MAKE SENSE OF YOUR SUPER FUND'S INVESTMENT PERFORMANCE FIGURES

Making sense of your MySuper product or fund's investment performance figures can be difficult. This easy guide will explain how they work and what they really mean.

Key points

Investment returns can be described differently by different types of funds.
The investment return money deposited into your account after all fees and charges is what you should really worry about.
Some funds have 'reserves' to smooth the investment return 'roller coaster'.
When comparing super funds, make sure you compare similar types of funds.

When a MySuper product or super fund talks about 'investment performance,' they can use many terms that confuse members. They even confuse many people who run super funds. So, what does the mysterious term 'investment performance' actually mean?

Investment performance describes how much your super product or fund is earning for you each year, each month, each day. Think of it as the investment profit they are making for you. Investment performance is also sometimes called the 'investment return,' 'performance,' or sometimes just the 'return.'

Another problem is that some products or funds report investment performance before they have deducted tax, some may deduct the tax and the investment fees but not the ongoing percentage-based fees, and some may deduct all taxes and all the percentage-based fees. Almost none, however, will deduct the dollar-based flat fees when declaring their investment performance even though for people starting out in super, who only have a small amount of superannuation savings, this fee is their biggest headache.

  Earnings rates and crediting rates
If you are a member of an in-house corporate, public sector or industry fund (known as a not-for-profit super fund), your MySuper product or super fund will often talk about its investment performance in terms of its 'earnings' rate and its 'crediting' rate.

The earnings rate is the investment performance earned by the super fund after paying the investment managers their fees but before paying the investment taxes and other ongoing fees. Think of this number as what it earns from the capital markets before deducting its own operating costs. This earnings figure can also be thought of as how good your super fund's trustees are at picking investment managers.

The crediting rate, on the other hand, is the investment return after all taxes and all the percentage-based management fees have been deducted, where these management fees include ongoing administration and investment fees. It is what has actually been deposited into your account and thus it's the ultimate measure of how your super fund is performing for you.

Make sense of those investment performance figures
Note that after your crediting rate has been deposited into your account, your member fee, if you pay one, is then deducted. Members should always focus on the crediting rate. Still, the earnings rate is a good way to judge how effective your super fund or product is at selecting investment managers, choosing investments and generally getting it right.

For the average superannuation investor, the relationship between a product or fund's earnings rate and its crediting rate is also very important to understand because it can tell you much about how a super fund operates. This is because from their earnings rate they pay investment taxes and other costs associated with operating the super fund. The bigger the difference, the more fees and costs are being deducted. For example, if your product or fund earned 10% but only credited 8% into your account, it means your true level of fees is the difference, that being 2%

 
  Reserving accounts
Some super funds may also divert some of their earnings rate into a reserving account to help build up a nest egg so they can top up returns in bad years. The downside, of course, is that in good years the returns will not be as good as they should be because some of the return has been diverted into this reserving account. Some people think these reserving accounts are bad because they take returns away from members in good years. Others think they are good because they boost members' returns in bad years. The truth is they are neither bad nor good, but if your fund uses one it is important to understand how it works and why they have it.

The only twist with reserving is that it can penalise people who don't stay with the fund for a long time as some of the fund's earnings are hived off for that rainy day that may not come around until after this person has left the fund. The flip side is that if you join in a bad performance year you could actually benefit because the return will be higher than those of other funds that don't use reserving. It's a case of swings and roundabouts.

 
  Flat dollar fees
If your MySuper product or fund charges a flat dollar fee, such as a member fee or a policy fee, it is usually paid after your crediting rate or after-fee performance has been declared and paid into your account. These member fees can have a significant impact upon your true return. For example, if you have $10,000 in super, even if your member fee is just $1 per week, it effectively means that an extra 0.5% will be deducted from your account.

Of course, as your super account grows, the impact of this member fee diminishes. For example, if you have $100,000 in superannuation, the impact of this member fee is only 0.05%. The lesson here is that flat dollar fees can impact people with low super account balances more than they realise. Most retail superannuation funds do not charge flat dollar member fees, but most industry funds do. The thing to watch though is that funds with member fees should have low percentage-based fees.

 

Fees affect performance

While in-house corporate, government and industry super funds speak in terms of earnings and crediting rates, corporate and personal master trusts usually just speak in terms of 'performance.' This can mean, depending upon the fund, either the earnings or the crediting rate, or something in between. But it's not as confusing as it seems  because in many cases they effectively mean crediting rates anyway, which you will recall are just the returns after all percentage-based fees have been deducted. The sting in the tail, however, is that many master trusts have a tiered fee structure.

A tiered fee structure is when the fees differ depending upon how much a member has invested with the fund or how much is in an employer's combined company account. For example, if you have less than $50,000 in your super fund account, you may pay 1.4% in fees, but if you have more than $50,000 in your super fund account, you may pay fees of only 0.7%. This means that two people in the same super fund may be paying quite different levels of fees. They may also receive different crediting rates; remember that the crediting rate is effectively the earnings rate less all the fees. These differing fees in the one fund can also mean that while low-balance members may be better off in an industry fund, members with higher balances who qualify for fee discounts may sometimes be better off in a master trust.

When SelectingSuper publishes the performance figures for master trusts, the rules applied are well tested. We assume the members pay the maximum fees and this allows us to convert the performance figures into crediting rate equivalents. We do it this way because it is consistent with the Australian Securities and Investments Commission's (ASIC) guidelines, and because it means the performance figures we publish will be the worst-case scenario, meaning that if you have a fee deal from your MySuper product or fund and you receive a fee discount you will get even more money in your account. For members of some corporate master trusts where the average member gets discounted fees, the basic crediting rate equivalent actually understates the returns most members receive.

To make sure you are comparing performance figures properly, all you have to do is ask if the investment return being publicly declared is before or after taking into account all these tiered management and investment fees. In other words, is it what members actually receive in their accounts, or is it before the tiered fee cuts in?

For example, some master trusts may say their performance is after fees, but they really mean that only the investment fees have been deducted. This will confuse members if they hear that their master trust 'earned' 10% even though they may have only received 8.5% as their effective crediting rate.

To avoid this confusion, a growing number of retail super funds now publicly declare investment returns that assume a member pays the maximum fee, i.e., the members receive no fee discounts due to having a high account balance. This means it is a true crediting rate or after-fee performance figure. But remember, if you are lucky enough to have a high balance in your account and pay low fees, you could actually be getting even higher crediting rates in your account. The table below shows you how this works.

Deconstruct your fund's investment returns
  Not For Profit Fund Corporate Master Trust Personal Master Trust
Capital gains from markets 10.0% 10.0% 10.0%
Less investment fees + taxes 0.7% 0.7% 0.7%
Fund earnings rates 9.3% 9.3% 9.3%
Less reserving 0.6% - -
Less other management fees 0.2% 1.0% 1.4%
Your crediting rate 8.5% 8.3% 7.9%

Source: Rainmaker Information

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