(Australia) Guidance on Superannuation Fund

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
dawsone
Posts: 8
Joined: Wed Apr 28, 2021 3:07 am

(Australia) Guidance on Superannuation Fund

Post by dawsone »

After reading the Bogleheads Guide to Investing I wish minimise fees for my Superannuation investment, which currnetly has $380k in it and will continue to recieve maximum pre-tax contributions for the next 18 years.

My financial advisor has suggested I move my $380k of super out of the high cost/fee Australian Ethical Growth fund into the following "High Growth" portfolio managed through a Netwealth WRAP with 66% in low cost Index Funds and 34% in Actively Managed Funds.

Asset Allocation
* Bennelong ex-20 Australian Equities Fund (Active) 10%
* Fidelity Australian Equities Fund (Active) 10%
* Franklin Global Growth Fund (Active) 7%
* Magellan Asset Management Ltd - Magellan Global Fund (Active) 7%
* Vanguard Australian Property Securities Index Fund 8%
* Vanguard Australian Shares Index Fund 21%
* Vanguard Emerging Markets Shares Index Fund 5%
* Vanguard Global Infrastructure Index Fund 10%
* Vanguard International Property Securities Index Fund 2%
* Vanguard WHolesale INternational Shares Index Fund 20%

Fees:
Admin Fee 0.37% (tiered)
Netwealth Annual Fee 0.06% ($240 p.a. fixed)
Investment Fees 0.51% p.a.
Total Fees ($380k investment): 0.94%

What guidance would anyone give on thsi mix of index and active funds as a suitable portfolio? (vs straight index)
What thoughts are there on the cost ratio of this portfolio?
Any other guidance on what to do with my superannuation to minimise costs and maximise my investment value at retirement?
Valuethinker
Posts: 42745
Joined: Fri May 11, 2007 11:07 am

Re: (Australia) Guidance on Superannuation Fund

Post by Valuethinker »

dawsone wrote: Wed Jun 23, 2021 3:48 am After reading the Bogleheads Guide to Investing I wish minimise fees for my Superannuation investment, which currnetly has $380k in it and will continue to recieve maximum pre-tax contributions for the next 18 years.

My financial advisor has suggested I move my $380k of super out of the high cost/fee Australian Ethical Growth fund into the following "High Growth" portfolio managed through a Netwealth WRAP with 66% in low cost Index Funds and 34% in Actively Managed Funds.

Asset Allocation
* Bennelong ex-20 Australian Equities Fund (Active) 10%
* Fidelity Australian Equities Fund (Active) 10%
* Franklin Global Growth Fund (Active) 7%
* Magellan Asset Management Ltd - Magellan Global Fund (Active) 7%
* Vanguard Australian Property Securities Index Fund 8%
* Vanguard Australian Shares Index Fund 21%
* Vanguard Emerging Markets Shares Index Fund 5%
* Vanguard Global Infrastructure Index Fund 10%
* Vanguard International Property Securities Index Fund 2%
* Vanguard WHolesale INternational Shares Index Fund 20%

Fees:
Admin Fee 0.37% (tiered)
Netwealth Annual Fee 0.06% ($240 p.a. fixed)
Investment Fees 0.51% p.a.
Total Fees ($380k investment): 0.94%

What guidance would anyone give on thsi mix of index and active funds as a suitable portfolio? (vs straight index)
What thoughts are there on the cost ratio of this portfolio?
Any other guidance on what to do with my superannuation to minimise costs and maximise my investment value at retirement?
Andrew9999 (Australian living in Asia) will come along shortly and correct all the mistakes I make in the below.

1. I don't know the Australian market. For an American that would be quite high fees - they can engineer it down to around 0.3 or less. In the UK pension fees run up to 1.0% (company pension) so it doesn't look out of line -- but you can do it yourself for less.

2. I don't see the need to hold various active funds - what is the case for doing so?

The strategy is overweight Australia which is about 2-3% of world markets. Why? Is this something about the attractions of dividend franking?

Generally I would suggest you don't hold more than about 10% of your equity portfolio in Australian equities.

The Australian index is heavily overweight financials companies and natural resources companies. It's not very well diversified. Your other assets like your home, job, future state pension are all in AUD, so why add to that?

18 years to retirement? I am guessing you are therefore about 47? In which case, you should hold some bonds. Age in bonds or Age-10% = % in bonds are 2 rules of thumb. That would suggest 37% bonds, so somewhere between 30-40% bonds*. Australia is a AAA credit rated country, so there's no problem holding all of that in Australian Treasury (govt) bonds. Unfortunately I don't believe they have an inflation linked bond product (like TIPS in USA or Index-linked gilts.

As to the actual percentages - 2% on international property is too small to make a difference. Either increase it to 5% or drop it. I question whether 10% in global infrastructure and 5% in EM is the right way round given size of EM markets. I'd be mroe comfortable with the percentages reversed --- although that would make the portfolio more sensitive to equity market movements (less diversification by asset class).

"Global Infrastructure Index Fund" sounds strange, as there are not many quoted/ listed infrastructure plays. What are the holdings of that fund?

* if you have cash assets like bank deposits outside your Superannuation fund, you should include those in your fixed income assets.
User avatar
andrew99999
Posts: 854
Joined: Fri Jul 13, 2018 8:14 pm

Re: (Australia) Guidance on Superannuation Fund

Post by andrew99999 »

1% is criminal. See the cost to your final nest egg with 1% fees over multiple decades.

The big question - what is the advisor fee? And is he getting paid through Netwealth?

Active management has been well and truly shown to be a game of luck, with 80% of active managers failing even to get the market return over the long term.


What they have chosen:
  • 50% Australian equities
    Slightly more diversified due to the Ex20 fund and Australian property, although funny enough is still highly concentrated in a tiny market and if the Australian economy takes a dump, not only does your home, cash, and job security get hit, but so does most of your investments. Everything goes down together.
    A far better way to diversify is by increasing your international allocation, and if you wanted to maintain your currency exposure, add some international shares AUD-hedged.
  • An attempt to diversify by holding infrastructure and emerging markets, so not bad, but unnecessarily complicated IMO.
I've seen worse, but you can improve on it significantly.


Let's see how you can lower the cost of this, simplify it, and reduce the concentration in the Australian market.
1. Drop Netwealth. If you want direct investments, use HostPlus ChoicePlus or Australian Super member direct. At about your amount of super is where it becomes cost-effective to do so.
2. Stick to index funds and throw out the active management.
3. I would lower the Australian equities (and by that, I mean the total 48%). I would go down to no more than 30%, preferring 25% or even 20%. Anything between 0 and 30 seems defensible to me.
4. Any fund with under 5% can be dropped since it won't make a material difference. Even 5% is too little IMO.

In the ChoicePlus menu of available ETFs, since you need to keep it under 20% per ETF, also 20% in their regular pooled options, so maybe:

ETFs (80% max)
20% VAS - Aus index
20% VGS - global developed index
20% VGAD - global developed index AUD-hedged
10% VGE - emerging markets
10% IFRA or DJRE - global infrastructure index or global property index (could this and roll it into international index)

Pooled options (min 20% required)
20% international index

The total cost (including the additional admin fees for the direct investment option) should be in the neighbourhood of 0.40% and reducing as your balance increases since a portion of that is fixed admin costs.

Result:
- cheaper (couple grand a year, and increasing)
- simpler
- more diversified (less concentration risk)
- maintains 40% AUD exposure
- no active manager risk
- no need to pay your advisor every year (which you almost definitely will with that mess of a portfolio)

Also worth checking out other options such as Australian Super member direct and how they differ. I forget all the details.

And finally — Vanguard is coming out with their superannuation offerings this year, which lots of people are waiting for with bated breath, and it might prove to be a superior option to other direct investment options such as HostPlus ChoicePlus and Australian Super member.direct.
User avatar
asset_chaos
Posts: 2025
Joined: Tue Feb 27, 2007 6:13 pm
Location: Melbourne

Re: (Australia) Guidance on Superannuation Fund

Post by asset_chaos »

Our wiki has a section on Australian super funds. You can move your super to one of several other funds and easily reduce that prospective 94 bp cost by a factor of 3 to 7 by choosing a fund's index options for World ex-AU and AU stocks and bonds. Compounding just the reduced costs for 18 years would result in about $50k more in your super than otherwise.

And, as andrew99999 points out, I hope Vanguard will launch their super fund shortly after the fiscal year and that it will be competitive.
Regards, | | Guy
Topic Author
dawsone
Posts: 8
Joined: Wed Apr 28, 2021 3:07 am

Re: (Australia) Guidance on Superannuation Fund

Post by dawsone »

Valuethinker, andrew9999 and asset_chaos, thank you all for youor rapid and hugely helpful guidance.
I can't believe it took me until almost 50 to find the Bogleheads, what a hugely valuable resource!
Thanks again,
Alex
Post Reply