Superannuation has been the place to be over the past five years – the top performing balanced funds (60 to 76 per cent growth assets) returned as much as 7.76 per cent – the latest figures from SuperRatings show.
The top 10 funds over five years included seven industry funds, a corporate fund (Qantas) and two retail for-profit funds. The lowest performer in the top 10 recorded 6.54 per cent.
The SuperRatings chart, above, shows the dramatic difference time can make to super returns. Over three years, top 10 returns ranged between 6.72 and 5.04 per cent, while over the year to June 2022 returns ranged from +1.57 per cent to –1.87 per cent.
The low returns or losses for the 12 months to June 2022 were driven by falling share markets and rising interest rates.
Average is good
Even if you were not invested in one of the top 10 funds over the last five years you are probably doing OK. That is because the average balanced fund returned 6 per cent over five years and 8.1 per cent over 10 years.
But the world has changed in recent times with the return of inflation, rising interest rates and sharp volatility in equity markets.
Also, the superannuation world is consolidating at a dramatic rate.
There will be eight super funds with more than $125 billion in assets by mid-2025, consultancy KPMG stated. That means your fund may have merged with another fund that you don’t know.
So far, mergers have been positive for fund members. “With mergers we’ve seen to date there has usually been a pretty material sort of benefit – a cut in 10- to 20-basis points in administration fees,” Kirby Rappell, director of SuperRatings, said.
In other words, funds become cheaper to run. As the chart, below, from KPMG illustrates there are large variations between the costs of different funds.
The high cost ones tend to be smaller boutique funds looking after small coteries of workers. The chart, below, is from June 2021, so some fund costs may have improved since then.
Mergers where small funds are swallowed by industry behemoths generally deliver better returns and “it’s been a pretty clear comparison [between pre- and post-merger returns],” Mr Rappell said.
As the fund market becomes more concentrated that will change. “You now have a smaller cohort of funds, but there will still be more mergers going forward,” Mr Rappell said.
With many mergers already capturing the low hanging fruit, further concentration of already big funds won’t necessarily deliver benefits to members, Mr Rappell said.
That means it will be worth your while to check the performance of any fund that merges with yours to help decide whether you are best served to stay with the merged entity.
Rising interest rates
Rising rates are changing the investment world by making equity markets more volatile and providing better yields for products that aren’t share based. Super funds are reacting to that with investment decisions.
“We see funds are reacting to that by going back into the fixed interest a bit more, also they’re going into listed property,” Mr Rappell said.
You can act yourself
For super fund members who have felt they were exposed to equities to a greater degree than they were comfortable with because returns elsewhere were negligible, things are starting to change.
That creates new options but you need to be careful. “If you have a long-term position in equities through super or elsewhere you don’t want to change that now because you are locking in losses,” said Dr Angel Zhong, senior lecturer in finance at RMIT University.
Those losses would come because share markets have fallen this calendar year and moving your super into a more conservative option would mean crystallising those lower market prices.
However, that is not the end of the story. “If you are putting any money into super beyond your compulsory contribution you don’t have to put all that extra money into your balanced option,” Dr Zhong said.
“You can actually spread that money across different options.” That could mean choosing another asset allocation in your super fund – something like fixed interest, cash, property or infrastructure.
Or if you have the knowledge and confidence “you could diversify into other asset classes such as shares, ETFs [exchange traded funds] or cryptocurrencies,” Dr Zhong said.
Alternatively, if you are coming up to retirement you may want to put extra money into conservative super options to give yourself a cash or near cash option to cover unexpected costs or pay for a year or two’s retirement income.
However, you can be too conservative in retirement planning.
“You should put aside enough to cover off the next three year’s worth of income needs without having to sell down assets,” said Rob Goudie, principal with Consortium Private Wealth.
Beware a rising cost of living in your retirement years. “A couple retiring in their 60s can expect at least one to live into their 90s,” Mr Goudie said.
“If you get too conservative your money will go backwards with inflation factored in and you risk running out of money late in your retirement.”
The New Daily is owned by Industry Super Holdings
