Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 256

Cuffelinks Newsletter Edition 256

  •   1 June 2018
  •      
  •   

Another week, another headline-grabbing slam on our superannuation system. According to Mercer's Global Pension Index, Australia has the third best system in the world behind only Denmark and The Netherlands. Gosh, the others must be terrible when the Productivity Commission says,

"Structural flaws - unintended multiple accounts and entrenched underperformers - harm a significant number of members, and regressively so. Rivalry between funds in the default segment is superficial and there are signs of unhealthy competition in the choice segment (including the proliferation of over 40,000 products)."

The Draft Report Overview runs to a hefty 571 pages so we have reproduced the Executive Summary here. It recommends that anyone should "only ever be allocated to a default product once, upon entering the workforce". The fund will be selected from a 'best in show' shortlist of 10. The problem here is that fund performance varies over time according to risk exposure, styles that deliver in certain types of markets, portfolio manager changes, etc. This year's top quartile fund is often next year's bottom, and the 'expert panel' chosen to select the funds will have many factors to juggle and overcome personal preferences. For example, a check on the Top 10 cheapest funds and the Top 10 best performers over the last three years shows no fund on both lists.  


Watch the hand-wringing when a 'best in show' fund has a poor year, with complex justifications for a 15-year-old stacking shelves in a supermarket who chose the fund for the rest of their life.

The Commission has observed some funds underperform over many years and the results are not fully explained by size, asset allocation or costs. One-third of funds do not beat their benchmark. A typical worker with a bottom quartile fund will retire with 53% more if they had invested in the top quartile. Here's the MySuper fund distribution:    

Productivity Commission Report, Individual funds with MySuper products, 2005 to 2016.

Size of circle indicates size of each fund's assets under management. PC Draft Report, page 11.

Unfortunately, it's not possible to backdate an investment into the top quartile fund, and guess what ... 25% of funds will always be in the bottom quartile! However, the vision to drive default super into low fees and high performance should at least lead to consolidation and greater competition. 

On the Productivity Commission, Amber Moncrieff implores women in particular to sort out their super, and Michelle Grattan explains why young people will have important choices to make.

Royal Commission: Be careful what you wish for

Banks are big and ugly and fair game, but like the Westminster political system, it looks bad until you consider the alternatives. From Round 1, do we really want to close the choices offered by mortgage brokers? From Round 2, do we really want banks to stop offering financial advice to their customers, and instead send them around the corner to an 'independent' adviser? From Round 3, do we really want the banks to stop or reduce lending to small businesses?

Go too far with bank regulation and a shadow industry will blossom, much of it not subject to proper scrutiny. Sure, there are plans to have non-banks report to APRA, but they will not carry the capital base or disclosure requirements of banks. These non-banks have less reliable sources of funding than the majors, and as Jonathan Rochford shows, financial markets are at a vulnerable time in the credit cycle after high yield debt has benefitted from many years of complacent liquidity. This at a time when more investors are using private debt for their interest exposure, and Mike Davis describes the development of this sector.

Don't sell your home to downsize yet

Last weekend, I went to sticky beak a house auction in a neighbouring street, only to be told by the agent that the auction would be delayed until the new financial year. The owners intend placing some of the proceeds into super under the new downsizer rules, but found out from their accountant the night before that the contract for sale must be exchanged after 1 July 2018.  

Managing portfolios and SMSF membership 

Noel Whittaker takes a swipe at Labor's franking proposals, failure to address super shortfalls for women and taxes on the rich. Our interview with global multi-sector manager, Pilar Gomez-Bravo, was a wide-ranging exploration of how she follows a vast range of markets in creating portfolios. Graeme Forster demonstrates that it's sometimes necessary for a fund manager to stand against even their own colleagues when convinced a company is a good buy. 

Raewyn Williams reports on her research into a little known subject, the extra costs that different types of fund managers incur. These expenses are passed on to end investors making the job of outperforming the index even more challenging. And Graeme Colley looks at the change in SMSF member limit from four to six and who benefits.
   
This week's White Paper from Folkestone's Adrian Harrington is his slide presentation from the Australian Shareholders' Association conference on the current real estate opportunities. 

Graham Hand, Managing Editor

 

Edition 256 | 1 Jun 2018 | Editorial | Newsletter

 


 

Leave a Comment:

banner

Most viewed in recent weeks

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Retirement

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Shares

On the virtue of owning wonderful businesses like CBA

The US market has pummelled Australia's over the past 16 years and for good reason: it has some incredible businesses. Australia does too, but if you want to enjoy US-type returns, you need to know where to look.

Investment strategies

Why bank hybrids are being priced at a premium

As long as the banks have no desire to pay up for term deposit funding - which looks likely for a while yet - investors will continue to pay a premium for the higher yielding, but riskier hybrid instrument.

Investment strategies

The Magnificent Seven's dominance poses ever-growing risks

The rise of the Magnificent Seven and their large weighting in US indices has led to debate about concentration risk in markets. Whatever your view, the crowding into these stocks poses several challenges for global investors.

Strategy

Wealth is more than a number

Money can bolster our joy in real ways. However, if we relentlessly chase wealth at the expense of other facets of well-being, history and science both teach us that it will lead to a hollowing out of life.

The copper bull market may have years to run

The copper market is barrelling towards a significant deficit and price surge over the next few decades that investors should not discount when looking at the potential for artificial intelligence and renewable energy.

Property

Global REITs are on sale

Global REITs have been out of favour for some time. While office remains a concern, the rest of the sector is in good shape and offers compelling value, with many REITs trading below underlying asset replacement costs.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.