Superannuation Comes Back – It All Arrival to Fees
You probably know that long term differences in performance can have quite a staggering impact on your final superannuation balance. It’s therefore very important to find a superannuation fund that is likely to deliver on performance over time. First step is to make sure you’re invested in a mix of assets appropriate for your situation (conservative, aggressive, in-between, etc.). The next step is to find the right superannuation fund.
If you review any statistics on how superannuation fund managers perform in relation to their relevant index (ASX 200 for example) you generally won’t be impressed. It is rare for a fund to outperform the index in one year. Fund managers cop a lot of grief over this with investors often questioning what they’re paying them for, but maybe we should consider what it truly means to outperform?
Fund s are measured against an index which is the combined performance of all investments included in that index; the ASX 200 for example is determined by the combined value of top 200 shares in the Australian share market by capitalisation. If the ASX 200 goes up by 20% in one year, and a managed superannuation fund measured against the ASX 200 goes up by 21%, then that superannuation fund has outperformed the index.
Superannuation fund managers will often be working with tens of millions and sometimes billions of dollars of investor’s money. The money that goes into Australian shares will generally be spread out across a large number of stocks for reasons of diversification (not all eggs in one basket stuff). Within that the managers will try their best to outperform. They will occasionally deliver a performance surpassing the index but will generally fall below it. There a few reasons for this;
Outperforming the market is really, really hard. Almost everybody that is invested in the stock market is trying to outperform it. Everybody’s got a different opinion and every opinion is jumped on by thousands of managed fund, corporate, professional and individual investors. Machinations of the market, efficient market theory, portfolio theory all suggest that it is very hard for anyone superannuation fund or investor to consistently outperform the market.
Too much money: If you’ve got $1 billion in Australian shares, you can’t just invest in 10 different stocks. Fund will often be invested in 50 or more stocks out of 200 stocks making it mathematically very difficult to outperform the index.
Because they want to: Much more important than to outperform the market is to not underperform it, at least not by too much anyway. Fund knows that they’re compared to other fund more than just the index. They also know that a 2% outperformance is likely to have less of an impact on their superannuation fund base than a 10% underperformance.
An advantage today is gone tomorrow: If a superannuation fund can momentarily find a way to outperform the market it is not likely to hold onto it for long. The sands of the market will eventually shift, what works one day won’t work so well in different market conditions. Other fund will catch on, they’ll figure out what the other superannuation fund is doing through careful analysis or better yet by poaching their staff. Once the secret is out, so generally is the advantage.
So managed fund might not all be evil, but they’re not all equal either. Some superannuation funds consistently outperform or underperform other fund. Although some fund is simply above or below par from a pure fund management perspective, there’s one factor that comes into play more than any other – fees.
If you consider that almost all fund have to contend with points 1 to 4 above that leaves fees as the final and consistent differentiator. Low fee superannuation fund s comes in many forms; industry, corporate, index and wholesale fund. These superannuation fund s commonly charge between .5% and 2% less per year than retail fund. And any considered analysis of the long term performance statistics taking all different fund types into account will generally show; industry, corporate, index and wholesale superannuation fund s at the top of the performance charts.
About author
Harrison Paspalis is an experienced financial advisor who is writing article on superannuation fund and other financial matters. According to him, australian superannuation is a plan and program which should be worth noticing.
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