On the shortcomings of retail super investment

It’s a matter of expertise. Anyone can hug the index, pay themselves a fee, and then give the index return minus the fee… The way to achieve global leadership in investing is to skew the fees towards paying for performance. (Kohler, 2014)

Australian superannuation funds may be big with respect to overall size (Australians have around 2 trillion dollars in super), but can be found lacking when it comes to respectable and reliable returns to their customers. Superannuation is not customarily thought about by consumers until their balance takes a hit during a stock-market downturn, or they are approaching retirement.

In general, very few people in Australia now know what they will have to live on when they retire. It is a lottery. In the space of two decades we have gone from knowing and not having to worry, to not having faintest clue, and worrying like hell (Kohler, 2012).

It is unfortunate that people tend to approach superannuation in a considerably hands-off approach, perhaps through lack of knowledge or through a perceived lack of agency with which to change their superannuation situation. Both situations are easily addressed. Knowledge about how superannuation typically works and performs can be inferred by addressing their performance over the last ten years.

The average investment return of Australia’s super funds over the past 22 years (that is, from inception) has been 7.1 per cent, while the average annual total return from the Australian share market over the same period has been 10.4 per cent (Kohler, 2014).

Essentially, retail super products, the sort a consumer is automatically placed into when they gain employment, deliver less return than the average growth of the Australian stock market when averaged out over a ten year period. One can either infer that retail superannuation products simply track the stock markets and then take their fees, lowering customer returns by around 3 percent… Or the superannuation companies are in fact making much more profit than basic index-tracking, and are simply pocketing the remainder and returning 7.1 percent on average. So it’s either underwhelming performance approaching incompetence or profiteering. The statistics quoted below suggest the latter is at least a part of the equation.

One in seven “growth” super funds containing a combined $3 billion have made nothing in the past decade, jeopardising the retirement plans of tens of thousands of workers (Rolfe, 2016).

A reactionary impetus from Countinghouse was forged when we realised the lack of transparency in retail super products essentially mean those companies are investing peoples retirement savings in what can probably be called mysterious ways. Transparency became a primary touchstone for our fund.

The industry will argue that it is, indeed, tightly regulated, but not where it counts. Other utilities’ prices are set according to the returns on capital of the providers; in super, not only are fees essentially unregulated, but few customers even know what they are… So the superannuation industry is in the happy position of providing a service that is mandated by law where the price is both unregulated and effectively unknown (Kohler, 2012).

To address the second fallacy, that of a lack of agency: A retail superannuation customer can take complete control of their retirement security by electing to move into self-managed superannuation. This can incorporate an index-tracking portfolio as a stable passive investment, but also incorporate property, appreciating assets and active investments like Countinghouse Fund into the mix. This approach will almost always beat retail superannuation annual return, but also enables transparency with regards to investments, insurance, fees and charges. The term self-managed can seem daunting, though it is typical for an individual to proxy through a financial advisor who will cover the administration, rebalancing and set-up processes for you. The outcome of transitioning to self-managed super is a firm grasp on the reigns of retirement, typically delivering much higher returns, greater transparency and flexibility. Superannuation may be compulsory, but belonging to an opaque and underperforming retail super product is not.

Kohler, A. (2012) Australia’s super system is a national disgrace. Retrieved 16th Feburary, 2017 from http://www.abc.net.au/news/2012-10-31/kohler-australia-super-disgrace/4343108

Kohler, A. (2014). Super investors are delivering average returns. Retrieved 16th Feburary, 2017 from http://www.abc.net.au/news/2014-11-13/kohler-super-investors-are-delivering-average- returns/5885638

Rolfe, J. (2016). Best and worst performing ‘growth’ super funds in the last 10 years. Retrieved 16th Feburary, 2017 from http://www.news.com.au/finance/superannuation/best-and-worst- performing-growth-super-funds-in-the-last-10-years/news- story/c0671d52663823f1a0955dfa3fd409f4