Running your own super using the industry’s ‘dirty secret’

Superannuation AustralianSuper SMSF self managed super fund DIY Mark Delaney
AustralianSuper chief investment officer Mark Delaney admits a well-informed investor could match the performance of most conventional super funds.

Is it feasible to run the investment side of your own superannuation fund?

The answer is certainly yes, although that comes with a few qualifications.

This be done either through a full self-managed super fund (SMSF) or the many platforms available via super providers that allow you to pick the investments while they handle the administration.

On the SMSF side, you need to make sure that your fund is big enough to be worth paying for the accounting and auditing fees required and you need to commit to doing some administration work.

However, an SMSF is really the only way of buying a property directly within your super fund – potentially tax free if it is held until after retirement.

Using a DIY fund through a platform is much easier and less complicated than an SMSF, but again you need to be certain that you are up to the challenges of making good investment choices and doing some functions such as fund rebalancing, term deposit purchases and ensuring that enough cash is put aside to handle withdrawals if the fund is in pension mode.

Mark Delaney admits passive investments beat some super funds

Surprisingly, highly regarded AustralianSuper chief investment officer Mark Delaney has admitted that a well-informed investor can match the performance of most conventional super funds by using passive investment through options such as exchange traded funds.

Speaking at a recent Australian Institute of Superannuation Trustees (AIST) conference, Mr Delaney admitted that most super funds cannot beat passives and that funds should not be spending money to try to do so.

“The dirty secret of the super industry is that most funds don’t do much better than the passive portfolios,” Mr Delaney said.

“If we took the median asset allocation of SuperRatings and then gave them all the index returns, we will get roughly what the median fund earns. That’s been the case for a long time so a lot of people would be better off taking a median asset allocation and indexing everything,” said Mr Delaney.

Overall returns are most important thing for members

It may seem like he is stating the obvious, but Mr Delaney said overall returns were the most important thing for members and that if managers could not beat these, they should not be wasting members’ money trying.

“The overall return is the thing that matters to members as that is what they will have to live on in retirement so we have to generate the biggest returns we can for members using both strategies and value-add to do so,” Mr Delaney said.

Make sure you are in a high returning fund

“The most important thing for them is to make sure they are in a high-returning fund. How the money is made is less important than how much money is made.”

“If you can’t make more money than passive then why should you spend members money. It’s not your money. Your job is to get the best outcome you can with their money.”

While it is possible to echo an investment allocation through passive investment, the really good fund managers such as AustralianSuper do add value by changing those allocations over time.

For example, the AustralianSuper balanced fund has an allocation to Australian shares of between 10% and 45% and is currently sitting at 21%.

International shares have the same 10-45% allocation and are currently sitting at 31%.

Some sectors easy to do passively, others more difficult

Some of the other sectors in the mix such as cash, fixed interest and listed property are fairly easy to replicate through passive investments such as exchange traded funds (ETFs) while others such as infrastructure, direct property, private equity and credit would be more difficult to replicate.

There are some listed alternatives that might work but they usually involve a bit of juggling and research compared to other investment areas.

Interestingly, AustralianSuper’s high growth pre-mixed allocation would be much easier to replicate using ETFs because it had a much larger allocation to local and international shares (27% and 45.5%, respectively).

Do you really want to DIY your super?

The question for the potential DIY super fund operator is whether they can reliably replicate the performance of a top-notch manager such as AustralianSuper – complete with dynamic asset allocation and periodic rebalancing – or whether they should just pick a good manager and run with it.

If fund managers should be measured by their fees and performance, so an honest DIY fund manager should be also measure themselves against the professionals.

As the field of super fund managers contracts, Mr Delaney said managers that fail to beat their benchmarks over time need to go as well.

Super fees still too high but falling

“That’s a question for pension plans, if you have a manager on their books who hasn’t beaten their objectives over five years, would you still hire them or would you terminate them?’’ asked Mr Delaney.

“Very few would keep them after five years. So how should they be treated themselves?”

Mr Delaney said fees on super funds were still too high, but he is doubtful that the Your Future, Your Super reforms would help to reduce them.

“Fees have come down a lot but what we should be doing is maximising returns for as little a fee-load as possible and I think we’ve been pretty good at it,” Mr Delaney said.

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