Wednesday 31 July 2013

The best deals in Superannuation in Australia Part 3

The KISS Principle: Keep It Simple, Super(annuation)Freak
Amongst my dozens (and dozens) of readers, not everyone wants to worry about the details of asset allocation or have to keep an eye on multiple funds.  I completely understand if you want to find a fund that you can leave for a decade and only revisit as your life situation and closeness to retirement changes substantially.  Your particular choice of fund may also depend on other factors such as the availability (and relative price) of insurance connected with the fund.
In this post I'll compare the diversified index fund offerings amongst the funds we've already looked at.  These funds target a particular asset allocation between Australian Shares, Fixed Interest (Bonds), etc, and allocate across different index products for you to achieve that target.  I'll split the funds between the most conservative funds (30% or less in the growth assets of Australian Shares, International Shares, and Property & Infrastructure), the less conservative that have an asset allocation closer to the typical Australian balanced superannuation fund (62-75% in growth assets) and those in between (50% in growth assets).  Typically the more growth oriented, less conservative funds are expected to experience higher long-term growth but also higher year-on-year volatility, so these may be less suitable if you only have a few years until retirement.
The different classes of funds are in the tables below.  I've ordered them by the best estimates available on Management Expense Ratio (MER), a % management fee charged on the assets you have in the fund.  Ideally we want to keep administration and management fees to a minimum while still being able to achieve our retirement objectives.
'Conservative' Funds:

ANZ: ANZ Smart Choice Super: Conservative
Colonial: FirstChoice Wholesale Multi-Index Conservative

'Moderate' Funds:
ING: ING Direct Living Super 'Smart' Option
ANZ: ANZ Smart Choice Super: Moderate
Colonial: FirstChoice Wholesale Multi-Index Diversified
'Balanced' or more 'Growth' oriented Funds:

1Includes credit reduction 0.09% for Operating Risk Reserve for FYs 2013-2016
2Includes admin fee 0.05%
*Unspecified distribution between Australian and Global Fixed Interest
Aust: AustralianSuper Indexed Diversified
HostPlus: HostPlus Indexed Balanced
SunSuper: SunSuper Balanced - Index
ANZ: ANZ Smart Choice Super: Growth
Colonial: FirstChoice Wholesale Multi-Index Balanced


Another option available are the ANZ Smart Choice Super 'Lifecycle' investment options.  These are arranged by decade of birth.  These gradually decrease the allocation to relatively volatile growth assets as time passes (so the allocations will change, e.g. the 1980s likely becoming more like the current 1970s allocation over the next decade).  My concern with these is that they will adjust in a completely set fashion, not taking into account our individual circumstances.  For example, if you find that your retirement savings reach your goal level much earlier than retirement (you have 'enough') then you may wish to reduce your level of growth assets earlier to emphasise preservation of assets.  You may equally be willing to take greater risks while older (and/or work longer) if you have not yet achieved your desired retirement savings level.  I include them for your information nonetheless:


Whether you want to take more detailed control of your super, or just want a fund you can let do the work for you, I hope this series has shown that there are index funds available in Superannuation in Australia that can help you achieve your retirement goals at a low cost.

Added: Links to Superannuation funds (and their fees):

Tuesday 30 July 2013

The best deals in Superannuation in Australia Part 2

In my last post I wrote generally about some of the low-cost providers of index funds within Superannuation available in Australia.  Today's post is for those who want more control over their investment options without the cost and administrative burden of a self-managed superannuation fund.

Specifically we'll be taking a look at AustralianSuper's MemberDirect option and ING Direct Living Super's Shares option.  Both of these options allow investment in individual companies on the Australian Stock Exchange (ASX) as well as a range of Exchange Traded Funds or Listed Investment Companies.

An Exchange Traded Fund (ETF) is basically a managed fund which trades like a share on the ASX. Typically ETFs have lower ongoing management costs than an equivalent standard managed fund but you do need to pay brokerage to purchase them, just like a share.  The ETFs that align with the investment approach I've been talking about are again Index Funds.  A Listed Investment Company (LIC) is typically more like an Actively Managed fund rather than an Index Fund, however there are some low-fee Listed Investment Companies and there may be a LIC which provides access to assets or an investment style not easily available in (Index) ETFs.  Index ETFs typically trade very close to their Net Asset Value (NAV), the price of the underlying shares or bonds in the index.  Listed Investment Companies may trade below or above the NAV depending on the market perception of the value added (or subtracted) by their management (needless to say, the evidence on active management is not in its favour).  Some ETFs and LICs target physical or synthetic exposure to commodities or currencies; As these are not income generating I personally do not see their value as an investment (I do notice neither AustralianSuper nor ING seem to include synthetic commodity ETFs within their options at time of writing: I personally would be concerned with synthetic ETFs about the additional counterparty risk embedded in such products).

What are ETFs useful for?

We've seen that a number of funds already have low-cost access to basic asset classes through index funds: Australian and (Broad) International Shares, Bonds, Property, Cash.  So the primary purpose of ETFs in an index-fund-based portfolio is diversify into or 'tilt' towards specific types of assets that may not be well-represented by the broad asset classes, or to lower costs further where this is possible.

To make this more tangible, some specific examples that are available include:
Exposure to Small Company Shares (in Australia or the US)
Exposure to specific Country or Region Shares (US, Europe, Specific Asian Countries)
General exposure to Emerging Markets or 'BRIC' Countries

In addition, the cost of some 'core' components of a portfolio may be lower in some cases, particularly
ASX200/ASX300 Australian Shares
US Total Market/S&P 500 Shares
All-World Ex-US Shares

What ETFs are available?

ING Direct have the largest range of available ETFs between the two products: ING ETFs

Particular ETFs available which I find attractive (but may not suit your particular situation) include:

MER (fees)
Vanguard® Australian Shares Index ETF VAS 0.15%
Vanguard® US Total Market Shares Index ETF VTS 0.05%
Vanguard® All-World ex-US Shares Index ETF VEU 0.15%
Vanguard® MSCI Australian Small Companies Index ETF VSO 0.30%
iShares Russell 2000 ETF IRU 0.23%
iShares Core S&P Small-Cap ETF IJR 0.16%

These provide even lower ongoing costs for Australian and International broad share indices as well as relatively inexpensive access to small Australian and US companies.  The iShares MSCI Emerging Markets ETF (IEM) may also be appealing if one wants a higher exposure to Emerging Markets but comes at a relatively high Management Expense Ratio of 0.69%, unsurprising due to higher costs in general for investing in Emerging Markets.

AustralianSuper only currently provide access to iShares ETFs: iShares ETFs

Some examples which may be valuable include:

MER (fees)
iShares MSCI Australia 200 IOZ 0.19%
iShares Core S&P 500 ETF IVV 0.07%
iShares MSCI EAFE ETF IVE 0.34%
iShares S&P/ASX Small Ordinaries ISO 0.55%
iShares Russell 2000 ETF IRU 0.23%
iShares Core S&P Small-Cap ETF IJR 0.16%

Outside of the US small-cap segment, in particular for the broad Australian and International share indices these do not seem to provide as good value as the Vanguard funds available in the ING product.  In particular, the Small Australian Companies fund seems fairly expensive at 0.55%.  The same Emerging Markets fund is also available in AustralianSuper.

How Much Extra Does it Cost?

On top of the Management Expenses of the investments themselves, both ING Direct and AustralianSuper have additional administration fees to access these options.  They both charge $180 p.a. as a basic fee.  For AustralianSuper this also provides access to term deposits (which are available fee-free with ING Direct).

Additionally, brokerage is payable to purchase ETFs (or ASX shares).  AustralianSuper have a sliding scale with a minimum of $15, then fees from 0.3% down to 0.12% for trades above $50,000.  ING charge a minimum of $20 or 0.13% per trade.  If not trading frequently, these fees are not vast but they may impede frequent portfolio rebalancing.  One other trading cost to keep in mind is that some of the ETFs are not traded as frequently on the ASX and, as a result, have relatively wide bid-ask spreads.  This means that the price you buy at may be a bit higher than the underlying value, and the price you sell at a bit lower.  It's definitely worth keeping an eye on the bid-offer spread when making these trades and consider if the cost is worth it for the objective of the particular ETF investment.

What limitations are there?

Both products limit the extent to which you can use these options and the extent to which you can concentrate your holdings within individual ETFs or shares.  The maximum in both cases is 80% of your total account balance in shares and ETFs, and 20% in a single share or ETF (although in the ING case that 20% may not be a strong constraint, for example you can combine a Vanguard ETF and a very similar iShares ETF).  Both require a minimum total balance of $10,000 and also require a small amount be kept in a low interest transaction account to cover fees.  AustralianSuper also requires a minimum balance of $5,000 in one of their own funds (some of which are good value nonetheless, as highlighted in part 1 of this series) and a minimum share or ETF buy order of $1,500.  In addition AustralianSuper MemberDirect is not currently available to Pension members, only during the 'accumulation phase'.

I'm not an accountant and the tax treatment of capital gains for your shares and ETFs is somewhat unclear to me.  Superannuation has the advantage of a 15% tax rate on capital gains (10% if held more than a year) and this certainly applies here.  In a standard superannuation managed fund, the fund is marked-to-market (its current value is calculated) and my understanding is capital gains are distributed to holders of the fund as units are bought and sold.  If I'm reading the AustralianSuper Member Guide correctly, it looks like capital gains are provisioned quarterly based on the gains and losses rather than on sale of your shares/ETFs.  I haven't been able to find the detail on the ING CGT treatment.  One advantage of a self-managed superannuation fund over these products may be that you can hang onto a share and only pay capital gains tax (or harvest capital losses) when you dispose of the shares.  I'd greatly appreciate any feedback on the tax situation from readers more knowledgeable in this area.

Conclusion

Overall AustralianSuper MemberDirect and the ING Living Super Shares Option can be valuable for either diversification into specific asset classes or reduction of fees on larger balances.  These have the potential for lower fees and administrative burden than a self-managed superannuation fund but are not without some limitations.  For the purposes of ETFs, the ING offering does provide broader options.  The AustralianSuper offering is probably best suited as a complementary investment for those who currently (or wish to) hold assets in AustralianSuper's other funds.

Other Superannuation funds are beginning to offer similar options, albeit less well-established and typically with fewer ETF options.  It will be interesting to see how the marketplace evolves and the extent to which funds compete for those who want greater control over their super.

As always, feedback from readers is greatly appreciated.

Links:
ING Living Super Shares Option and List of ETFs

Additional Note: ING do not appear to offer comprehensive ASX 200 ETFs in their direct investment option any longer.  This may reduce the usefulness of the option to some (while there are still similar options such as ASX 50 or high dividend yield index funds, or low-fee LICs such as AFI and ARG none of these are as well-diversified as the Vanguard® Australian Shares Index ETF)

Sunday 28 July 2013

The best deals in Superannuation in Australia Part 1

We've discussed that all other things equal, low cost and index funds are a cost-effective way to save and invest.  This post will show some of the options for making such investments within Superannuation in Australia.  Note that I have no financial interest in these funds (other than planning to put some of my own Superannuation savings into SunSuper and ING Living Super, due primarily to their low costs) and this post is fairly general and will not take into account your specific needs or opportunities.  I'll be focusing on offerings during the 'accumulation phase', so fees and options will vary slightly if you're already looking at transition to retirement or pensions.

SunSuper

SunSuper are a Queensland-based "Industry Fund".  Industry Funds are typically "owned" by members so are often (but not always) cheaper than retail funds.  Many are now available to the public without needing to be part of the particular industry or region that they were originally intended for.

Their administrative charges are pretty reasonable at $1.25 per week (around $65 per year) + 0.05%. Hidden within their investment options in their product disclosure statement are a number of low-management-fee, primarily index-based options (Investment fees are 2013-2014 estimates from their website):

Investment fee incl admin
Balanced - Index 0.16% 0.21%
Australian Shares - Index 0.15% 0.20%
International Shares-enhanced Index (unhedged) 0.25% 0.30%
International Shares-enhanced Index (hedged) 0.25% 0.30%
Australian Property-Index 0.15% 0.20%
Fixed Interest-Index 0.15% 0.20%
Cash 0.10% 0.15%

These are particularly inexpensive options if you want to mix-and-match your own portfolio broken into different asset classes.  The one thing to watch out for is their Fixed Interest - Index option includes overseas bonds (hedged back into Australian Dollars), which is fine if that's what you want but may not be what you were expecting.  The Index and Enhanced Index funds are managed by State Street Global Advisors, who have a long history of offering index funds in Australia (through Exchange Traded Funds).  SunSuper will automatically rebalance your portfolio for you six-monthly or annually.  They do charge a 'buy-sell spread', basically their transaction costs if you switch between options, as well as a $40 withdrawal fee if you transfer assets out of their funds entirely (to another Superannuation fund).

When I checked for me, their insurance options also seemed reasonably-priced.  One way to compare insurance prices is to use Chantwest's Applecheck (I've included a link to SunSuper which will let you access it to compare funds without paying for the comparison).  In terms of comparing fees overall, I've found the tool less useful (as it compares 'standard' options which often charge higher fees than the index options).  However for comparing insurance fees, administration fees and other aspects of funds I've found it helpful.

AustralianSuper

AustralianSuper are another industry fund.  Their administrative charges are a flat $1.50 per week (around $78 per year).  Their investment options include (fees for the 2012-2013 financial year):

Investment fee
Indexed Diversified 0.11%
Australian Shares 0.26%
Australian Fixed Interest 0.16%
International Fixed Interest 0.13%
Cash 0.08%

Note that their Australian Shares option is not an index fund but is at least low cost and may be useful if you wish to increase the asset allocation towards growth investments (the Index Diversified option is 38% cash and fixed interest and, unlike SunSuper's Balanced Index fund, does not include Property Investment Trust exposure).  AustralianSuper also charge a similar withdrawal fee.

One other option with AustralianSuper, if you want more control over your detailed investments, is their MemberDirect option.  This does come with additional fees but also gives access to further Index Funds through iShares Exchange Traded Funds.  I'll have more on that option in a later post.


HostPlus round out our look at industry funds.  Their administrative charges are again a flat $1.50 per week (around $78 per year).  Their investment options include:

Investment fee With ORFR
Indexed Balanced 0.05% 0.14%
Cash 0.04% 0.13%
Macquarie Investment Management – Australian Fixed Interest* 0.00% 0.09%
BlackRock Asset Management –  International Fixed Interest 0.17% 0.26%
Industry Super Property Trust – Property 0.30% 0.39%
Industry Funds Management – Australian Shares 0.06% 0.15%

Note * the Macquarie Investment Management – Australian Fixed Interest option is actually Macquarie agreeing to "Guarantee the return of the UBS Composite Bond Index (All Maturities)", not a direct investment in Fixed Interest.

One important additional piece of information with HostPlus is they are currently building up an Operating Risk Reserve as part of the Operational Risk Financial Requirement (ORFR). The tangible effect of this will be "it is estimated that the 30 June crediting rates will be reduced by approximately 9 basis points on an annual basis" for the next three years.  I've included an effective extra 0.09% in the "With ORFR" column above but their options are good value regardless.  HostPlus also don't seem to charge a Withdrawal Fee.

Competition is beginning to heat up among Retail Funds as well as Industry Funds.  I expect this to be a rapidly changing part of the Superannuation landscape over the next few years.  At time of writing some other cost effective ways of investing Superannuation in low cost funds are:


ING Direct, owned by a Dutch banking and financial services company, have some interesting offerings which may be useful particularly in combination with other funds. Their 'Safe' and 'Smart' options do not charge administrative or management fees.  Their select options (total fees 0.75%) are probably a little too expensive compared with products available from other funds.  Like AustralianSuper, for an additional fee they have a 'Shares' option which, for our purposes, can be useful for investing in Vanguard, iShares and other Exchange Traded Funds.  I'll look at this option and AustralianSuper's MemberDirect in a later post.

ING's 'Safe' option allows us to invest in Cash and Term Deposits without extra fees.  Just like all the other Super funds above, these are not directly guaranteed by the government (which is available in term deposits within a self-managed superannuation fund) but are very steady (if typically low-return) investments just like cash and term deposits outside Super.

ING's 'Smart' option is a 50% Cash/50% shares Balanced (index) fund with no management or administration fees (a buy-sell spread does apply).  The particular allocation might not suit everyone, and it does have a $5,000 minimum total account balance (waived when regular contributions are made to the account).  But that's still pretty impressive.  Keep in mind if you have other Super funds, though, that you could have some or all of that 50% cash typically earning a higher return in Term Deposits or Bonds so this should be weighed against the lower fees for the 'share' part of the product.  ING don't charge a Withdrawal Fee.

One other thing with ING is that you are required to keep at least $500 or 1% of your overall investment in a lower-return 'Cash Hub'.


ANZ have recently entered the fray with a number of low cost and index fund options.  You can choose a 'Life-Cycle' style option, where they progressively make your asset allocation more conservative as you get older, a fixed pre-mixed option from 'Conservative', 'Moderate' or 'Growth', or mix your own from: Cash, Global Fixed Interest, Global Property, Australian Equities and/or International Equities (apparently hedged to the Australian Dollar).

ANZ charge a flat $50 administration fee and 0.5% management fee (except on Cash) which is reasonably competitive for a retail product.  A very quick look at my situation suggests their insurance fees are higher than many industry funds.  And a neat feature if you bank with ANZ is that you can see your Superannuation balance in your regular ANZ internet banking.  ANZ don't charge a Withdrawal Fee.

Colonial First State FirstChoice Wholesale Personal Super

Colonial are a bit more expensive in their % fees.  However they don't charge a fixed administrative fee or withdrawal fees so, with a minimum balance of $1,500, are particularly useful when you are just starting out and have a low-balance.  While personally I really like the Industry Funds, those $65+ fixed annual fees are effectively 1% if you only have a $6,500 balance.  For me the break-even point was around $30,000-$40,000 in Superannuation; below that the fixed fees meant that an Industry Fund would be more expensive, while above that the Industry Funds above were better value for me. I suggest you do your own calculations for your particular situation.

Noteworthy options include:
Investment fee
FirstChoice Wholesale Multi-Index Conservative 0.64%
FirstChoice Wholesale Multi-Index Diversified 0.68%
FirstChoice Wholesale Multi-Index Balanced 0.73%
Colonial First State Wholesale Index Australian Bond 0.44%
Colonial First State Wholesale Index Property Securities 0.44%
Colonial First State Wholesale Index Australian Share 0.44%
Realindex Wholesale Australian Small Companies 0.89%
Colonial First State Wholesale Index Global Share 0.56%
Colonial First State Wholesale Index Global Share – Hedged 0.56%


Of course, which fund manager and fund is best for you will depend on your particular situation (in particular on the size of your Superannuation balance and the particular assets which suit your investment timeframe and risk appetite).

Hopefully that gives you a good first-look at some of the low cost and index fund options available in Superannuation in Australia.  As always, I'd greatly appreciate any feedback or information on other good low-fee options that I haven't yet come across.

Background and Investing our Superannuation in Index Funds

This post will contain many links, as I want to get to the best deals in superannuation more quickly and much of this has been covered by others.  I'm happy to expand on any of these points down the track if there is demand.

For those needing a primer on Superannuation more generally, a good starting place is ASIC's MoneySmart

Basically Superannuation is a 'container' for your assets.  The advantage is that, within certain limits, a permanent employee can salary sacrifice and pay only 15% tax rather than their marginal rate, and then 15% on earnings (with potentially lower rates still on capital gains).  The disadvantage is that generally the money isn't available until age 60 (with some exceptions).  Just like your own money, your Superannuation can be invested in many different assets such as cash, term deposits, shares, bonds or property.  What options are available to you depend on the superannuation fund you choose (and most people do have choice these days).

There may be many individual reasons for choosing a particular fund.  You may get a particularly good rate on Life, Total & Permanent Disability or Income Protection Insurance through your fund.  Your employer may subsidise or match additional contributions to a particular fund.  The main focus of this blog will be on what low-cost funds are available in Superannuation in Australia, in particular index funds.

What is an Index Fund and the case for Index Funds

When you look at the performance of your Superannuation your provider will usually compare the performance of your fund against an index such as the All Ordinaries or ASX200 index in Australia.  For example the ASX200 represents a capitalisation (size) weighted average of the top 200 publicly listed companies in Australia.  There are similar indices generated for global shares, bonds, etc.

One way of investing is to invest in the components of the index.  That way you'll always be close to the index or 'market' return.  Thankfully we don't have to buy the individual components of the index, there are funds set up to do this for us.  You may think that way you'll only get an 'average' return but there are a number of reasons this isn't the case.  The main advantages as I see them:

  • Index funds are much lower cost, as much less needs to be spent on research and salaries.
  • There's no evidence from either academic or professional studies that fund managers can consistently outperform an index, even putting aside the extra cost.
  • On average this means we can expect a bigger balance in retirement, with lower risk
More details on the advantages of index funds are available on the bogleheads site and forum: Advantages of Indexing
James L. Collins has some great posts about index investing on his blog also, such as this link
EDIT: Another (freely available) look at Index Funds in a portfolio in Rick Ferri's Whitepaper

There are some excellent books on the topic also.  My personal favourites deal with Asset Allocation in greater detail also (how to select the proportion of shares and bonds, international shares, etc. in your overall portfolio).  These are by William J. Bernstein:
And a less intimidating read if turned off by the word standard-deviation: The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between

Books often recommended more generally on Index Funds are by John C. Bogle, the 'father' of index investing, such as Common Sense on Mutual Funds
Or in the spirit of Bogle: The Bogleheads' Guide to Investing
Larry Swedroe surveys the evidence in great detail: The Quest for Alpha: The Holy Grail of Investing
An overview on Investing for retirement comes from Rick Ferri (and I've linked to the free pdf version on his website as the book 'Serious Money' is out of print)

Note that these books and sites are somewhat US-centric.  However the principles are certainly applicable to Australia.

If you're convinced that low cost and index funds are a good strategy, my next post(s) will discuss how we can invest in these within Superannuation in Australia.