The choice on how to invest your superannuation fund is one of the most important financial decision you have to make. The decisions you make today will influence how much you will have at retirement. Different decisions today will coupled with the impact of compounded long term investment returns could mean very different outcomes down the track.
The definition of the best superannuation fund is in the eye of the beholder where it is dependent on individual risk and return profiles. This is because everyone’s circumstance is different. As there are number of industry and retail super funds, it is most likely that there is a combination of super investment options that will meet most individual’s distinct risk and return needs.
How is super fund managed?
Money in super can either directly investing in shares if you know how to analyze shares or choose a super fund that will manage it on your behalf based on a pre set strategy. (see our Top 10 Shares to Buy from our model portfolio just to get an idea of what we are holding in our portfolio).
We highlight some factors investors should take into consideration when comparing super funds to invest in.
1. Best Super Fund Return does not have to beat the market
When you think about super funds one of the first thing you would ask is what is its return over a given time. Typically, 3 and 5 year return is an indication of the skill of the manager if it is an active fund. Passive funds like index funds just track the market so super fund that track the market the return of the fund will be the market return. This could be advantages for most investors as passive investment is a low cost option that still give investors a long term equity market return.
Return between funds are only comparable if they are invested in the same asset class. Just to be clear, share funds returns should not be compared to bond fund returns.
Fund returns while important in determining the best super fund. It should not be judged by it self.
2. Choosing Super Fund either in Retail Funds or Industry Funds
The first step in choosing the best super funds is to understand the distinction between retail funds and industry funds.
Retail funds are commonly known as funds managed by financial institutions AMP, Macquarie Group or big 4 banks. Industry super funds commonly are funds which are created by non profit institutions owned by its members. Fees can be lower with industry super funds however options while not limited are usually out matched by those available on the retail super fund platform.
For some investors the best super fund option could be the one that is leaning towards more niche investment markets.
3. Compare Superannuation Risks – the best performing super funds might not be the best option
Super Fund Returns should only compared within the context of the risk taken. Common mistakes made by investors include misjudging the risk of the underlying portfolio.
Some fund strategy are inherently high return because the investments include significant risks. Examples of this include Small Cap or concentrated equity funds.
To understand the risks in the super fund, investors need to understand the underlying assets the fund is invested in.
4. Best Superannuation Fund Allocation
Each investment asset class have its own risk and return profile. Overall return is dependent on the allocation of the funds in the super account across different asset classes.
Below we highlight 3 of the most common asset classes investors have in their super fund and the major advantageous and disadvantageous of each asset class.
Equities – Equity funds invest in listed shares. Shares over the long run has the highest returns but it comes with the greatest risk. Even with the tax advantage of franking credits, it is can be rewarding holding equity exposure in the super fund.
Funds could investing in either Australia or internationally as well as specific strategies that focus on value or growth or large and small cap stocks.
Most platform provides an Australian index fund option that track the performance of the market. It is designed for those that are looking for a low cost share option for the super fund. The different of index fund to active fund is in active funds, the fund manager select stocks that they think will outperform the benchmark. This is because research shows most managers could under perform the market.
Fixed Income – Commonly also known as bonds because incomes are fixed or known to a certain degree at the purchase date. Investor with large fixed income allocation aim to generate income from the portfolio relative to capital gain.
The trade off of immediate and fixed income over a time frame is lower return versus equities. From the risk side, bonds are higher on the capital structure where bond holders get their capital back in liquidation event before equity holders.
Traditional super funds provides a balance option of 60/4o mix between equities and fixed income. As you get older, the weighting should lean towards fixed income more heavily. However this is dependent on the risk the individual is willing to take in the their portfolio.
Real Estate – Investors can invest in properties through super funds. The real estate funds in super can be different to investors home or investment properties as it gives investors opportunity and access to the commercial real estate market like office, industrial or shopping centers as well as spreading across multiple buildings, state or even countries.
Downside of real estate investment is its illiquidity. Long term holders of real estate can receive a balance of income and capital gain.
Top 10 Super Funds
|2||BT Funds Management||Retail||1241470||78463|
|4||Colonial First State Investments||Retail||947090||68942|
|5||State Public Sector Superannuation||Industry||552030||59679|
|6||FSS Trustee Corporation||Industry||747634||53872|
|9||Retail Employees Superannuation (REST)||Industry||2126038||39363|
|10||Commonwealth Superannuation Corporation||Industry||660071||36455|
Table above shows the top 10 super funds in Australia. We have categorized them by total assets managed. It is a mix of industry and retail funds. There are number of investment options within each fund for investors to choose from.