The backbone of a super fund is its investment menu. What is it, how does it work, and how do you navigate your way through it?
By Penny Walster

KEY POINTS
A superannuation fund's investment menu is the list of investment choices it offers regarding how money can be invested. Choices can include choice of investment strategy and choice of investment manager. If you can't decide, your super fund will assign you into its default investment option or suggest you put your money into a balanced option. Value choice funds have limited investment menus, deluxe choice funds have mediumsized investment menus, and premium choice funds have extensive investment menus. The higher the fees you pay, usually the more investment choices you have and the more support you will get from a financial adviser.

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 all these investment choices, there are three main things for you to think about:

• Your investment strategy
• Who manages your money
• How many options do you need.

Your investment strategy

Your investment strategy describes the type and mix of assets you want your investments to include. Do you want to spread investments across lots of different classes of assets - shares, property, bonds, 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 a 'diversified' investment strategy. If you want to focus upon a single asset class, this is a 'specialist' investment strategy. Diversified options can also be called 'multisector' options, while specialist asset class options can also be called just 'sector' options.

Growth or income?

Investment strategies are usually categorised by how much money is placed in 'growth' assets and how much is in 'income' assets. By growth assets, we mean shares and property, and by income assets we mean bonds and cash. Bonds are also often called 'fixed interest'.

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. The trick is understanding that your returns from growth assets may jump around more from year to year, ie, they are more volatile. This chance or likelihood of your returns jumping around from year to year is called 'investment risk'. Conversely, the more income assets in your investment portfolio, the lower your expected longer term returns, but the lower your investment risk. This is what financial advisers mean by the trade-off between returns and investment risk.

If you decide to go for a difersified investment option, they come in four main levels:

• Growth funds generally have more than 75 per cent in growth assets.
• Balanced funds generally have between 55 per cent and 75 per cent in growth assets.
• Capital stable funds generally have between 35 per cent and 55 per cent in growth assets.
• Capital guaranteed funds generally have less than 35 per cent in growth assets.

Following our rule of thumb, the higher the proportion of growth assets, the better your longer term returns should be. Because superannuation is a long-term game, you might be more inclined to accept higher investment risk and this is why most super funds will generally recommend you adopt balanced or growth investment strategies.

The major advantage of using diversified investment options is that the super fund makes the decisions about the mix of assets to buy. But as investors become more experienced, they sometimes want to make these decisions themselves, and they can do this using specialist asset class investment options. And by mixing several specialist investment options together, investors can effectively construct their own customised investment portfolio.

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 balance investment risk, you can also help balance investment risk by spreading your money across several investment managers. Investment options that do this are called 'multi-manager' options, while 'single-manager' options are those that give all your money to just one investment manager.

Multi-manager investment options are becoming popular because they are a way of spreading risk when choosing investment managers. The sting in the tail is that if you use a diversified investment option to spread your investments across lots of asset classes, and you do this through a multimanager investment that uses too many investment managers, you will end up with so much diversification across asset classes and investment managers that you will effectively just be matching the market.

If this is what you want then great, but investments that are too diversified will never beat the market because, as they spread themselves out, they begin to simply match the market. Recall the risk-return trade-off.

Most investment options available through inhouse corporate, government and industry funds are really multi-manager investment options, because the fund trustees pick several investment managers to run each investment option. Master trusts, on the other hand, usually offer a bigger mix of multimanager and single-manager investment options. Remember, this is one of the major aspects that makes master trusts different, though not necessarily better or worse.

Your Investment Menu

Number of options	Menu type	Segments covered	Choice of Investment Strategy	Choice of Investment Manager	Overall Fees
1-15	Value	Mainly industry funds	Yes	No	Low-medium
16-80	Deluxe	Mainly master trusts	Yes	Limited	Medium-high
more than 80	Premium	Master trusts only	Yes	Extensive	Medium-high

Source: Rainmaker Information

How many investment options do you need?

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 very important because the more choices and flexibility you want the higher your super fund's fees will probably be.

At SelectingSuper we call funds with a limited number of investment choices 'value choice' funds, we call funds with a medium number of investment choices 'deluxe choice' funds, and we call funds with lots of choices and flexibility 'premium choice' funds.

Most value choice funds are in-house corporate, government or industry funds, and most deluxe or premium choice funds are master trusts. This means that when choosing between industry funds and master trusts, you are really choosing between how simple or sophisticated you want the investment menu to be. However, we are now seeing some industry funds start to offer more investment choices and so cross the line into being deluxe choice funds.

As you choose super funds with more investment options, you will probably also find yourself working more 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 the options available.

Value choice funds are usually the lowest cost super funds, and premium choice funds are usually the highest cost. But some premium choice funds will offer fee deals to some employers and some members, so you can sometimes get a premium choice fund for a value choice price. Deluxe choice funds are usually a little cheaper than premium choice funds, but not by as much as you might think.

What if You Can't Decide?

Having many investment options is great for people who are comfortable making investment decisions, but not everyone is ready or able to make these decisions. If you are one of the many 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, or they will suggest you choose a balanced option. Some funds even designate different options as their default depending upon your age, with the idea being that the younger you are the more investment risk you should be able to tolerate, and so the more growth assets should be in your investment portfolio.

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