What is the best super fund

Is there such a thing as the best Super fund?

As you can imagine, I am always getting asked questions about Super. In this article I will answer one of the most frequently asked question about Super – what is the best Super fund?

The simple answer is there is no best Super fund. The more detailed answer though is whichever fund gives you the ability to choose the right mix of investments and charge no more than about 0.6% in total fees.

This is very important for those with another ten or more years to go until they can access it. Not getting it right could cost you many tens of thousands by the time you retire.

Below I will go through the process I use when helping clients with their Super.

Administration fees

Most super funds charge some type of administration fee. Simple. I want a fund that has administration fees of less than 0.3%, noting that it is relatively easy to get one with between 0.1% and 0.15%.

Investment fees

Investment fees range from close to zero through to 3%. There is no evidence to suggest that higher fees will give you better results. In fact higher fees will usually result in lower returns. Often the reason for this is that active investments cost more (more on this below).

I want total investment fees to be less than 0.5%, noting that investment fees are not the most important thing.

Investment style

Broadly there are two types of investment strategies. Active and passive.

Active Investment

Active investment means the fund manager tries to pick which companies will perform the best. Of all active fund managers around the world, 75% of them don’t beat the average of the market they benchmark themselves against. In Australia over the last 15 years, 80% of actively managed funds have not beaten the index after fees were taken out.

Why? They nearly always have higher fees and they can’t consistently pick which companies will perform the best over the long term. To be able to get a return that is higher than the average (after their fees are taken out), these companies need to consistently be able to pick which companies will underperform and which will overperform. Very few can consistently do this – and if fund managers do overperform there is no evidence they will continue to do it.

Passive investment

Passive investment (aka index investing) means the fund manager doesn’t try to guess which companies will do better than the others, as they just invest in everything. They simply aim to get the average of the market. The good thing about these investments is they have low fees and perform in the top 25% of similar investments.

For my clients (and myself!), I want a superfund that has a good selection of passive or index options. This should be more than just the diversified index option that many offer, as for most people the diversified index option will have too high a percentage of conservative investments.

Investment options

Out of all the factors, having the right investment options is the most important thing you should focus on, as it will have the biggest influence on your retirement balance.

People, helped along by super funds and fund managers, often make investing and choosing investment options too complex. Let’s keep it simple. Broadly, there are four types of assets. Business, property, bonds and cash.

Businesses and property are considered growth assets as they usually provide higher returns in the form of either dividends, rent or growth. While these investments increase the chance of higher returns, they also come with more risks. In particular, more volatility and more chance of negative returns.

Bonds and cash are when you lend your money to others (governments or other corporations) and get interest in return. These are classed as conservative or income assets. They provide an income but no real growth, although there is very little risk their value will fall substantially.

In some cases you may also want to consider having investments that are leveraged (i.e. the fund borrows money to invest). This is much higher risk, but can give better returns if done well.

Generally, people with more than five years until they can access their Super (ie those under 55) are best placed having a high proportion (up to 100%) of passively invested growth assets. This will be more volatile than a more conservative portfolio, but over the long term it is highly likely to provide better returns. This is why you need a super fund that has more than just the diversified passive/index option as generally these have too much cash or bonds.

Diversification

While you want a high proportion of passively invested growth assets, it is important not to put your eggs in one basket. Just because US Shares (or to be honest Meta, Amazon, Tesla, Alphabet and Apple), does not mean this will continue. As an indication, the US market went backwards for large parts of the early 2000’s.

It is important to spread your investments across Australian index funds, International index funds and Property Index funds if possible.

Conclusion

Bringing it all together, if you are have ten years or more until you can access your Super (ie you are 50 or under) and are looking to get the most out of it the three main things to look for (in order of importance) are:

1. Make sure your super fund allows you to have a high percentage of passive or index growth assets diversified across Australian and International shares and property. Before you look at other funds, check out the investment options of the fund you are in. If it has these, great, if not, look elsewhere.
2. Check the investment fees your fund charges for the investment options you want. Ideally these should be around 0.1%, but if it is 0.3% it isn’t the end of the world. A word of caution, if the investment fees are 0% dig deeper. Are you really getting what you think it is, because no fund manager ever invested your money for nothing. There is a high chance the passive investment isn’t a passive investment at all.
3. Finally, check the administration fees. Anything below 0.3% is ok, but close to 0.1% is better.

Before I finish, note that  before you move, always consider your insurance.

• You may not be able to replace your insurance if you move funds
• Your employer may be paying for your insurance but will only do it if you are with their preferred super fund (this is common with people working for multinational companies). If this is the case, weigh up whether the cost of insurance premiums outweighs higher investment fees.