funds, and determine just who is “the best”. If this article looks wordy then i apologise BUT superannuation is one of the largest investments most Australians will hold in their lifetimes, and the current marketing rubbish being spruiked by fund managers, “industry funds”, self-managed super fund promoters and everyone in between highlights the superficial approaches being taken to this matter. Interpreting super returns is important, and not something that should be worked out on the basis of television commercials or patronising marketing campaigns or two minute sound-bytes. It isn’t impossible for the non-financial person to get a grip of the basics but it does involve investing a little bit of time. So grab a brew of your favourite bevvy, shut down those other tabs that have Facebook and your home banking open, and focus for a wee while on the issue of comparing superannuation funds.
Superannuation is an incredibly complex area when considered as a whole BUT there are steps that anyone can take to gain a better understanding of what is happening with their money and what alternatives are in the offering.
Super Fund Returns
Our focus in this post is not the administration of a super fund, nor the insurance costs or the range of insurance options. It is not the custodianship, management nor the internal taxation treatment. We will ignore the provision of in-house advice, the role of financial advisors and the relative merits of self-managed super funds versus public offer funds. In fact, we will distill our initial foray into finding the best super fund down to one simply point – investment returns.
Now let’s accept up-front that this is an incredibly narrow definition of what is “best”. It’s a bit like deciding a Miss Universe pageant on the basis of earings. They may be funky, expensive or incredibly pretty but they ain’t the whole picture, are they? However, it is the primary point of discussion (outside of the current ridiculously biased marketing campaigns that stifle any genuine discussion on fees) when people sit down to look at their superannuation accounts and annual statements, so that is where we are going to start.
Compare the large super funds
Frankly, i don’t have the time to go through a complete analysis right now, so i’ve narrowed the research to a few of the “Biggies” of the superannation world:
- MLC – owned by National Australia Bank
- Colonial First State (“CFS”) – owned by Commonwealth Bank
- AXA – now part of the Top20 listed company AMP Limited
- Vanguard – part of the massive Vanguard global group
- AustralianSuper – the largest “Industry Fund”
Note that these have been chosen simply because they encompass a huge chunk of the super fund members in the retail space in Australia today. I make no representation that these are better or worse than any others but in my opinion they do represent a good sample from which to look at methodology and ideas for sorting out ways of identifying “the best” super fund. The list of disclaimers and other such rubbish that must be attached to any discussion on super is noted at the base of this post. It is painful but necessary to go through what is NOT covered as much as what IS covered, so i will place the bulk of this at the end, where you can view it after working through the main point of this note.
Finding the best “Balanced” or “Managed” funds
Again, a little bit of background first. In a competitive world, super funds are under continuous pressure to provide new and improved investment options. The list can often get quite exotic but these are really “fringe” investments used by a very small percentage of the total super fund membership. We will stick to “diversified funds”. Again, marketing gets in the way of common sense in most discussion on super, so we are going to look at what are usually the “default” or “where you go if you don’t make a choice” investment options – and that usually means the balanced or managed investment options.
There are a few more points that we will need to revisit shortly but let’s first simply look at the “raw” returns of the various funds over the last 12 months.
12 month super returns to 5th September 2011
Here are the returns of the five funds mentioned, charted to show the change in unit prices for each over the period through to September 2011. This is a good time period to consider, as it includes the end of financial year (during which some argue that insitutions sometimes “window dress” their books to hide investment return issues) as well as the more recent period of global turmoil. Most people will look at their statements to the 30th of June 2011 and draw all conclusions about their fund from that one document. This is simply not a good idea – the average fund is down quite a bit from that date, and making decisions today based on an arbitrary period to the 30th June isn’t going to work when you look at your account balance today.
Superannuation returns should be considered from multiple measurement periods – not just one. Having said that, we have to start somewhere, so we’ll start with just one time period.
To view a larger image, click this link 20110906 1 Year Diversified Comparison
What are the key points we can immediately identify from this chart? Assuming that my figures are correct (and the basis for compiling the chart is shown below – feel free to follow my pathway to put together your own comparison), we can identify a few relevant highlights:
- All of the funds provided worse outcomes than bank interest. The “best” return amounts to a mere $353.91. If your super balance was $100,000 then it only translates to $3,539.10. What on earth is are these “supposedley professional” fund managers doing when even bank interest in any good internet account would have paid 6% – almost doubling the return?!
- The range of potential outcomes is not as varied as you would expect after 12 months of government debt drama’s, interest rates in the US falling to the lowest levels on record, sharemarket booms and busts, currency fluctuations and credit availability problems.
- With $10,000 invested one year ago the end result is only a difference of $476.77 between the best and the worst.
- AustralianSuper Balanced offered the best return at $10,353.91
- Colonial First State First Choice Personal Super Balanced offered the worst return at $9,877.14
- All of the funds appear to move in step with each other – in financial terms this is referred to as a “high correlation”. The seem far more similar than they seem different.
And this is the key point that should be taken away from this chart. These funds seem to move in harmony. It’s almost as if their managers ring each other up and have a discussion along the lines of “hey, great move yesterday but you’ve moved out of line and we’ll be catching up today”. Anyone looking at these results will begin to wonder if there isn’t some underlying thread that is common between all of these incredibly different funds? If they are so different, why do they move in such a similar way? And if they move in such a similar way, why is there any difference in the end result at all?
How do you compare these funds in a meaningful way when the differences are so small?
The first area to consider is WHERE THE DOLLARS ARE INVESTED.
What on earth is “Asset Allocation” and why is it important?
This is the big $69 question, isn’t it? Ok, i’m going to let you all in on a very big secret. Please keep it to yourself, as it is the kind of information that institutions just hate their investors to know about. That’s why i am posting this note here, so only the select few who have access to the internet will find out about this big secret.
Hey, it’s Friday and i’m on my second coffee – so i’m going to throw in a bit of Friday foolishness based on the pile of newsletter/ website marketing material that i have received today… (ps. feel free to ignore this, it’s just me letting off a bit of sarcastic steam).
Click *here* right now to learn the essential secret that YOU need to know about your super right now but I warn you, it’s a secret that your super fund will never tell you!
Investors will be blindsided by the impact of this one key piece of investment knowledge – but the average Joe is too busy trying to earn a buck to pay attention.
Our investors have banked huge profits acting on this inside knowledge. If YOU ACT NOW, we’ll share it with you – BUT YOU ONLY HAVE 24 HOURS TO ACT – after that, we are closing the books and you’re on your own.
We are so certain that this idea will make you money that we are providing a 12 month money-back guarantee and the first 200 subscribers will receive a set of super-sharp steak knives, completely FREE!
Ok. i’m bored of that now. Let’s get back to looking at comparing superannuation funds and why something with the inane name of “asset allocation” is such a big deal.
Asset allocation is financial planning jargon for where the super cash is invested. It’s virtually impossible to analyse a massive investment portfolio as it would contain hundreds or even thousands of individual accounts and holdings. To make it easier, those holdings are bundled up into groups or “asset classes”. These break down into three primary holdings. They are then subsequently broken up in various ways but we are going to stick to the three main ones:
- Cash and fixed income securities.
- Property and property securities.
- Shares and equity holdings.
For the completely nerdy of heart, there is a debate in funds management circles that rises from time to time when there are claims of a “new” asset class. Examples are “alternatives” such as infrastructure and direct property. They may have different characteristics but in reality infrastructure is a share in the ownership of an equity investment and direct property is pretty obviously just one of the many forms in which property market exposure can be obtained. There is one argument in there that i subscribe to, and that is the potential to treat cash as an asset class all of its own. There are a lot of reasons for this but we’ll cover some of them later in this analysis.
There are a few other key parameters that fold around these three primary asset class allocations:
- Australian vs International exposure in fixed income, property or shares.
- Trading strategies such as “passive versus active”
- Strategic vs Tactical allocation.
For the moment, we are simply going to look at the mix of asset classes. That is, the amount of money each of our five sample super funds allocated to cash, shares or property. We will then look to see if there is anything we can take from comparing that mix of assets with the investment performance of the funds.
Diversified Fund asset allocations
Again, we need to pause for a quick look at the scope of this analysis.
First and foremost – your super fund will NEVER tell you exactly where your money is at any one time. Aside from the administrative complexity of making this happen there is the “commercial intellectual property” issue and the market sensitivity of exposing corporate steps that may be considered confidential or valuable for “first-mover” advantages.
Secondly – The allocation of money between these areas is a matter of continuous change, improvement and research. Any allocation you look at will be a historical snapshot. The fund will often set out a range that the fund manager will stay within but that range is usually set very wide, to allow the fund manager to deal with the ebb and flow of business cycles and opportunities.
Armed with these cautions, let’s consider the asset allocations that we can obtain for these five diversified funds.
You can see that the funds vary quite widely in what they consider to be “balanced”. Colonial First State (CFS) and Vanguard tend to see balanced as a 50/50 mix of cash and fixed income vs shares and property. AXA and MLC appear to see balanced as meaning a larger exposure to areas such as shares and property. AustralianSuper takes an altogether different approach, with signficantly lower exposure to cash and fixed income.
This is where things get a little complex but in the interests of sticking to a broad analysis, i have taken the various publicly available data for where each fund places its money, and have then tried to group those assets into broader asset classes. Again, this analysis opens up many avenues for complaint and misunderstanding, and so please remember to spend time going through the notes at the end of this article. They set out my methodology (or lack of it) and the various issues it raises. One important point that is raised when looking at this from the point of view of the “average” super fund member with access to publicly available data, is how extremely hard and time consuming it is to obtain this very, very basic data on different funds.
What we will now do is to look at an even broader asset mix concept – that of “growth” versus “defensive” investments. This can be quite handy, as it can help simplify an understanding of just what is being done with your money. Let’s start by looking at broad definitions of these two financial terms and how they are used in the context of a super fund.
- Growth – This can be a bit of a misnomer in times such as these. Assets in this area can grow of fall in value, often by large price levels. The types of investments that would go in here are generally seen as shares and equity holdings (Australian and International) and direct or securitised property (Australian and International).
- Defensive – This is less contested in its meaning. The standard definition is cash and fixed income securities. Sometimes you’ll hear the term “debt” used for this sector as it is basically an area in which one party loans to another with some form of security or guarantee of eventual repayment. Under this logic, even cash in the bank is a form of debt (from the bank back to you as the depositor). Although care should be taken in reading the title too literally (as high yield global junk bonds are considered defensive under this definition), the assumption is that these assets will not be as volatile in value – and will generally have a greater income component – than growth investments.
Asset allocation discussion
Now we can sit back for a moment and ponder what we have observed so far. We can see that MLC and AXA take a similar broad approach in the mix of more volatile and less volatile investments. Similarly, Colonial First State (CFS) and Vanguard on the face of it, seem to take a similar approach. AustralianSuper is clearly taking a completely different approach altogether, by holding far less cash and fixed income – areas that are considered defensive.
If we look at the 12 mont return again, can we see any relevance to the groupings of super funds via their allocations to growth versus defensive areas? Feel free to agree or disagree with my observations. After all , this is a blog and these are simply my observations and musings, and i am just one financial planner full to the brim with my own bias, preferences and set of experiences. Having said that, here are my observations of what we would expect to be the case:
- If asset allocation has any relevance, we would expect to see a grouping between the returns of MLC and AXA, between CFS and Vanguard and there is every chance that AustralianSuper will move somewhere altogether different.
- It would be surprising to see such large differences in approaches to what constitutes a “balanced” or “managed” investment result in a similar level of performance or co-ordinated movements in prices.
And after looking back at those 12 month return figures, here are my observations:
- The MLC and AXA results are relatively close.
- The Vanguard and CFS results differ quite markedly.
- The AustralianSuper has reached quite high levels comparatively when things were going well but appears to have fallen “back with the pack” when financial markets tumbled post April 2011.
The average person will not really be able to ascertain too much from these figures, other than the similarity of movements in account prices.
However, a financial planner will usually look a lot further, and will identify Vanguard as holding an extraordinary level of cash compared to the other funds – 22%. This large pocket of cash would provide a high level of stability in times of high volatility. This is reflected in the outcome in September, when markets all over the world are looking highly unstable.
A further point can be taken from the relative performance of the AustralianSuper Balanced fund.
Like many Industry Funds, the allocation to growth assets is very high. This is argued backwards and forwards in financial circles over whether various assets are “defensive” or “growth”. Most obviously, it is the very high allocation to direct (as in, not listed on the sharemarket) investments into infrastructure assets (such as airports, roads and utilities), property and private equity. Some funds consider this to be “defensive”.
Again, this is an arguable point, as timing and valuation differences are quite strong influences on the medium term prices associated with these investments. Most retail and wholesale funds do not consider these investments “defensive” as they are usually a form of equity, and are therefore subject to the same valuation metrics as any other equity based asset. The industry fund trustees and asset allocation asset consultants will quite rightly argue that these funds have a very special position in the market, as they have high levels of mandated contributions through SGC super and award monopolies. This allows them to hold a lower level of liquidity than would be required of a retail or wholesale fund in the “normal” market. In addition, that mandated cashflow allows them to meet most redemptions from cashflow, reducing the need to sell assets, and increasing the ability of the fund to make purchases in times of reduced prices.
The outcome over 12 months points to the AustrlianSuper approach holding up very well in a highly uncertain market.
In summary, it does appear that the performance can be at least partially explained by looking at the specific allocation of money between the asset classes.
We also need to consider the returns of the individual asset classes themselves, to help us gain an insight into how managers who are deciding on a mix of these assets have done at the job of allocating money between shares, property and cash. i will update this in a later post.
Diversified Super returns since 2008
Right at the beginning we considered the point of measuring like for like and over relevant time frames, and yet have only so far considered one single 12 month period in isolation. We have been able to identify a rough interraction between fund returns and asset allocation but the argument so far is not overly strong. Let’s consider a longer time period, and one that includes some of the most difficult times for investors in recent history.
Remember, we are working from publicly available data here, so there are a lot of limitations to making this review thorough. We are hamstrung by the need to find equivalent data from all funds – and the AustralianSuper Balanced fund returns are from the AustralianSuper website, which only has the comprehensive spreadsheets going back to July 2008. Therefore, we are going back as far as we can now for all 5 funds. Most of these funds have histories considerably longer than this but we are lookoing for common data, so we are limited to starting from July 2008.
Here is a chart that i have prepared from a rather exhaustive review of the five funds’ unit prices. Again, the methodology is set out at the end of the post, so feel free to tackle it yourself and point out any irregularities or improvements to what i have done.
So, armed with our discussion so far, what do you note about the respective returns of our five funds? Is there any potential relativity that you can spot between the asset allocation and the returns achieved over this period?
Here’s my take on what we can see:
- A much clearer relativity between Vanguard and CFS.
- A clearer relativity between MLC and AXA.
- The AustralianSuper fund moving between the “two camps”
Is the relative performance what we would expect after having a good ponder on the mix of money held within each fund? My answer – YES!
Please take a while to have a very good think about this. Think about the highly professional and academically robust investment processes that each of these super fund managers utilises to obtain their results. MLC uses a “manage the managers” approach that has stood the test of time since implemented by Bill Webster back in the 1980’s. Colonial First State is acknowledged as a highly successful fund manager that takes a very active and tactical approach to selecting particular investments. Vanguard utilise a low cost, “passive” indexed approach that minimises any form of selection for markets or stock selection. AustralianSuper have eschewed a listed only approach in favour of seeking unlisted, direct asset ownership that will hopefully provide a higher level of long term stability and return with lower costs. AXA have been able to call on the resources of the AXA group globally to build their portfolios and ensure they operate with the very best information and process that money can buy anywhere in the world.
Surely these difference should result in outperformance by one over another?
Each of these managers brings their own mix of skills, experience, knowledge and scale to the role of running a diversified superannuation fund. And yet, after all is said and done it would appear that the primary driver of returns in the research done here has been the mix of cash, property and shares. Take away the names and the respective performances can be tracked to within a small tolerance of accuracy simply by looking at the performance of the underlying asset classes.
The super industry performance secret exposed
You’re still reading, so please accept a heart-felt “well done” for sticking with me through this. By now, you’ve probably realised where all of this investigation has taken us. It can be seen by distilling the results of our brief foray into super performance analysis down to the key points.
- The returns of super funds with similar mandates can be expected to follow similar pathways.
- The definition of what constitutes “balanced” or “managed” can vary widely. Most marketing and media coverage completely ignores this fact and goes on to compare apples with bananas.
- The bulk of the performance of the diversified super funds is going to come from WHERE the money is invested, rather than HOW it is invested or WHO invests it.
Put another way – it is arguably more important to know and understand and research exactly where your money is than it is to know whether you are in a retail fund, industry fund or any other type of fund. And this is likely to be the case regardless of the tactical “cleverness” of the particular fund managers and their teams.
Now these are heretical words on my part. Super funds and fund managers spend literally hundreds of millions of dollars trying to convince super fund members and investors that they are safer, better, wiser, more active and successful than any of the alterative funds on offer. It really wouldn’t do for the average super fund member to realise that they’ve been taken for a ride. For some reason, the idea that asset allocation will determine the vast bulk of your return has remained a hidden secret for decades. And this continues to be the case, even though the fundamentals of what i have covered here have been the bedrock of financial investment processes for a very long time. It is pretty much Money 101 for anyone who enters the financial world. Thankfully, the vast bulk of humanity is not aware of this website, so the ideas and ponderings here can be a secret between you and i.
And the BEST SUPER FUND is…
Ok. After looking at things so far, we can make an initial assumption that the best super fund is:
- The one that you understand.
- The one that doesn’t hide where your money is.
- The one that has money where you are comfortable for it to be.
- The one that has a mix of investments that ties in with your expectations for changes in price and exposure to shocks from global debt crisis’, sharemarket corrections and bond market gyrations.
- The one that does all this and then goes on to best meet your needs for the “other” aspects of super, such as:
- Insurance options
- Contribution options (EFT, BPay, pay deductions et)
- Strength and continuity of the fund manager or administrator
- A range of investment options to allow you to tailor your precisely preferred portfolio.
As you may be beginning to realise, there is an awful lot of work to do when comparing superannuation funds. This is really just an initial foray, so I hope this has been helpful. Please feel free to comment or criticise, to forward on or to question anything covered in this post.
Very Important Disclaimers & Disclosures
The analysis that i have done here will upset most of the fund managers mentioned, as their respective stengths and market advantages appear diminished by what we have found. I have no particular reason to favour one over another, and have attempted to approach this as an exercise that can be replicated by anyone at any time. Of course, the conclusions are mine and mine alone – so alternative possibilities should always be considered and pursued.
There is the Very Imporant Disclaimer page, http://www.michaelsmusings.com.au/warnings-and-disclaimers/ which sets out the primary legislative disclosures about the future being uncertain, the dangers of using past returns as an indication of future performance and the rather obvious disclaimer that nothing in this article is to be considered as personal advice. You must not use any of this article as the basis for buying, selling or holding particular securities or investments – that can only be done after appropriate research into your own personal financial position, objectives and attitude to risk, which is something that this site cannot do.
Shortfalls in my analysis..!
There are many, as any such analysis must superficially cover some points in favour of others in order to keep the overall length and readability viable. Here are the more obvious ones:
- There are only two primary measurement periods in the examples. A more robust look would consider rolling measurement periods – such as looking at the 12 month returns of all of the super funds every month for a year. In that case, we would have 144 data points that more readily attributes performance to underlying conditions.
- The starting periods are arbitrary. I have simply used the latest 12 month data i could find, and then looked for the earliest common start date for which i had information on all 5 funds. If time allowed, it would be more appropriate to look at figures from the start date of each fund.
- I have completely ignored the “product” on offer. In other words, the only fees being considered in my analysis are those that are dealt with in the unit pricing of the funds. This would not usually cover any fees that may apply to monthly account keeping charges, contribution fees or “platform” fees. This is a highly valid criticism. However, my focus here is on the supposedly “simple” issue of comparing relative performance and on trying to strip away the marketing imperatives that so highly distort any reasoned analysis of super fund returns and comparisons.
- I have not validated the information with any of the companies concerned. This is true. The primary reason is time and resources. If i was purporting to be an experienced analyst then maybe i’d need to aim at a higher level of academic perfection but i am not, and this is simply one financial planner’s look at the task of comparing super funds based on accumulated knowledge, experience and training.
You may have noticed a rather large jump in some of my conclusions – this involves the references of returns from a diversified portfolio versus the underlying asset class returns. In other words, does the mix of shares, cash and property = 1+1+1 = 3 or has the manager added to or taken away from the returns that would be expected if you were to invest in the same allocation through individual options (ie, through selecting cash, shares and property individually and not looking at the overall diversified fund option). This is quite an exercise, which i have skimmed or skipped in this note – it will be covered in a later note.
The biggest shortfall in my comparison of the super funds is one of the biggest issues in the super area. This analysis is completely devoid of relevance to your own personal position. Let me explain. This (and just about every other note i have ever read) is based on an arbitrary time period and arbitrary amounts of money. The reality is that the particular fund return will be distorted beyond recognition by your own personal circumstances. For example, you may have your super contributions made from your pay, in which case they may be invested weekly, fortnightly or monthly. You may pay your own money through salary sacrifice in which case the dollars will usually be accumulated and then forwarded on to the super fund at irregular times. You may only pay into your super once a year. In all of these circumstances, your return will differ from that of a straight line measurement from date X to date Y. This is because your money would potentially have been invested at a completely different price level, thereby making your return unrecognisable from any published 12 month, 2, 3, 5 or 10 year return.
Another big issue for returns is the size of your existing super account. If it is small then the price differentials for your regular payments will have a large impact, meaning that your actual return will be quite different to the stated 12 month return. Alternatively, if your existing balance is large compared to your ongoing contributions, you may find that your account balance is not much different from a year ago, even though you have paid in a large amount along the way. When returns are flat or negative this is the first complaint of many people. After accounting for the 15% contributions tax and negative returns, it may seem as if all of your money going in has simply disappeared!
The idea that asset allocation is the major contributor to long term performance is encapsulated in Modern Portfolio Theory. This theory has its detractors, owing to is focus on past results (it can cynically be suggested that Modern Portfolio theory and the use of the efficient frontier methodology can be distilled down to making sure you have more of what has done well in the past and less of what did badly… the major problem of course being the suggestion that you can know these things in advance). However, this theory is what underlies the construction of investment portfolios today so it remains a central pillar in understanding what super fund managers and trustees do with your money. Here’s a bit more reading on Modern Portfolio Theory.
For those keen to check my figures, here is the process that i followed. Feel free to emulate me anytime.
- Daily figures were obtained from the IRESS stock exchange data feed for those funds which supply the information. The files were exported as CSV data files and converted to Excel spreadsheets.
- AustralianSuper details are not generally available through this source, so i downloaded the respective financial year unit price spreadsheets from the AustralianSuper website as CSV files and compiled them into a continuous unit price history from 2008 to September 2011. I then altered the CSV format to Excel format.
- I amalgamated the various worksheets into a single workbook and transferred the various figures to a single spreadsheet.
- I identified a common start date and established a common base figure ($10,000 in this case).
- I altered all unit prices to the common baseline and then had that resultant figure alter by each subsequent data point – checking for public holidays and variances from periods where prices may not have been updated.
- The resultant figures were charted, using Excel.
- I can make no warranty as to the accuracy of the underlying figures, and have not had my work cross-checked by anyone else – so this is simply my interpretation of my compiled figures.
“The BEST super fund” is a non-statement, as there is no BEST. Different funds will provide different features and benefits that alter from time to time. In my experience, even the biggest and strongest institutions will close down a fund or alter its structure fundamentally if that is in their best interests (such as a fund being closed because the scale is no longer viable or the underlying technology is a legacy system that needs to be closed down for corporate reasons). For this reason, you will often find that financial planners are a rather cynical lot – more interested in keeping up to date with changes and processes than getting hooked on the marketing hype of one fund or another.
The fund managers mentioned have websites that vary in usefulness. Feel free to look through their individual offerings and disect my data or interpretations.
The AustralianSuper website is particularly good. It includes a comprehensive listing of the “alternative” assets that are held in the balanced super option. These include private equity holdings and infrastructure assets such as airports and utilities. The direct property holdings are also listed in some detail. This level of disclosure is to be congratulated, and is a great step forward in helping members understand where their money is being kept.
Finally, comparing super funds is a tricky business, with every man and his dog claiming expertise and a sticky web of legislative rules overarching the entire subject. Here are a few major websites with more official ideas on the topic.
This is the Australian Taxation Office information page on choosing s super fund, which has some helpful information and links http://www.ato.gov.au/individuals/content.aspx?doc=/content/00105466.htm&pc=001/002/064/002/001&mnu=1101&mfp=001/002&st=&cy=1
Some superannuation fund comparison websites: