The time has arguably never been better to switch out of an expensive, poorly performing superannuation fund and into one with better performance and lower fees.
With interest rates so low they are almost negligible and returns on all other asset classes being compressed, fees that were once unexceptional now threaten to rob your super of a big chunk of its annual return.
While there is a case for higher fees for funds with excellent returns, there are far too many that combine poor returns with high fees – potentially robbing their members of up to $200,000 or more from their final retirement balance.
Fat cat funds can drain retirement wealth
The recent Stockspot Fat Cat Funds report is an excellent place to start checking because it uses longer term post fee returns (five years) to compare the 100 biggest fund managers offering a range of investment styles (aggressive, growth, balanced and moderate) and clearly outlines fees.
All told it compares 600 multi-asset investment options.
While the leader board of the best “fit cat” funds near the top features some of the expected results like HESTA, UniSuper, IOOF and AustralianSuper, the “fat cat” funds near the bottom are also fairly familiar for all of the wrong reasons, with many of the fund managers having featured in the Hayne Royal Commission.
AMP and the formerly ANZ-backed OnePath together made up more than half of the 40 poorly performing “fat cat” funds, with AMP the undisputed “leader” in being the worst-performing fund provider across all four categories.
Macquarie also featured in some of the poorer performers net of fees.
Particularly notable was AMP Capital’s Dynamic Markets Fund which managed the incredible feat of being the first balanced fund to deliver a negative annual return of 2.2% over five years.
It is truly staggering to think that a supposedly professionally and actively managed super fund could be easily outperformed by virtually anything – an Australian index fund or even a simple bank account.
Focus on fees
What the Fat Cat Funds report does show is that it is crucial to focus on fees.
Stockspot founder and chief executive officer Chris Brycki said it was no longer enough to blindly trust your super fund was performing well.
Stockspot’s analysis found the average “fit cat” growth fund charged 1.10% in fees while the “fat cat” average was 2.08%.
Mr Brycki said a 30-year-old that switched from a fund charging 2% fees to one charging between 0.5% and 1% would get an extra $200,000 to $250,000 upon retirement.
Investment performance matters too
Obviously fund performance is another important ingredient but it’s more difficult to ascertain, given that past performance is not an accurate indicator of future performance.
Five-year comparisons are a bit better because they indicate better performing funds over a longer term which tend to be better run but it is also important to consider things like robust investment methods, what percentage of funds are illiquid and overall risk when comparing different funds.
Other things to consider when thinking of changing funds are insurance coverage and exposure to capital gains tax, with professional advice often required unless members do significant due diligence of their own.
A great time for ethical and sustainable funds
Another notable feature of this year’s funds list is that ethical and sustainable funds generally put in quite strong performances.
In this case it may have been because fossil fuel companies have done poorly over the past five years and might recover later but that is also part of the point of such funds.
It is also possible companies with a worse environmental record will miss out on returns as cleaner and more sustainable alternatives blossom.
Industry funds still on top
The list is also instructive in the enduring debate between industry and retail super funds, with industry funds coming out on top this time, largely due to lower fees but a higher allocation to unlisted assets.
There are investment environments when that larger allocation to unlisted assets could be a disadvantage but it improved the investment performance this time.
All of the bottom ten funds were retail funds but there were also some well performed retail funds higher up the list.