Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated again]

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asset_chaos
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Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated again]

Post by asset_chaos »

Updated again to include APRA test results to identify failing super funds

See below for the better comparison using tax drag and index return data over the same period as the APRA data

I read today that the Australian tax office had put up a superannuation (retirement) fund comparison tool, using data collected by APRA. Apparently it's a new government initiative. It is a step in the right direction in that the tool let's you easily compare total dollar fees for a portfolio of any given size (and your age, which I don't fully understand). The tool does not report any kind of risk measure, nor any kind of risk-adjusted return, but it does give six year return numbers, data current as at 31 March 2021. It looks like the ATO plans to update the tool every quarter. Importantly the data is for the default (the so-called MySuper) fund for each superannuation fund complex. No default fund I've ever read about indexes, but these are the funds most people use because they don't make a conscious and informed choice.

When there is data, I feel an uncontrollable urge to graph. Below is plotted the 6 year average fund return versus total dollar cost for a $100,000 portfolio of someone aged 42. The portfolio size was chosen to match the comparison portfolio size in our wiki page about Australian super (and conveniently you can divide dollars by 10 to get cost in basis points). The age is just midway between 18 and 65. 57 funds out of 80 total made the list. The 23 funds not making this list were labeled restricted, i.e. not open to the general public, so I restricted the analysis to funds that anyone could chose. Eight funds that did not have return numbers were also excluded, leaving 49 funds in the analysis. Most of the funds are industry (non-profit) funds, but a handfull are for-profit funds. The black dots in the figure are the data for the 49 funds. The median fee and the median 6 year return were respectively 1% and 6.6% per year; these median values are labeled by the gray open circle.

Image

While the data itself is interesting, I find it even more interesting to imagine what all these super fund members in default funds could have earned and could have paid in fees if the default funds were comprised of a few low cost index funds. This is one of the failures of the comparison tool: no attempt is made to benchmark against an objective standard or against the policy portfolio of the fund. First the fees.

The vertical red line represents the fee level for the $100,000 portfolio if using the index fund options at SunSuper or Aware super (formerly FirstState). And these are not the lowest cost indexed options around; the indexed balanced option at HOSTPlus, for example, costs around $140 per year. The red line indicates that you could pay a third or less than the median cost of the default funds by chosing a super complex that let's you index. As Bogleheads, we know these extra costs compound: high costs rob us of the dollars we need for a comfortable and secure retirement. The graph makes clear that the default fund fails on cost compared to what you could pay by chosing the indexed option.

But what about returns? There's an old nostum that better returns are worth paying more for. Let's see what the data for Australian super has said over the last 6 years. The first thing to notice is that there is zero correlation between fees and returns for the default funds (black dots). Whether you paid $500 or $1500 per $100,000 invested did not predict what kind of returns you got. As I expected a negative correlation, I was surprised at zero correlation, but I suspect it's a quirk of the short 6 year time-frame.

More interesting is the question, what returns could these funds and their members have gotten with an indexed global balanced fund? I compute the return to a 70:30 stock:bond portfolio using the real returns reported by wholesale (institutional) index funds at Vanguard AU. And keep in mind that this is not a theoretical exercise: every one of these super funds could have been invested this way via Vanguard or Blackrock or any number of other index fund managers. I've chosen to construct a portfolio as
  • 60% Vanguard International Shares Index Fund, 5 year return 12.88%
  • 10% Vanguard Australian Shares Index Fund, 5 year return 10.11%
  • 20% Vanguard International Fixed Interest Index Fund (Hedged), 5 year return 2.52%
  • 10% Vanguard Australian Fixed Interest Index Fund, 5 year return 3.10%
5 year returns are as of 31 May 2021. The International Fixed Interest Fund is a global governement bond fund that I used because the global aggregate bond fund does not have 5 year return data. You'll notice that the 5 year returns of the indexed portfolio does not match the 6 year returns of the default super funds. I don't know how to easily avoid this. 6 years is simply not a standard reporting length in the industry. 3, 5, 10 year returns are easy to look up; 6 year returns are not. We have to take what we can get, and below I'll do a bit of a sensitivity analysis. I chose 70:30 because many of the default funds I've looked at are 70:30, growth:defensive, albeit almost always with hedge funds and alternatives as part of their mix.

The indexed portfolio that any of the super funds could have used returned 9.5% a year and is represented by the horizontal red line in the figure. This return is higher by 1.4% a year than even the best performing super fund. The large magenta dot in the figure at the intersection of the vertical (costs) and horizontal (returns) red lines marks the location of a real, and markedly superior, portfolio that any of these default funds could have used; and, that any individual using the non-default, index investment options at real super funds could have made for themselves. A caveat to this is tax. I believe the APRA return numbers are net of tax, whereas the constructed portfolio had no tax taken out. I don't know how much super funds pay typically in tax; however, even knocking off 15% of the indexed portfolio return for tax only reduces the index portfolio return to the level of the best performing default funds.

The bottom line, which experienced Bogleheads already know, is that costs matter---a lot. Even more so because performance is ephemeral, while costs are eternal. (I'm pretty sure that's a Bogle paraphrase.)

Did I play fair in making comparisons? The indexed portfolio has more in ex-AU stocks than I suspect is typical in an Australian super fund, at a time when ex-AU did better than AU stocks; although, that's also a choice---and a risk---to be markedly different from the global stock market index. But, as a bit of a sensitivity analysis, let's mark down the ex-AU stock index fund to have the same return as the AU stock index fund, equivilent to assuming zero investment in ex-AU stocks, which is also atypical for super funds. Now that's the darker magenta dot, and the indexed portfolio returns 7.9% a year, a hair below the best performing default funds, but still comfortably above the median return. Even if we knock off 15% more for tax, our indexed portfolio is still a bit above the median return (6.7% vs 6.6%). And the indexed portfolio is guarenteed to earn market returns, whereas the actively managed default funds take on the extra risk of falling short of market returns.

The data says it's just a fact, and a shame for the retirement security of the fund members, that the default high-cost active management funds have fallen woefully short of what the members could have earned at lower cost in a global balanced indexed portfolio.
Last edited by asset_chaos on Tue Aug 31, 2021 6:36 am, edited 4 times in total.
Regards, | | Guy
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by AlohaJoe »

asset_chaos wrote: Tue Jul 06, 2021 2:08 am
  • 60% Vanguard International Shares Index Fund, 5 year return 12.88%
  • 10% Vanguard Australian Shares Index Fund, 5 year return 10.11%
  • 20% Vanguard International Fixed Interest Index Fund (Hedged), 5 year return 2.52%
  • 10% Vanguard Australian Fixed Interest Index Fund, 5 year return 3.10%
5 year returns are as of 31 May 2021.
FWIW, you should be able to add an extra year of result with some elbow grease by using Vanguard AU's website.

If you go to a fund's page and click on Performance there is a Total Returns chart which lets you get the information you're looking for. It won't directly provide 6-year returns but it'll give you enough information that you can construct 6-year returns yourself.

For instance, if you click "Monthly" then it'll show you monthly returns going back a decade or so. Then you can export that to a table and do some math of the monthly returns since May 2015. The monthly returns are annualised (ugh, why?), so you need to de-annualise them before you compose them.

https://www.vanguard.com.au/institution ... 100/equity
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by Hockey Monkey »

Great work putting this together.

You can get after tax data from the Vanguard site

Eg Vanguard International Shares Index Fund @ 12.88% is before tax. After tax on distributions it is 12.45%
https://www.vanguard.com.au/institution ... 116/equity

Updated figures
60% Vanguard International Shares Index Fund, 5 year return 12.45%
10% Vanguard Australian Shares Index Fund, 5 year return 10.67% (higher due to franking credits)
20% Vanguard International Fixed Interest Index Fund (Hedged), 5 year return 1.71%
10% Vanguard Australian Fixed Interest Index Fund, 5 year return 2.61%

Exact matching time periods also make a big difference. I don't think we can read too much into this data unless we can get the exact same 6 year period covered by APRA to (31 March 2021) which as the previous posted mentioned might be possible from the Vanguard site, but is difficult to also layer in tax above which appears to be to 31 May 2021 only.

Perhaps this could be approximated by applying a difference between the before and after tax 5y numbers. Eg determine 6 year return to Mar 2021 and then deduct 0.43% (12.88%-12.45%) for International Shares etc.
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by Hockey Monkey »

Another option to get 6 year 31 Mar 2021 data might be to use the SunSuper index fund options at https://www.sunsuper.com.au/investments ... ionCode=44
as the baseline. They were managed by Vanguard during this period

Eg Australian Shares - Index
31 Mar 2015 $1.82949 unit price
31 Mar 2021 $2.73444 unit price

Annual Return = ((2021 Price-2015 Price) / 2015 Price + 1) ^ (1 / 6)-1 = 6.9%

Hopefully I haven't made any errors :)
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by asset_chaos »

AlohaJoe wrote: Tue Jul 06, 2021 4:39 am
asset_chaos wrote: Tue Jul 06, 2021 2:08 am
  • 60% Vanguard International Shares Index Fund, 5 year return 12.88%
  • 10% Vanguard Australian Shares Index Fund, 5 year return 10.11%
  • 20% Vanguard International Fixed Interest Index Fund (Hedged), 5 year return 2.52%
  • 10% Vanguard Australian Fixed Interest Index Fund, 5 year return 3.10%
5 year returns are as of 31 May 2021.
FWIW, you should be able to add an extra year of result with some elbow grease by using Vanguard AU's website.

If you go to a fund's page and click on Performance there is a Total Returns chart which lets you get the information you're looking for. It won't directly provide 6-year returns but it'll give you enough information that you can construct 6-year returns yourself.

For instance, if you click "Monthly" then it'll show you monthly returns going back a decade or so. Then you can export that to a table and do some math of the monthly returns since May 2015. The monthly returns are annualised (ugh, why?), so you need to de-annualise them before you compose them.

https://www.vanguard.com.au/institution ... 100/equity
Hey, I didn't know those monthly results were there; thanks for pointing that out. But I might be too lazy to do that work. I've tried something else first: yesterday I emailed VanguardAU asking them for the data. I'll give them till end of next week to respond. If they don't respond or say no, I'll see if I can put the data together from their tables of monthly returns.
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by asset_chaos »

Hockey Monkey wrote: Tue Jul 06, 2021 11:22 pm Great work putting this together.

You can get after tax data from the Vanguard site

Eg Vanguard International Shares Index Fund @ 12.88% is before tax. After tax on distributions it is 12.45%
https://www.vanguard.com.au/institution ... 116/equity

Updated figures
60% Vanguard International Shares Index Fund, 5 year return 12.45%
10% Vanguard Australian Shares Index Fund, 5 year return 10.67% (higher due to franking credits)
20% Vanguard International Fixed Interest Index Fund (Hedged), 5 year return 1.71%
10% Vanguard Australian Fixed Interest Index Fund, 5 year return 2.61%
I'm not sure that's the right after tax information for investments held within super funds. I think that's the after tax information for funds in a taxable account. The ATO says for self-managed super funds, which I think is the same for all super funds, that tax is 15% of investment income. The 15% for total tax in the OP is a vast overestimate of the tax drag. Tax drag should be more like 15% of, say, 2% portfolio total yield for a tax drag inside a super fund of more like 30 basis points. Indexed ETFs give off little to zero capital gains, and a hypothetical default indexed super fund ought to have plenty of cash flow to rebalance without having to sell and potentially incur capital gains and the attendant tax. As I think it would be difficult to estimate the effect of franking credits and with it being probably only a small adjustment, I think it's better for an order of magnitude estimate to ignore franking credits.

That's why I think in the OP I overestimated the tax drag by two orders of magnitude. A more reasonable estimate for tax drag of an indexed global balanced fund inside super seems to be around 0.3%.
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by Hockey Monkey »

asset_chaos wrote: Wed Jul 07, 2021 11:43 pm I'm not sure that's the right after tax information for investments held within super funds. I think that's the after tax information for funds in a taxable account. The ATO says for self-managed super funds, which I think is the same for all super funds, that tax is 15% of investment income.
The page I linked has a specific section After tax income with a dropdown selection for super fund tax.

I understand it is the exact number without trying to guess, however unfortunately limited to 5y or 10y

I think sunsuper indexed options unit prices may be a better approach as they factor in tax withheld for any time period
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by asset_chaos »

Hockey Monkey wrote: Thu Jul 08, 2021 2:46 am
asset_chaos wrote: Wed Jul 07, 2021 11:43 pm I'm not sure that's the right after tax information for investments held within super funds. I think that's the after tax information for funds in a taxable account. The ATO says for self-managed super funds, which I think is the same for all super funds, that tax is 15% of investment income.
The page I linked has a specific section After tax income with a dropdown selection for super fund tax.

I understand it is the exact number without trying to guess, however unfortunately limited to 5y or 10y

I think sunsuper indexed options unit prices may be a better approach as they factor in tax withheld for any time period
Hey, that's great. I didn't know the after tax returns for a super fund were there. If nothing else, it gives a better estimate for the tax drag of the funds inside super.
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by asset_chaos »

VanguardAU replied about 6 year data, but all they did was point me to the same tables of monthly returns that AlohaJoe did. Between that and the Vanguard tax drag data that Hockey Monkey pointed out, we can make a solid comparison of an indexed global balanced portfolio with the APRA default fund data. The gross 6 year annualized returns of the four index funds was
  • Vanguard International Shares Index Fund, 10.63%
  • Vanguard Australian Shares Index Fund, 6.66%
  • Vanguard International Fixed Interest Index Fund (Hedged), 3.04%
  • Vanguard Australian Fixed Interest Index Fund, 3.00%
for a gross 6 year annualized return to the indexed global balanced portfolio in the OP of 7.95%.

Tax drag varies year to year but within a range of +- 30 basis points for the stock funds and +-10 basis points for the bond funds. I chose to average Vanguard's superannuation tax drag for 1, 3, 5, and 10 years to arrive at a typical number for a fund's tax drag, rather than try to calculate the exact tax drag of this particular 6 years. This typical tax drag for the funds was
  • Vanguard International Shares Index Fund, -0.55%
  • Vanguard Australian Shares Index Fund, +0.62%
  • Vanguard International Fixed Interest Index Fund (Hedged), -0.67%
  • Vanguard Australian Fixed Interest Index Fund, -.51%
for a tax drag to the indexed global balanced portfolio in the OP of -0.45% and a net of estimated tax 6 year annualized return of 7.5%. As noted above, franking credits give Australian shares a tax boost instead of a drag.

The plot now looks as shown below. Notation is the same as in the OP, except for the addition of the cyan line showing the slightly negative correlation of the default funds returns with increasing fees. The horizontal red line is now the net return of the OP portfolio, while the magenta circle is a real, low-cost portfolio that any one of the superannuation complexes could have used as the default fund or that any person could choose for their superannuation fund. The low-cost portfolio is at the 90th percentile of returns, and of course has the relative certainty of earning market returns going forward. It's worth noting that the 0.9% better return than the default fund median is almost entirely explained by the 0.7% lower cost of the OP portfolio to that of the median default fund, which is an enduring structural advantage for the indexed portfolio, as long as default funds remain relatively high-cost.

Image

While it's not true that past performance predicts future performance, it is true that past cost is indicative of future cost. Every dollar of cost today compounds to many dollars of lost returns tomorrow. Performance is ephemeral, while cost is eternal.

I think it's a shame that none of these super fund complexes have a low-cost default fund. A low-cost default fund would truly put members' interests first. Maybe that's a challenge that someone in the superannuation industry will take up.
Regards, | | Guy
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated]

Post by Jaymover »

I have super and an ordinary (taxed portfolio). It is hard to work out comparative tax drag when comparing super with the ordinary portfolio, however many super funds suffer "fee drag". With an ordinary portfolio, it helps if you defer capital gains tax events for years when you dont earn much.

What I noticed however that there is a full percentage additional annual returns between a super choice in a pension fund rather than an accumulating fund. As you know in the pension phase super earnings and capital gains are completely untaxed. The hitch with the pension fund is that you have to take out 5% per annum as an annuity, however this is currently set at 2.5 percent to appease wealthy retirees even though super unit prices have fully recovered and then some.
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by AlohaJoe »

asset_chaos wrote: Sun Jul 11, 2021 12:35 am I think it's a shame that none of these super fund complexes have a low-cost default fund. A low-cost default fund would truly put members' interests first. Maybe that's a challenge that someone in the superannuation industry will take up.
Nice work!

I've always been shocked at how terrible the Australian Superannuation industry is...especially since it was the first international location Vanguard expanded to outside the US!
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated]

Post by Jaymover »

The other problem comparing funds is that the "balanced fund" can be anywhere from 85/15 growth to defensive down to 50/50. No wonder there is such a range of performances with the stock heavy balanced funds having outperformed most over the last 5 years.

The standard balance funds include a sizeable allocation to unlisted infrastructure and unlisted property. I think it is worth having some exposure to these as they are probably quite stable and hard to have exposure to unless you are rich (all super fund holders can have fractional exposure for a fairly marginal fee) however in recent times the vanilla index super funds with shares/bonds have outperformed all the others taking 2021 into account.
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated]

Post by Hockey Monkey »

Great work, thank for updating. That looks more like I expected where a small number of funds outperform.

As a matter of interest, what were the 4-5 funds that outperformed?

We have been members of UniSuper since inception in 2000 which has consistently outperformed either due to skill or luck, so whilst my head tells me to switch to indexing for the future, I haven't been able to pull the trigger yet.


Another tweak people can use to boost indexed returns is use ETFs rather than managed funds.

Let me use a concrete example for the past 6 years of returns since VGS has existed.
VGS
Growth 7.97% p.a., Distribution 3.28% p.a

Vanguard International Shares Index Fund
Growth 5.76% p.a., Distribution 5.44% p.a.

Identical returns (except for minor fee difference) but very different after tax outcomes due to the higher distributions in the managed fund
2.26% difference in distributions x 10% CGT (33% discount) = 23 basis points p.a.

The difference is much less in Australian equities due to less growth an more liquidity

VAS 2.68% Growth, 4.41% Distribution
Vanguard Australian Shares Index Fund 2.45% Growth, 4.60% Distribution

0.19% difference * 10% tax = 2 basis points
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated]

Post by asset_chaos »

Jaymover wrote: Sun Jul 11, 2021 6:12 am The other problem comparing funds is that the "balanced fund" can be anywhere from 85/15 growth to defensive down to 50/50. No wonder there is such a range of performances with the stock heavy balanced funds having outperformed most over the last 5 years.

The standard balance funds include a sizeable allocation to unlisted infrastructure and unlisted property. I think it is worth having some exposure to these as they are probably quite stable and hard to have exposure to unless you are rich (all super fund holders can have fractional exposure for a fairly marginal fee) however in recent times the vanilla index super funds with shares/bonds have outperformed all the others taking 2021 into account.
Yes, in the OP I alluded to one of the comparison tool's failures being a lack of any kind of risk measure or comparison to an objective benchmark. As one of the columns in the tool is labeled performance assesment with all funds currently not assessed, I think some kind of benchmarking will turn on at some time. In fact a quick google reveals an article in The Age, which says
In September, data on the website will be updated with the results of a new “performance test” to be applied by the regulator (currently they all just say “not assessed”). If a fund fails this test – meaning its returns fall outside an acceptable band from a benchmark performance – this information will appear next to their name on the YourSuper list. ...

“If a fund fails the test two years in a row, they can’t accept new members,” says Super Consumers’ Xavier O’Halloran.
But what is this performance test? Another google reveals an article that says the performance test is
The Your Future, Your Super (YFYS) annual performance test will apply to MySuper products from 1 July 2021 and ‘trustee directed’ products from 1 July 2022. Some of its key features are:

Product performance is tested against a benchmark comprising prescribed indices weighted in line with a fund’s strategic asset allocation (SAA). This means that the test measures the effectiveness of a fund’s implementation of its strategy relative to its YFYS benchmark, not the suitability or performance of the strategy itself.

The performance measurement period is generally eight years (seven years for the first test). While a year of ‘good’ performance helps, each year is the start of a new performance period and so consistency of performance will be rewarded.

A product passes the test provided the product return (including allowance for administration and advice fees) does not underperform the benchmark by more than 0.5% pa.
Benchmark construction individualized to each fund's policy portfolio and using "prescribed indices" seems like a quite reasonable approach. I'm ok with management setting the overall risk profile of a default fund. And if that last item means the comparison is to the net of fees return, I have to say the performance test seems pretty well constructed.

Of course, what's the best way for a fund to make sure it stays within 0.5% of it's benchmark? It seems to me like the best way is to implement the policy portfolio with low-cost index funds and keep all fees and costs well below 0.5%. That would guarentee a fund passes the test every year.

Maybe this performance test will start to drive positive change in the super industry.
Regards, | | Guy
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated]

Post by asset_chaos »

Hockey Monkey wrote: Sun Jul 11, 2021 6:52 am Great work, thank for updating. That looks more like I expected where a small number of funds outperform.

As a matter of interest, what were the 4-5 funds that outperformed?

We have been members of UniSuper since inception in 2000 which has consistently outperformed either due to skill or luck, so whilst my head tells me to switch to indexing for the future, I haven't been able to pull the trigger yet.
In the comparison tool one can click on performance to order the list by performance, but the top performing funds were HostPlus, AustralianSuper, Local Government Super (not to be confused with Local Authorities Super), and CBUS. Unisuper did the same as the indexed portfolio; it's the black dot that the red horizontal line cuts through.

In case anyone else has ideas for further analysis, here is the entire list:

Code: Select all

APRA data Current as at 31 March 2021
from ATO webpage https://www.ato.gov.au/YourSuper-Comparison-Tool/ accessed 6-July-2021

49 (of 57) super products found, exclude restricted funds (8 funds didn't show return data)
Total number of funds including restricted funds = 80
Age 42 | Balance $100,000.00  

Annual fee	 6 year net return	Name
[$]    		 [%]
	
556		7.51			Unisuper
567		6.65			Bendigo Superannuation Plan
630		6.31			QSuper
635		5.38			AMG Super
657		8.1			AustralianSuper
719		6.34			Australian Meat Industry Superannuation Trust
808		6.08			REST Super
822		7.09			Mine Superannuation Fund
840		6.12			Colonial First State FirstChoice Superannuation Trust
848		7.38			Sunsuper Superannuation Fund
848		7.09			Local Authorities Superannuation Fund
854		7.77			CBUS
855		6.6			NGS Super
890		4.58			Energy Industries Superannuation Scheme
902		5.81			Labour Union Co-Operative Retirement Fund
905		6.88			Media Super
910		5.5			OneSuper
912		6.95			Equipsuper
932		6.73			Aware Super (MySuper)
942		6.97			Aware Super (MySuper LifecycleGrowth
948		6.86			Spirit Super
960		6.30			Retirement Portfolio Service (ANZ Smart Choice)
965		6.92			HESTA
981		6.60			Lutheran Super
1000		6.19			NESS Super
1008		7.03			CareSuper
1031		6.48			Super Directions Fund (AMP MySuper No.3)
1036		6.10			REI Super
1037		7.04			First Super
1038		6.42			Retirement Wrap (BT MySuper)
1038		6.36			ASGARD Independence Plan Division Two
1051		7.39			Statewide Superannuation Trust
1055		6.77			Guild Retirement Fund
1082		6.26			Suncorp Master Trust
1108		6.84			Telstra Superannuation Scheme
1121		7.90			Local Government Super
1137		5.74			IOOF Portfolio Service Superannuation Fund
1147		6.92			Australian Ethical Retail Superannuation Fund
1147		6.92			Building Unions Superannuation Scheme (Queensland)
1148		6.58			Intrust Super Fund
1150		6.03			AvSuper Fund
1164		6.71			Club Plus Superannuation Scheme
1178		6.97			Prime Super
1178		6.42			legalsuper (MySuper Balanced)
1178		8.1			HOSTPLUS Superannuation Fund
1182		6.18			LGIASuper MySuper Lifecycle
1225		5.47			Christian Super (My Ethical Super)
1228		6.46			TWU Superannuation Fund
1510		6.4			Mercer Super Trust
Regards, | | Guy
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians

Post by fabada »

asset_chaos wrote: Sun Jul 11, 2021 12:35 am While it's not true that past performance predicts future performance, it is true that past cost is indicative of future cost. Every dollar of cost today compounds to many dollars of lost returns tomorrow. Performance is ephemeral, while cost is eternal.

I think it's a shame that none of these super fund complexes have a low-cost default fund. A low-cost default fund would truly put members' interests first. Maybe that's a challenge that someone in the superannuation industry will take up.
Thanks @asset_chaos, this is a great post.

I was pretty disappointed to see changes to superannuation legislation proposed in last year's budget get neutered, presumably after some heavy lobbying by super funds. So it's good to see a step in the right direction in terms of government-provided comparison. But still, the amount of fees earned by super funds/money lost by Australians in underperforming default funds is a travesty.

I wonder whether the positive tax drag from franking credits is at risk due to any legislative changes. Probably not, given the last election was decided by proposed changes to them, but still. It seems slightly flawed to base superannuation decisions on boosts from policy, but at least it's easier to change super funds than sell a house (which you might have over-enthusiastically bought, dreaming of that sweet, sweet negative gearing).

I reckon the lowest-cost, highest-impact intervention would be find a way to convince a bunch of young people otherwise disengaged from their finances/super to spend ten minutes transferring to an index fund option. That might be the highest ROI action they could possibly take: tens to hundreds of thousands of dollars extra for a fraction of an hour.
Jaymover
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated]

Post by Jaymover »

In some ways it is a shame that the super industry is so fragmented. It is actually good to own unlisted infrastructure and real estate within super however all super funds seem to be going about their purchases separately making the cost of owning those assets more expensive. The money is needed looking forward, particularly in relation to building affordable housing
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andrew99999
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated]

Post by andrew99999 »

Jaymover wrote: Tue Jul 13, 2021 9:31 pm In some ways it is a shame that the super industry is so fragmented. It is actually good to own unlisted infrastructure and real estate within super however all super funds seem to be going about their purchases separately making the cost of owning those assets more expensive. The money is needed looking forward, particularly in relation to building affordable housing
I really like the idea of diversifying into unlisted property and infrastructure. The problem is the lack of transparency and the fees. If I had the time and ability to dig into it in detail, I think those would be an ideal addition to a portfolio. I just see a lot of risks (of the many layers of fees, active management risk, liquidity risks, a.k.a. during covid, etc.). Also, I don't want to rely on trusting someone else's judgement, which could easily be flawed.

Also, you mention building housing. Residential real estate is probably one of the lower correlated asset classes to equities, as opposed to what most REITs have (office, retail, industrial — all of which are more correlated with the business cycle), but again, it's not really a passive investment because you have to check up on the active management decisions in detail.

So for me, it's one of those things that looks great in theory but not so much in practice.
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asset_chaos
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Re: Australian retirement funds: general reinforcement for Bogleheads and specific thoughts for Australians [updated]

Post by asset_chaos »

Today APRA released the results of its performance test of super funds. 8 of the 49 funds in the analysis above were rated underperforming. (The released results are binary: funds are only rated performing or underperforming. APRA presumably could have been more nuanced in their assessment but were not given that mandate.) And what is the criteria for a fund being performing versus underperforming? As quoted in the link upthread,
Product performance is tested against a benchmark comprising prescribed indices weighted in line with a fund’s strategic asset allocation (SAA). This means that the test measures the effectiveness of a fund’s implementation of its strategy relative to its YFYS benchmark, not the suitability or performance of the strategy itself.

A product passes the test provided the product return (including allowance for administration and advice fees) does not underperform the benchmark by more than 0.5% pa.
I think this means each fund is evaluated against a custom benchmark of indices for each asset class it utilizes, weighted at the fund's neutral policy portfolio. The benchmarking also seems to be generous to the funds by being net of administration fees; moreover, a fund gets a performing grade by only underperforming its benchmark by 0.5% a year. I've updated the plot above by placing smaller red dots onto the failing funds:

Image

Note that the red dot closest to the median result is actually two dots so close together that they're indistinguishable at the scale of the plot.

It's mildly interesting that for some funds close together on the plot one fund is failing and the other is not, e.g. the two funds around $800 of fees and about 6% of performance. Presumably the red, failing fund took more risk---and it didn't pay off---while the black dot fund with almost identical costs and returns had presumably a more conservative portfolio that broadly performed in line with its risk profile.

I find it also mildly interesting that cost does not correlate with failing over this 6 year time frame. Four failing funds had above median cost and four had below median cost. I think this data is telling us that the median cost is still far too high. We need to eschew all default fund options and invest our super in the few truly low cost index fund options, as represented by the magenta dot, with their structural advantage of low cost compared to all default funds.

By the way, the failing 8 funds are

Code: Select all

update 2021-August-31

Funds that now APRA lists as Underperforming (8 of the 49 funds above, 16%)

635		5.38			AMG Super
840		6.12			Colonial First State FirstChoice Superannuation Trust
890		4.58			Energy Industries Superannuation Scheme
902		5.81			Labour Union Co-Operative Retirement Fund
1038		6.42			Retirement Wrap (BT MySuper)
1038		6.36			ASGARD Independence Plan Division Two
1150		6.03			AvSuper Fund
1225		5.47			Christian Super (My Ethical Super)
It's worth noting that the failing funds are a mix of for profit and industry funds. Generally one should invest with the not-for-profit funds, but one can't just blindly assume every industry fund is a good fund.

Is there a way we, as Bogleheads, can more widely disseminate the message, clearly supported by the data, for our fellow Australians to chose the low cost index option for their super? Even better, to sway fund complexes to make indexing the default?
Regards, | | Guy
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