People often ask the question “what is the best performing superannuation fund?”
The answer is quite simple and can be stated in two words. “It depends!”
It depends on what you mean by “the best”. Does it mean “the best for you”? Does it mean “which fund had the highest return”?
Does it mean “which fund was the best performing superannuation fund last year” or does it mean “which fund was the best performing superannuation fund over the past 5 years, or 10 years”?
Or it might mean “which fund was the best performing superannuation fund irrespective of its management fees?” or “which fund was the best performing superannuation fund net of its management fees?”.
Or again, it might mean, to you, “which fund will be the best performing superannuation fund for me between now and when I retire?”.
In reality, the right answer is not that straightforward. Let’s take one example.
In the 2016/2017 financial year, there were some geared share funds that boasted returns of 40% or even 50% for that year. But some of those funds have also had losses of around 70% in a past year. So, one of the first lessons we learn is that returns over a one year period are not what we would recommend you base an investment decision on!
So, should you choose a longer period to compare returns? Maybe 5 years or 10 years? Well, that’s probably a better option that one year, but then we come face to face with another reality – past performance is not always an indication of future performance!
Fund managers (or the people who work in the teams that determine what the fund invests in) are all human. Which means that people move on to other fund managers and some of the senior ones may take with them many of the skill sets that have helped a fund achieve excellent returns (or maybe the opposite!).
And fund managers all have their particular “style”. Some are “Passive” and some are “Active”. Passive managers generally have low fees. Examples of these are Index funds which basically follow a particular stock market index such as the ASX200.
Active managers usually charge higher fees because they have teams of professions researchers and portfolio managers who are trying to obtain higher returns. There are “Growth” style mangers and there are “Value” style managers. The former tend to invest in stocks in companies that high returns on equity and will grow in value in the future.
“Value” managers look to invest in a strong company but at a “value” price.
Then there are funds which focus on “small” public companies versus larger ones. These fund managers believe that the smaller companies can often deliver better returns because they are more able to cope with change and have greater opportunity for growth. Yet they also have the potential for associated greater risk.
Confusing isn’t it?
And what makes it more so, is that each “style” of fund (or fund manager) will, at some time, have its day in the sun! At some stage in the financial cycles that our superannuation will exist in, between now and our retirement, each style will have a time when it performs extraordinarily well, and will probably have a time when it shows negative returns.
So – what’s the answer? How do I pick the best performing superannuation fund for me?
We suggest that there are a number of steps that are essential
- Determine your Risk Profile. This is your tolerance to risk and volatility. It will depend on a number of factors that are peculiar to you – your age, financial situation, how long before you retire, future plans, other assets and inheritances and so on. A good financial advisor can assist you in determining your Risk Profile
- We usually suggest selecting more than one fund manager! What’s that saying; “don’t put all your eggs in one basket”? Well, that certainly applies to what could end up as your most valuable asset. Many of our clients select a “platform” that enables them, at a very modest cost, to spread their superannuation portfolio over a number of different fund managers, with diversification over multiple asset classes such as cash and fixed interest, property and infrastructure, and domestic and international shares.
- By all means look at past performance but do it over a period of many years, not one year, and remember, there is no guarantee that future performance will follow past performance.
- Remember the market will not always go up. You can expect that on a number of occasions in your journey to retirement (or Financial Freedom as we like to refer to it as) there will be “corrections” where the value of a portfolio will drop – sometimes significantly. Diversifying over different fund manager styles should help in keeping a drop in your portfolio value to a minimum in the circumstances.
If you would like us to show you how your fund has performed, and to let you know what type and style of fund manager you have at the moment, simply complete the questions below and we will send you, obligation and cost free, a summary report.