Question

I tried to put in some basic information from each fund into a spreadsheet to compare what my super would be after 30 yrs. And they all come out pretty much even. I have no idea how to work out tax. So how the hell do u compare funds and investment options.

Answer

Comparing super funds is quite a challenging task, mainly because there is NO right answer and there are SO many options so anyone who tells you otherwise is kidding themselves (or lying). But here goes…

Probably the biggest driver of your end super outcome will be what assets you’re invested in so would start by selecting what kind of investment option is right for you. In the financial advice industry, this is known as selecting your “risk profile” and a financial adviser will generally use a questionnaire to help determine the level of risk you’re prepared to take on. Having a quick Google, a number of different providers offer free online questionnaires. Without endorsing any, here a few:

Selecting your risk profile is not an exact science but one of the biggest factors is the amount of time you plan to be invested for. As a general rule, the longer you’re investing for, the more risk you can afford to take on and the bigger return you can expect over the long-term. This is because the riskier investments that offer the higher returns over the long-term (e.g. shares and property) go in cycles and the longer your investment horizon, the better your ability to ride out these cycles. Most funds offer 5 or so premixed options where everything is done for you ranging from stable (lower risk) to high growth (high risk) so would then choose one that reflects your risk profile. WARNING: don’t just look at the names as funds can be different here e.g. some funds will have “Balanced” funds at 50% growth assets, 50% defensive assets (makes sense) whereas another fund’s “Balanced” option could be 75%+ growth assets. Even sneakier, some classify growth assets like property as defensive so could be worthwhile looking at the allocation breakdown to compare and know what you’re actually investing in.

Lows fees are very important however by chasing the lowest cost option you may end up with an inferior result. When comparing options I consider fees (as this is something you can 100% control whereas you can’t control future performance) but also consider net performance after fees and taxes. Luckily, most funds report their performance after fees and taxes, making them easy to compare. Also, if total fees (excluding insurance) are higher than 1%, it could be a sign that fees are being wasted leading to bad performance.

One reason why large Industry Funds (owned by their members) have performed well in the past is that for various reasons they’ve been able to have higher allocations to unlisted property and infrastructure (think roads, airports, utility providers) which have performed well, however, these assets add more expenses to the fund so if you invest in a really cheap fund, there may be lower allocations to these assets. I don’t know if these assets will continue to perform well but they do add diversification to a fund.

Some resources to help you assess funds and their performance are:

Past performance does not guarantee future performance however super fund performance over a long period of time (e.g. 5 or 10 years) suggests to me that a fund is doing something right. I’d therefore look to choose a cheap fund that is beating its peers and in the top 10 over these longer time periods. I stress there’s no guarantee here. The top performing fund over this period is unlikely to be the top performing fund over the next period so choose a good option and accept that you’ve given yourself the best chance of a good outcome and accept there are always going to be funds that do better.

As most super fund returns are quoted net of tax there’s no need to take tax into account when comparing super funds as tax on concessional contributions (generally 15%) is the same regardless.

For comparison purposes, I wouldn’t project the differences out. This can help give a good indication of fees however as mentioned above, fees aren’t everything. You could use the past performance of funds (remember is net of fees) to model out the differences over-time however as this is past performance it’s not indicative of what is going to happen so I don’t think this exercise is valuable in choosing a fund. It would help put into perspective the differences in net performance however e.g. over 20 years for a 35-year-old with a starting balance of $95k and salary of $65k, the difference between an 8% return and 9% return is around $74k in today’s dollars.

Other points

DIY options – some funds (most funds) offer more specific choices as well e.g. Australian shares, cash etc. By choosing your own portfolio you’re effectively making bets on what asset class is going to outperform the other and is very hard to do consistently. These funds hire dozens of investment professionals with decades of experience who analyse investments every day of their life. I don’t think I have the smarts to outperform them and therefore believe these investment options aren’t worth considering unless you have a really specific investment need that requires a tailored portfolio.

Self-Managed Super Funds and “SuperWraps” – these are funds that are usually only viable from a fee perspective if you have a really large balance (say $500k+) and although they have their benefits they’re simply not required for your average investor.

Employer funds and Defined Benefit funds – these are funds that are exclusive to employees or past employees of certain organisations. Much more to be considered on these funds but if you’re in one, be very careful leaving it because you could be getting a great deal.

Sustainable and Ethical funds and investment options – it’s becoming more and more popular to invest in line with your values and many super funds now offer options that invest in more ethical conscious investments. Unfortunately, at the moment there aren’t too many options across the risk profiles however expect these options to increase and fees to come down as competition increases.

Insurance – again far too much detail for this post however insurance costs within your super can make a huge difference. Insurance premium costs aside, the best outcome is often obtaining quality, retail, commission-free policies through an adviser who can structure the policies so that your insurance is funded mostly from your current fund. This is because these policies are often higher quality and not limited by superannuation legislation, leading to a higher probability to you successfully claiming on the policy should you need to. Although this option isn’t always more expensive, if costs are a large factor, insurance through your super is better than no insurance so it could be worthwhile comparing your options as premiums can vary significantly, below is a link that can help you compare Life/TPD premiums and most funds also have a calculator on their website where you can compare their premiums:

Because premiums can vary so much I would not include insurance premiums in the total cost of your super fund, rather compare separately. It may well be worthwhile having a fund for your main super balance and having a small balance funding an account with competitive insurance in it. WARNING: if you do this make sure your balance is always high enough to fund the premiums and it may be required to have your contributions going into this smaller fund (if this is the case you may need to do a rollover every now and then to your bigger fund).

Other tips

  • When comparing performance, make sure the time period and dates are the same.
  • When changing funds and there’s insurance involved, make sure your new cover is in place BEFORE closing your old account.
  • Small differences in net performance can lead to huge differences in account values over the long-term as a result of compounding.

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