MAKE SENSE OF YOUR FUND'S INVESTMENT MENU

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?

Key points

A superannuation fund's investment menu is the list of investment choices it offers.
Choices can include choice of investment strategy, choice of investment manager and even 'lifestyle' choices.
If you can't decide, your super fund might assign you into its default investment option, suggest you put your money into a balanced option or one matching your age.
If you join a MySuper product, you do not need to worry about investment choice because these products only offer one choice.
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, or just the investment strategy underpinning your MySuper product, there are three main

things for you to think about:

  • The investment strategy.
     
  • Who will manage your money.
     
  • How many investment options you need.
     

Your investment strategy 

  Diversified or specialist?
The people who run your MySuper product or fund are called trustees, or directors. Super funds usually have between four and 16 trustees. Some funds that operate as 'equal representation trustee boards' - e.g., in-house corporate super funds, government funds or industry funds - have half the trustees appointed by the fund sponsor (say, the employer) and half appointed by members or people representing the members (say, a union).

In many commercial products or funds, such as master trusts, the trustee role is played by an approved trustee company that is especially set up to provide these services. Approved trustees are registered with the industry regulator, the Australian Prudential Regulation Authority (APRA), and have to satisfy a range of licensing requirements before they can offer their services.

Trustees are not expected to be experts in all aspects of how to run a product or fund, but they are expected to know how to manage people who are. Your fund's trustees are there to represent you, and make sure the fund is working properly for you and its other members. If anything goes wrong with the fund, the buck always stops with the trustees, and this motivates them to make sure that things are working properly. A good trustee board will always listen to the members and will work to keep them informed about how the fund is performing.

 
  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., share dividend or rental income while some income assets can also fall or grow in value - meaning it's not always as straight forward as the textbooks tell us.

The proportion of growth assets in a diversified investment option is used to classify it into one of the four main types:

  • Growth - more than 75% in growth assets.
     
  • Balanced - 55-75% in growth assets.
     
  • Moderate - 35-55% in growth assets. These may also be called capital stable options.
     
  • Conservative - have less than 35% in growth assets. These may also be called capital guaranteed options.
     

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 they should come with lower volatility and less investment risk.

This is what experts mean when they talk about the risk-return trade-off.

 
  Life stage investment choices
A new style of investment option that is becoming more popular in Australia following its wide use in the US 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 40.

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 55 who was born in the 1960s who expects to retire in about 10-15 years, your super fund might similarly assign you into an investment option with lower exposure to growth assets but higher exposure to income or defensive assets.

An important aspect 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 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 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 life stage option, or they will suggest you choose its main balanced option. In Workplace funds these default options are called MySuper products.

MYSUPER AND INVESTMENT CHOICE 

If you are in a MySuper product, or have chosen your fund's MySuper option, you do not need to worry about investment choice because the whole point of these products is that they are purpose-built for people who don't want to make these decisions. Your money will be assigned into either a growth or a life stage investment  strategy similarly to how funds construct their default investment option.

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 help control 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. 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 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 very 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 will probably 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 result 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
1 MySuper products No No Low
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

Make Sense of Those Investment Performance Figures
Make Sense of the Fees Your Fund is Charging You
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When comparing super funds and considering what is right for you, look for funds displaying the AAA Quality Assessment and Rainmaker SelectingSuper Award logos.

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