When I ask people what their retirement dreams are, the answers tend to be simple. Most of us just want to have enough saved to live a comfortable life doing more of the things that we enjoy. But for many of us, particularly women who take significant time out of their careers to care for others, the idea of living a comfortable retirement can seem more like a stretch target than a certainty. So, let’s delve deeper into women’s super.
It’s why if I were to hand you a crystal ball right now to help you make a decision about where to invest your super, my guess is that there’s one question you’re likely to ask first:
‘Which fund will have the highest returns, and grow my money the most, between now and when I retire?’.
Or perhaps, you’d ask:
‘Which fund that invests ethically and broadly in-line with my values will have the highest returns between now and when I retire?’.
Of course none of us, sadly, have a crystal ball.
So when it comes to making a decision about choosing a super fund, or any investment fund, we need to know what we should be considering with the information we have available now, to make a good decision about the potential performance of a fund in the future.
This information is important because small differences in the average performance of a fund, could add up to hundreds of thousands of dollars difference in retirement outcomes later in life.
It’s not overly complex to make a sensible decision about how a fund may perform. There are a few key factors to consider. But sadly most of us have never been taught a framework for evaluating potential performance.
It’s why the Banking Royal Commission found that many Australians are invested in poor performing super funds charging excessively high fees. And it’s why there is now such a strong focus on educating people about investment fees.
There is even a school of thought that simply choosing the fund with the lowest fees is likely to lead to the best performance. The world-renowned investor Warren Buffet has famously instructed that when he passes away he wants the bulk of his money left in trust to be invested in low-cost index funds. And in Australia, the Barefoot investor has sold millions of books showing every-day Australians how they can ‘save’ money by paying lower fees on everything from home loans to investment products.
But are fees really the golden panacea when it comes to making a decision about the future performance of an investment fund?
Well, the answer is yes, and no.
I should premise the rest of this article with the disclaimer that I am the Co-Founder of a superannuation fund that charges below-average fees for a ‘balanced ‘ product’, but has never been focused on offering the lowest fee product on the market as the best strategy for driving returns to our members.
I also believe that when it comes to financial information and resources, you should interrogate anything you read, and come to your own conclusions.
My view on why it is problematic to focus solely on fees to evaluate the potential performance of any form of investment fund is that it’s a short-cut designed to get people out of the worst-performing funds, but it’s not necessarily a good one for choosing the best performing funds.
And I certainly think that the average Australian is smart enough to be given a more sophisticated framework to work with.
What the data shows about fees and performance
There’s certainly a strong correlation between the worst-performing super funds and the high fees they charge. For instance, a 2019 report produced by Stockspot showed that the ten worst performing funds charge their average member over 2% in fees, well above the average fees charged by the best performing funds. The same research showed that the top-performing super funds generally have below-average fees.
Yet, when we dig into the data further to determine if lower fees necessarily mean higher returns, the water gets a little murkier.
Research released last year by Superguide, based on independent superannuation data provided by Super Ratings, considered ten-year performance history and showed that the top-performing funds were not those with the lowest fees. For instance, the funds with the lowest, second lowest and third lowest fees, ranked 42nd, 107th and 61st out of 177 funds in terms of net returns to members over the ten year period. On the other hand, the fund that provided the highest net return to members after fees over the 10 year period, ranked 107 out of 177 funds in terms of fees.
Moreover, the research found that over the past ten years, the fund that actually provided the highest returns for members, charged over double the fees for someone with a balance of $50,000 compared to the lowest fee fund that only ranked 42nd in returns after fees.
In other words, choosing the cheapest fund available may prevent you from getting ripped off, but it’s unlikely to answer that question you asked that crystal ball: which fund will perform the best? And it’s certainly unlikely to answer the question of which fund will perform best based on your specific needs and risk profile.
That’s because there are a number of reasons that fees vary between funds, this includes that it typically costs more to have money invested in higher growth assets compared to having more money invested in more conservative investments, so funds often (but not always) charge a higher fee for options with more ‘growth’ focused investments.
So how do you evaluate which funds are likely to perform best?
To answer this question, I’m going to quote the sensible and unbiased advice on the Australian Government’s Money Smart website.
‘Compare your fund’s investment performance over at least five years. Consider the impact of fees and tax. Compare like with like. For example, only compare a balanced option with another balanced option, and try to use the same time period.’ – Money Smart, 2020.
Stay tuned for part two of this blog, I’ll break this down for you to show you how you can use this guidance to make an informed investment decision!
We feel so passionately about women’s superannuation. However, this is a very complex topic so we’re incredibly grateful that the team at Verve Super lent their expertise to share this information. However, it’s important to do your own research and consider things like fees, investment performance, insurance cover, your risk profile, and alignment with your values when considering if a superannuation product is appropriate for you.
This article is issued by Verve Superannuation Pty Ltd (ABN 65 628 675 169, AFS Representative No. 001268903), which is a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956, AFSL 238184), as the Sub-Promoter of the Fund.