Where's Your Superannuation Invested?

It’s an interesting question. Some of you will know, most of you won’t and that’s quite a concern. Besides your house, your superannuation fund is your second biggest investment that will carry you through retirement and give you the lifestyle you desire. Most tradesman will say their super is invested with one of the big industry funds but be completely unaware of the underlying assets in the fund. For something that affects every single Australian in such a huge way, it pays to know where your hard-earned money is really going.

Speaking with a friend over the weekend, I asked him where his super was invested. Seems like a straight forward question but all he could tell me was that it was in ‘some type of managed super fund’. After a bit of digging, we managed to find out his superannuation fund was invested in a stock standard AMP Flexible Lifetime Super fund using a balanced investment option. Great… so where exactly was the money going? How much risk is your super fund taking to achieve these returns and what are the underlying assets?

As I soon found out, it’s not an easy question to answer especially when investing in an industry, retail, corporate or public-sector fund. A Self-Managed Super Fund is the only type of super fund where a superannuate is fully aware of its underlying assets. Whilst one can find out the price of any ASX listed at the click of a mouse, good luck trying to find out what specific investments your fund manager is investing your money into. How do you know your fund manager isn’t losing you money? Well here’s some hard facts:

• 1 in 7 growth super funds have made nothing over the past ten years.
• 47 of 346 growth funds in operation since 2006, failed to beat the official inflation rate over that time (2.5%).
• ANZ runs 27 of these lemon funds.
• More than 150 funds have not earned more than 3.5% a year.
• 33 funds have only delivered an average investment return of 5% or more for the past 10 years.
• REST is the top earner with 6.7% a year.
• Top 5 performers 2016/17:
  • HOSTPLUS – Balanced (12.4%),
  • First State Super – Growth (12.3%)
  • Sunsuper for Life – Balanced (12.2%)
  • Russell iQ Super Employer – Russell Balanced portfolio (11.9%)
  • Australian Super – Balanced (11.8%)
• Bottom 5 performers 2016/17:
  • Betros Bros Super Fund No 2 (3.2%)
  • ASGARD Independence Plan Division 2 (4.7%)
  • LESF Super (5.4%)
  • Pitcher Retirement Plan (5.9%)
  • AMP Superannuation Savings Trust (5.9%)

One fund manager, ANZ’s One Path, wrote to its members telling them that long-suffering account holders should leave if the super fund is unable to perform any better. What a disgrace. We suggest if your super is invested in any of these bottom performers, you should switch. You don’t want to be one of those people that realize later in life that you’ve not enough to survive retirement and then start taking bigger and bigger risks to improve returns. In short, it spells disaster.

The question on your mind now is probably where to switch and what investment option within a super fund do I choose? So, first things first. Generally, your employer will contribute 9.5% of your pay towards your super fund every month. From here that pool of money is invested into shares, bonds, property and cash. Portfolios are weighted between growth and defensive assets. That means you have the choice of selecting a pre-made portfolio to meet your risk level and financial objectives. So, when you’re selecting the investment option in a super fund, you’re effectively selecting the assets you want your money to go into. But how risky should you go?

Above 80% of Australians have their super in a balanced option. That generally means 60%-80% of growth-style assets, such as shares (both international and Australian) and property, and 30% to 40% in more conservative investments, such as cash and fixed interest. Anything above 80% in growth-style investments is considered high risk growth.

“It pays to know where your hard-earned money is really going”

A recent AFR article highlighted the fact that many super funds were hiding the extremely high levels of risk by investing in assets that are difficult to classify. Unlisted property and infrastructure assets fall under this banner. By investing in these assets, some super funds can achieve much higher returns by hiding the level of risk they’re taking and deliver time and time again. Balanced super funds have been investing in highly geared infrastructure projects such as airports, toll roads and tunnels because these assets are deemed ‘defensive’ or safe. But it’s far from the truth. These balanced super funds are sometimes 90% invested in high risk options, deemed defensive. This sort of deceptive ‘funny buggers’ can lead to painful losses. In the event of a sharp correction, these balanced funds will be absolutely hammered due to the high-risk assets that are in the portfolio. And all it will take is a sudden rise in interest rates. Infrastructure and property assets will turn sour.

"Many super funds were hiding the extremely high levels of risk"

Here is a good example from Australian Super and their super portfolio mix.

A Balanced fund means 60% shares and 40% cash & bonds. Looking at the above table you’ll notice a few extra assets that don’t quite fit the shares or cash banner. They are Private Equity, Direct Property, Infrastructure, and Credit. According to the rules they’re all deemed defensive. Let’s see how ‘defensive’ they are with 27.20% in alternatives i.e. private equity, property, infrastructure and credit.

Delving a little deeper into the fund, we found out that the Australian Super fund invests in high risk transmission lines, airports, toll roads, seaports, water utilities, communications, wind farms, shopping malls, and office buildings. There were some 200 property projects, 400 private equity projects and 1040 debt securities issued by companies such as $356m in ENA S.A.U, which is a Spanish road toll operator. These assets should be deemed high risk growth assets. If that was the case, this balanced option would be 88.1% growth and 11.9% defensive. Wait a minute. That looks a lot like a high growth fund?

According to MLC Wealth Sentiment survey, 45% of women aged 18 to 29 and 27% of men the same age, have no idea what risk profile their super is invested in. That is – conservative, moderate, growth or high growth. Women aged 30-49, the figure is 27% and 14% with men. The risk profile is such an important aspect of your super fund, it simply can’t be ignored. Your super fund should be a safe, low risk investment that is able to ride market downturns and still be reasonably safe. Don’t fall victim to the balanced fund high risk rort. When the tide changes, you don’t want to be caught out.

Ishan Dan, Wattle Partners