Apples, oranges and fund performance surveys
No-one currently invested in superannuation funds or managing funds on behalf of super fund members has ever experienced anything like the kind of financial conditions we have seen over the past twelve months. Apart from cash and nominal government bonds, every other major asset class has performed poorly. This has been the worst global financial crisis since the Great Depression.
The pain of experiencing poor returns can be exacerbated if an investor feels they have performed even worse than others courtesy of the fund or funds they have invested in. Consequently, the plethora of fund performance surveys, particularly as quoted in the press, get a lot of people talking about relative performance. There’s nothing particularly wrong with this, provided you know the limitations of these surveys, and can interpret the results. Here then, is my list of five traps for the unwary when it comes to interpreting performance surveys.
Compare apples with apples
There is no point in comparing funds that have vastly different objectives, risk profiles and hence asset allocations and using the performance differential to judge the quality of the fund or its managers. In poor markets, such as the environment experienced over the past year, funds with higher exposures to growth assets (shares and property) are inevitably going to fare much worse than more defensive funds. In boom times, defensive funds are going to lag behind considerably. Even comparing two funds that are both described as ‘balanced’ can be very misleading. Depending on the survey and the particular manager, a balanced fund could have anywhere between 50% and 75% in growth assets.
Worse still, at least one recent survey table in the press compared ‘default fund’ options for a range of superannuation fund offerings. The risk profile of these funds, their asset allocations (including the proportion of each fund in liquid vs illiquid assets) differs so markedly, that the rankings are pretty much meaningless.
Liquidity matters
The lion’s share of the quoted difference between the performance of industry super funds and master trusts run by private operators such as MLC reflects neither commissions nor superior investment expertise. The assets managed by private trusts are overwhelmingly liquid, i.e they are in publicly traded securities such as equities and bonds. The prices of these securities are set daily in active markets, and these prices are used to construct daily unit prices for the trusts. Consequently, unit prices and quoted performance figures of these funds will reflect the performance of the listed markets they are exposed to, for good or for ill. Many industry funds, including most of the current top performers, have substantial exposures to unlisted investments in property infrastructure, or other alternative investments, that tend to be valued infrequently. Their quoted performance figures are stale.
The challenge here is that when someone buys into a fund – any fund – they need to be confident that they are paying a fair, current market price. The greater the share of infrequently priced, illiquid assets in a fund, the less likely it is that new investors are paying a fair price.
Sleeping at night versus chasing high performance
It’s important to pick an investment strategy for your superannuation that suits you – your age, financial goals and appetite for risk. Everybody is different. A more conservative fund that is currently top of the league tables may not be right for your long-term needs if you’re young, and need long-term growth. And make no mistake; sharemarkets are still going to be the most likely source of long-term growth. The converse is also true: when the boom was still going on, how many people were attracted to a high risk strategy that might have been top of the tables then, only to find that it was much higher risk than they were really comfortable with? There’s no point in chasing high risk, if you can’t sleep at night when times get tough.
Are the fees really that high?
Conventional wisdom suggests that private master trusts have significantly higher fees (of the order of 2% or so) than industry superannuation funds, and this difference reflects commissions paid to financial advisers as well as administration costs associated with the platform used by private master trusts.
Professional advice is valuable. It can stop people doing incredibly daft things with money, ensure that they have a plan for meeting their financial goals (including how much money they’ll need in retirement) and navigate them on their financial journey through life. Whether that advice is paid for via commissions or as a distinct fee for advice should be up to the consumer. In many cases, the commission component of master trust superannuation fees is dialled down to zero, in cases where the client pays the adviser directly. In the case of some newer platforms such as MLC’s MasterKey Fundamentals, there is no commission component.
The cost of administration tends to be variable. Often, when constructing the performance surveys, the total cost of superannuation is calculated based on a fixed superannuation account balance of say $50,000. At that level, administration fees as a percentage of the account are at or close to their peak. An increasing number of people have balances considerably higher than that, and pay nothing like the kind of administration fees quoted in some surveys.
Past performance really is no guide to future performance
At the end of every prospectus, product disclosure statement, investment presentation or newsletter, you’ll see this statement or something very close to it. Investment managers and super funds do not put it there for amusement or because ASIC tell us it’s required – it’s there because it’s true. Even when a survey compares funds of similar risk profile, asset allocation, and liquidity, based on a fair assessment of the relative costs, last year’s star performers often end up as today’s bottom dwellers, and today’s stars could just as easily be at the bottom of the ladder within the next few years. Changing funds based on past performance has been shown time and again to be a mug’s game. Too many investors typically exit an underperforming fund or investment before its performance improves, and get into high performers before they start to slide.
Whether we like to admit it or not, superannuation is our longest term asset. Even if I’m 70 today, the chances are that I’m still going to be investing for 10 years or more. If I’m in my 30s, I have many decades of investing ahead of me. Does it really make sense to judge such an investment based on how it’s fared over 12 months?
Important Information:
Any advice in this communication has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on any advice in this communication, consider whether it is appropriate to your objectives, financial situation and needs. You should obtain a Product Disclosure Statement or other disclosure document relating to any financial product issued by MLC Investments Limited ABN 30 002 641 661 and MLC Limited ABN 90 000 000 402 and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the Product Disclosure Statement or other disclosure document is available upon request by phoning the MLC call centre on 132 652 or on our website at www.mlc.com.au
An investment in any product offered by a member company of the National group does not represent a deposit with or a liability of the National Australia Bank Limited ABN 12 004 044 937 or other member company of the National Australia Bank group of companies and is subject to investment risk including possible delays in repayment and loss or income and capital invested. None of the National Australia Bank Limited, MLC Limited, MLC Investments Limited or other member company in the National Australia Bank group of companies guarantees the capital value, payment of income or performance of any financial product referred to in this publication.
