Why you need to check before changing how your super is invested
Hopefully you have used the coronavirus-induced "hibernation" productively and got to grips with your super. While financial markets have been battered, it's important to remember your super is a long-term investment and knee-jerk responses can be damaging.
This doesn't mean you should ignore things either. The more informed you are the better off you are likely to be.
At times like this, people sometimes question whether their investment option is the right one and whether they should switch. Most members are in their fund's MySuper default option, perhaps because they haven't made an investment choice. But apart from a few duds, most balanced default options have performed remarkably well since super's inception nearly three decades ago.
But there may be people who are better off in other investment options. Younger members, with decades ahead of them, may get higher overall returns with a growth option because they can ride out the market dips.
At the other end of the spectrum, members who are about to retire, or are in retirement and no longer earning money, may want to preserve their capital and prefer something less volatile, even if it means accepting lower returns.
To accommodate members who prefer a more tailored approach, funds offer various diversified, pre-mixed options such as growth, balanced or capital stable. They include varying exposure to growth and defensive assets.
Growth investments include shares, property and alternative assets such as private equity, hedge funds and infrastructure. Defensive assets include bonds, bank bills, debentures and cash.
The strategic allocations for each option will move within a range depending on the outlook.
"Unfortunately, there isn't much standardisation when it comes to labelling in super," says Xavier O'Halloran, director of Super Consumers Australia.
"As an example of the huge variations in labelling, the Hostplus MySuper 'balanced' option was classified by APRA as being invested in 93% growth assets. At the other end of the spectrum, the Commonwealth public sector's 'balanced' MySuper option was classified as only having 62% invested in growth assets."
Colin Lewis, head of strategic advice at Fitzpatricks Private Wealth, agrees.
"The definitions between funds vary. What is a balanced option in one fund can be a growth option in another fund. You need to look at what the percentages are between growth assets and defensive assets."
Alex Dunnin, executive director of research and compliance at Rainmaker Information (which publishes Money), says there are some broad rules when it comes to labels, but if you want to compare how the same option varies from one fund to another, it can be quite a challenge.
"You need to look at what asset classes they invest in, what portion is allocated into shares and the split in the types of shares they've got - Australian, international, emerging markets - and what portion is in property, what portion is in bonds ... and obviously fees.
"If you are asking those types of questions, you are having a good look, but then it only matters if the fund has got a demonstrated track record. There are some products that do and some that don't."
Dunnin says the tricky aspect is that not all funds get the returns you'd expect given their asset mix.
"The MySuper options of the major super funds are remarkably robust, tough and versatile. Jumping out of them may not always lead to the results you'd expect," he says.
In other words, look before you leap. You might be in the best option after all.
Finally, if you do want to switch super funds, be careful you don't forfeit any irreplaceable life insurance. And if you're in pension phase, check first that you are not going to lose any grandfathered social security benefits like the Commonwealth seniors health card.
And if in any doubt, seek professional help from a financial adviser to ensure everything is in good order.
What's in a label
Rainmaker Information's Alex Dunnin says classifying assets as growth or income is not always clear-cut or easy.
"The trouble is, people start to argue about how you should categorise some asset classes, like unlisted [direct] property and listed property. Is unlisted property that is held as, say, a building, a growth asset because the super fund expects it to grow in value or is it an income asset because it delivers rental income? It does both so a super fund may split how it
classifies this asset."
Similarly, some funds may describe their infrastructure assets as income assets because they deliver income streams much like how a bond does. But critics will say these are growth assets because they are property. The truth is, they are a bit of both.
"These factors mean that when investors start to delve into choosing their own investment options, they need to look under the bonnet and, while taking note of the formal categories, be mindful that there is ambiguity around these.
"While this may seem a bit unhelpful it's not too different to how we should judge share funds. Some are aggressive, some are conservative, some are highly concentrated, some are deliberately speculative. Yet they are all 100% shares."