A super fund's investment menu is the full list of all the fund's investment options or choices. When trying to make sense of these investment choices, or just the investment strategy underpinning your MySuper product, there are three main things for you to think about:
Your investment strategy
|Diversified or specialist?|
|Your investment strategy describes the type and mix of assets you want your investments to include. Do you want to spread your investments across lots of different classes of assets like shares, property, bonds and cash; or do you want to invest only into specific asset classes?
If you want to spread your money across several asset classes, this is called a diversified investment strategy. If you want to focus upon a single asset class, this is called a specialist investment strategy. Diversified options can also be called multisector or even multi-asset options, while specialist asset class options can also be called just sector options.
The major advantage of using diversified investment options is that the super fund makes the decisions about the mix of assets to buy for you. But as you become more experienced as a super fund member you may want to make these decisions yourself, whether that means you choose just one asset class specialist option or you mix your own selection; this is why many funds now offer lots of specialist asset class investment options.
The irony is that by mixing several specialist investment options together, you may be effectively constructing your own diversified investment portfolio anyway, albeit one that is more customised.
|Growth, income or defensive?|
|Investment strategies are usually categorised by how much money is placed in growth assets and how much is in income assets. Growth assets such as shares or property are so named because they are meant to 'grow' in value over time, and income assets such as bonds and cash are so named because they are intended to hold their value and deliver regular income.
Income assets are also known as defensive assets as they are much less likely to fall in value, meanwhile bonds are also known as fixed interest. The subtlety is that some growth assets can also be defensive and deliver income, e.g., shares can deliver dividend income and property can deliver rental income while some income assets like infrastructure can also rise in value. It's not always as straightforward as the textbooks tell us.
The normal rule of thumb is that the more growth assets in your investment portfolio, the better your chances of making more money over the long term. But your returns may jump around more from year to year, i.e., their returns are more volatile and so they have what is known as higher investment risk.
Conversely, the more income or defensive assets in your investment portfolio, the lower the expected longer-term returns but that should come with lower volatility and less investment risk.
This is what experts mean when they talk about the risk-return trade-off.
|Lifecycle investment choices|
|A new style of investment option that is becoming more popular in Australia following its wide use in the United States and the introduction of MySuper is what are known as lifecycle, life stage or age-based options. These are diversified investment options where your super fund assigns you into an investment strategy depending on how old you are, or its flipside, when you expect to retire. These options are described in more detail on page 18.
For example, if you are under the age of 45, meaning you were born in the 1970s or later (i.e., you are a Gen- Xer) your super fund might assign you into an option it could variously call a 1970s or 20-year strategy. Because you are likely to be in that investment option for about another two decades, the investment strategy is very growth asset oriented with a high exposure to shares and property.
If you are a baby boomer aged 60 who was born in 1960 and expects to retire in about 5-10 years, your super fund might similarly assign you to an investment option with lower exposure to growth assets but higher exposure to income or defensive assets.
Another important thing for you to consider about these types of investment options is how does your fund transition your account balance into different investment strategies as you get older? The two main approaches are to either physically swap you from one option to another - and thus implicitly force you to sell units in one option and buy units in another triggering higher embedded tax costs - or adjust the investment strategy across the investment option's whole portfolio based on the average age of all the people in that option.
|WHAT IF YOU CAN'T DECIDE?
Having many investment options is great if you are comfortable making investment decisions, but not everyone is ready or able to make these decisions. If you are one of the many millions of super fund members in Australia who can't decide which investment option to choose, then your super fund will assign you either into its default investment option, which is usually a balanced or growth option, a lifecycle option, or they will suggest you choose its main balanced option. In workplace funds these default options are called MySuper products.
Who manages your money?
Do you want to use just one investment manager, or do you want your money spread across several investment managers? In the same way that diversifying across several asset classes helps you control investment risk, you can also reduce investment risk by spreading your money across several investment managers.
Investment options that do this are called multi-manager options. In contrast, single-manager options are those that give all your money to just one investment manager. But if you use a diversified investment option to spread your investments across lots of asset classes and you do this through a multi-manager investment that uses too many investment managers, you could end up with so much diversification across asset classes and investment managers that you will effectively just be matching the market.
How many investment options?
The next question is how many investment options do you want to be able to choose from? Do you want only a limited number of choices, a medium number of choices or lots of choices? This question is important because the more choices and flexibility you want, the higher your super fund's fees will probably be.
It's also worth noting that if you choose super funds with more investment options you may need to work closely with your financial adviser because the more choices you have usually means the more help and advice you will need to take full advantage of all the options available.
The twist is that funds with low fees usually have fewer investment options while funds with high numbers of investment options usually have higher fees. This is why, when you are choosing superannuation funds, and choosing between investment menus you are also implicitly choosing the type of fund you want to join and what fees you expect to pay.
The following table illustrates how this works.
|Your investment menu|
|Number of options||Primary segments||Choice of investment strategy||Choice of investment manager||Overall fees|
|2-15||Mainly industry funds||Yes||No||Low-medium|
|16-80||Mainly retail funds||Yes||Limited||Medium-high|
|More than 80||Retail funds only||Yes||Extensive||Medium-high|
|Making sense of super investment performance figures||Are you paying too much in super fees?|