This article is following on from How to judge the performance of a super fund (and other investments) – Part 1.
Understanding Risk Vs. Performance
When looking at the performance of a super fund it’s important to consider the risk profile of your investment. That’s because funds that typically target higher returns, also carry higher risk in years where the market performs poorly.
Investment options, in order of how much they are invested in ‘growth assets’ can include:
- Investment mix: around 85% in shares or property, and 15% in fixed interest or cash. Or 100% in shares or property for a ‘high growth’ option
- Returns: Aims for higher average returns over the long term. This also means higher risk of losses in bad years than would generally be experienced with lower-risk options.
- Investment mix: around 70% in shares or property, and 30% in fixed interest and cash. Or 50% in shares and property for a ‘moderate’ option.
- Returns: Aims for reasonable returns over the long term, but with less risk of losses in bad years. Those losses usually occur less frequently than in the growth option.
- Investment mix: around 30% in shares and property, and 70% in fixed interest and cash.
- Returns: Aims to reduce the risk of loss and therefore accepts a lower return over the long term. There is less chance of having a bad year than in the Growth or Balanced options.
- Investment mix: 100% in deposits with Australian deposit-taking institutions or in a ‘capital guaranteed’ life insurance policy.
- Returns: Aims to guarantee your capital and accumulated earnings cannot be reduced by losses on investments.
Now here’s the tricky part. You can’t always rely on the name of a fund’s investment option to determine if it truly fits into the categories above and there can be significant variance. This is important and I will give you an example of why:
Imagine that there are two funds with the name ‘Balanced’ in the title, yet Option A has 50% invested in growth assets like shares or property and Option B has 80%. In years when the market conditions are good, Option B is likely to outperform Option A, but in years where the market turns downwards Option A is likely to outperform B. Over the long term, it’s likely that Option B will outperform Option A, but it also carries more risk with it. Because Option B has more money invested in growth investments and will likely outperform over the long term, this may also impact considerations around comparing fees between the two funds.
The lesson here is, to check on the information available on the super fund’s website, or read the PDS, to understand the true investment mix of each of the available investment options.
Similarly, you may also be interested in ‘ethical options’ and again here it is important to consider like-for-like products as there is no specification around what is and isn’t considered ‘responsible’, ‘ethical’ or even ‘green’, so make certain that you understand exactly where your money is invested if this is important to you.
Once you know what investment option is right for you, and you understand how to find ‘like-for-like’ products to compare, then it’s time to check out how they are performing.
There are a few ways that you can compare the performance of various funds once you have selected some like-for-like investment options. You can take a look at each fund’s PDS which will list the target return for each investment option. You can then compare the target return with how these options have performed over the past 1 year, 3 year, and 5 year time horizons. This information should be reported by your super fund as the net return after variable fees and taxes have been taken out. You’ll usually find this information on the super fund’s website. It is also provided in the Annual Statement provided by your fund after the end of each financial year. Just be careful that you are comparing the correct like-for-like options.
Of course, it’s important to remember that past-performance is not always an indicator of future performance, so try to look at more than one indicator of performance.
Understanding how fees fit in
Take a look at the fees that the fund is charging, and ask yourself if those fees appear to be reasonable and justified based on the performance of the fund and the other services the fund provides.
If you’re in a super fund that is charging higher fees than comparable like-for-like options and performing worse, it may be something you want to consider.
A note on ethics and performance
Ethical funds are one type of fund that tends to demonstrate that lower fees don’t necessarily equal higher returns. There is typically a cost associated with investing ethically, as undertaking the screening of ethical companies is an additional cost.
However, the average ethical investment option (when they are actually well-screened ethical products and not only ethical by name) are generally outperforming the market over the short, medium and longer-term.
A final note on choosing the right super fund
Just remember, that there are other considerations outside of performance to consider when choosing the right superannuation fund or investment option for you, this may include ethical decisions about where your money is invested, as well as decisions around your risk profile and the type of insurances and other services being offered by the fund.
However, taking the time to consider how a fund may perform will support most of us to make a sensible decision about building our retirement savings over the long term, whatever our dreams of retirement may be.
We feel so passionately about women’s superannuation. However, this is a very complex topic so we’re incredibly grateful that the team at Verve Super lent their expertise to share this information. However, it’s important to do your own research and consider things like fees, investment performance, insurance cover, your risk profile, and alignment with your values when considering if a superannuation product is appropriate for you.
This article is issued by Verve Superannuation Pty Ltd (ABN 65 628 675 169, AFS Representative No. 001268903), which is a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956, AFSL 238184), as the Sub-Promoter of the Fund.