Three ways to pick a great superannuation fund

Superannuation fund retirement HostPlus investment risk level fees
Chant West says “middle” growth superannuation funds have produced a 13.4% return.

It has never been more important to pick a good superannuation fund to make sure you have the best possible retirement.

With most Australians now to be forced or “stapled” into a single fund – ending the bad old days of multiple funds – having a fund with good long-term returns is vital.

Over the past year, many funds have shot the lights out in terms of performance with the median or “middle” growth funds producing a 13.4% return, according to Chant West numbers.

HostPlus has great returns in the short and long term

The best performer in 2021 was HostPlus Balanced, with a whopping 19.1% return after fees and taxes, while that same fund was equal first for returns over 10 years.

However, nine funds delivered returns of 15% or more for 2021, which is an amazing performance given the turmoil that the year produced.

Some of the other really solidly performing funds included SunSuper and ChristianSuper which both topped 16%, while Mine Super and TelstraSuper came very close with 15.9% returns.

The problem with looking at just one year returns though is that they could be deceptive, with 10-year returns giving a much better example of the long-term performance of the fund.

That sort of time period shows the strength of the investment method being used and consistency of performance over different market conditions – something that could well come into focus in 2022 which has already thrown a few curve balls in the form of some hefty share market falls.

Make sure you choose the right investment risk level

Perhaps the first thing is to ensure that the risk level of the fund you choose aligns with your own risk tolerance.

There is no use complaining about hefty investment losses if you have chosen a high growth fund when you would actually prefer a conservative setting.

Because labels between different funds change, it is also important to really check that the label you end up choosing is the right one for you.

In general terms, the younger the person with a superannuation fund, the higher their risk tolerance should be because they have plenty of time to rise out downturns, although personal preference is still very important at all ages.

Some people are happy to live with lower average returns in exchange for not enduring years when the fund balance falls and it is important that these feelings are taken into account when choosing a risk level.

Low fees are vital to get good returns

Secondly, you need to choose a fund that has low fees for both investment and administration.

Many studies have shown that fees are one of the biggest determinants of overall performance and paying higher fees does not “buy” any extra performance.

This issue has also shown up in all of the Australian Prudential Regulation Authority’s “heat map” tests, which consistently show that high fee funds tend to have poor overall performance.

Size matters and allows for lower fees

The third issue which is related to the second one is the size of the fund.

Larger funds tend to have much lower administration fees due to their larger scale.

This often, but not always, means industry funds which by their structure don’t need to pay profits to private owners, allowing for lower fees as those profits are instead paid back to members.

The 10-year performance results show that with industry fund giants HostPlus and AustralianSuper both delivered an average 10.7% return each year for the decade.

Industry funds also dominated the rest of the ten year returns with UniSuper returning 10.6% on average, closely followed by Cbus MySuper, VicSuper and SunSuper which all topped 10% a year over the decade.

They are all very strong performances for balanced funds, which normally aim to beat inflation by 3.5% a year, which translates to about 5.5% to 6% over the last decade.

Whether funds will be able to reproduce such strong returns in 2022 is already looking more difficult due to some hefty market falls but funds that have managed returns above 10% for a decade should be able to remain competitive due to their strong investment systems.

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