New low-cost Infrastructure Superannuation investment from HostPlus

Australian industry super funds have done well out of unlisted infrastructure as an asset class.  While it's fair to ask whether this record will continue in the future with more competition for these assets, or whether the lack of liquidity in these assets means we have not been paid a sufficient premium to hold them, in the one path of history we have experienced it has been a successful strategy.

HostPlus have introduced a new investment allowing access to these assets and the expertise these funds have built up with the IFM – Australian Infrastructure option.

With investment management costs of 0.45% p.a. this is the most reasonably-priced way yet to access unlisted infrastructure assets for individuals who want to customise their asset allocation (many industry MySuper funds already provide access for those who want a single all-in-one investment, although most are more expensive than this option).

Note also that the investment is capacity constrained, the "option may be closed to new investors if a cap of 3% of total funds under management for the Fund is reached".  While I'm not switching to HostPlus to access the fund at this stage, it seems a good way to diversify further for those of us with a degree of home bias and a desire to keep costs low.  I may even recommend it to my Mum.

Upcoming super fee changes

For people considering switching super fund providers I just wanted to highlight some upcoming changes to fees.

For people using or considering AustralianSuper Member Direct to invest in ETFs or term deposits the annual fee is rising to $395.  As I recently mentioned they have improved the ETF offerings and have some new features.  However this seems far too much to pay for a relatively restricted product (with a maximum of 20% in any one ETF). Hopefully other providers will stay closer to the $180 p.a. mark but let me know if your provider is following AustralianSuper's lead.

SunSuper (who I have my superannuation with) are increasing their administration fee by 0.04% p.a. (gross of tax) to 0.1% p.a.  However I don't think this will end up being bad news.  They've recently entered into an agreement with Vanguard to provide them with passive investments.  We should see some impact of this around mid-June with their updated investment guide but I expect this will mean lower investment management fees over time.  A first indication is a change in name for their international shares funds from "Enhanced Index" to "Index".  I'll keep you posted as details emerge but expect we'll finally have an inexpensive way to invest in the low-cost Vanguard Australia wholesale funds in our super.

Finally, if you are considering switching providers, a reminder to check insurance costs and ensure you are covered before closing your old super account (the conditions of insurance approval vary between super funds so be sure to check).  If you use the Life and TPD insurance in Super a number of funds have had to pass on increasing insurance costs recently.  If you have a low balance this can make a bigger difference than small changes in investment or administration costs. It is still often cheaper than insurance outside super so make sure you do the comparison before you switch.

Links:
AustralianSuper Member Direct Guide
SunSuper enters strategic alliance with Vanguard

Australian Super Offers New ETF Choices

Just a quick update to let you know Australian Super have enhanced their ETF offerings as at 28 March. Particularly valuable are the inclusion of Vanguard and SPDR International Share ETFs previously discussed, with VTS and VEU coming in at the lowest cost while WXOZ and WXHG provide an all-in-one solution.

Each ETF is still limited to 20% of your overall Australian Super assets.  There are new Australian Shares and Fixed Interest ETF choices also but once you include transaction fees, Australian Super's competitively priced and well-performing Australian Shares and Australian Fixed Interest "DIY Mix options" will be hard to beat using ETFs.

Global Large-Cap Shares		MER
Vanguard® US Total Market Shares Index ETF	VTS	0.05%
Vanguard® All-World ex-US Shares Index ETF	VEU	0.15%
SPDR® S&P® World ex Australia Fund	WXOZ	0.42%
SPDR® S&P® World ex Australia (Hedged) Fund	WXHG	0.48%

Link: Australian Super Member Direct Investment Menu

You can't always get what you want but... You get what you need

A reader wrote

I've read a couple of your older articles on super funds using ETFs. I was interested in your updated thoughts on this topic.
I feel that the Australian government has failed the public interest on this topic, quantifiable at 1-2% p.a. of most people's retirement income.
Surely a firm is offering something like the IRA in the US: virtually no fees, admin/reporting taken care of, invest in anything you want (such as ETFs) and the IRA typically runs off a commission. Anything more than 30 bps p.a. total is preposterous (excl insurance).

Since the focus of this blog is on available products and strategies I will start with that in mind.

In terms of what is currently available, there is no Super product I'm aware of that allows us to "invest in anything you want (such as ETFs)" while remaining that inexpensive. There are funds that allow a limited investment in a limited range of ETFs (e.g. Australian Super, ING Living Super and Hostplus) and cost a minimum of $180 p.a. There are wrap accounts that often allow a wider range of investments but usually cost more than 30bps for the account alone before investment management fees. And there are SMSFs with relatively high fixed fees (minimum $700p.a. before investment management and transaction costs) and/or effort required.

So you can't always get what you want.  But if you try sometime, you just might find.  You get what you need. [Thanks to The Rolling Stones]

I want exactly the same thing.  But I do not think my retirement is imperilled without it.  While we don't have all the flexibility we want, I've documented enough choice at low cost to give us what we need.  For example:

For someone who just wants an all-in-one fund they can add to and forget about during their accumulation, Australian Super Indexed Diversified or Hostplus Indexed Balanced cost 0.21% and 0.04% p.a. respectively (plus $78 in administration fees).  If you want things simple but don't want as aggressive an allocation (70-75% in Shares) both also offer low-cost Fixed Interest and Cash choices which can be used to lower the overall volatility.

For someone like me who wants to customise their broad asset allocation, I use SunSuper Index and Enhanced Index funds to access broad asset classes at a cost of 0.2-0.3% p.a. (plus another $65 in administration fees).  Many allocations could also be achieved using a mix of funds and ETFs with a provider offering direct investment options (e.g. Australian Super, ING Living Super and Hostplus), although I found this to be more expensive and actually less flexible for my desired allocation.

If I were living, working and retiring in the US I would probably take advantage of the offerings from Vanguard or Schwab and go into asset-allocation overload.  But there are no guarantees this would leave me better-off, and it certainly won't leave the average investor better-off - there are only so many micro-cap deep-value stocks to go around and by definition not everyone can overweight a specific market anomaly.  Plus unlike the US, it is much less likely my employer in Australia will put me in a (401k) plan charging > 1% p.a. which I cannot roll-over until I leave the job.

There are many improvements that can improve retiree outcomes.  But while I'd love more investment flexibility for myself, I just don't see that as providing big gains to society.  If anything there is some evidence that, for the average person, having more choice and more flexibility in investment products tends to have individuals make poor choices (such as switching out of shares after a downturn) and lead to worse outcomes.  So what can make a bigger difference in my opinion?  The majority of Australians with superannuation sit in the default allocation of their employer's default superannuation fund.  The biggest gains in "accumulation mode" are in ensuring those default allocations are appropriate (in terms of risk) and are provided at a reasonable cost.  Once in "pension mode" there are probably also gains in the retirement income products that can be offered.  However, with the exception of standard life annuities, this is a somewhat experimental time for such products - it will be interesting to see how they evolve.  And while the current superannuation taxation arrangements have certain advantages for many I care about, they do not seem sustainable within my lifetime or an efficient way to encourage saving and reduce reliance on the age pension.

You might wonder how we have the strangely limited products currently available. For example, most of the direct investment options limit you to 20% in any one holding. This makes sense for a single share but less so for a broad ETF. Part of it is regulation: trustees are required to act in members interests, which includes diversification.  Also, the same 1 or 2 consultancies are used by most of the funds to ensure they meet these requirements with new products.  In protecting themselves legally, most providers end up with a very similar set of rules and ETFs available.

But when it comes to pricing, the key is the limited market for true price-based competition. We have a small population but a large super system. It's actually one of the largest defined-contribution retirement systems in the world - so why isn't there much price competition? Well, the majority of fund members stick with the default asset allocation from one or more of their employers' default funds. So the number of individuals making active choices is not that large a market.  And the number of those who are cost-sensitive is smaller still. So the profit opportunities in providing maximum flexibility to cost-sensitive, not-so-large customers like me aren't likely to be huge (to incentivise private providers; there are relatively reasonable, very flexible options for individuals with very large balances).  And the gains to society by increasing the level of flexibility offered now are unlikely to be large, so government isn't likely to prioritise it except on ideological grounds. It seems likely that improvements will be at best incremental rather than revolutionary.

Those are my thoughts on the issue. What are your thoughts? How are current product offerings not meeting your wants or needs?

Vanguard raises the ETF-bar by lowering the cost

Until yesterday we've had to make some compromises when investing internationally using ETFs on the Australian Stock Exchange.

The lowest-cost option in terms of expense ratio has been the combination of VTS (US Total Market) and VEU (All-World ex-US).  But this requires investment in multiple funds, and these funds are cross-listed US funds which can make VEU, in particular, less tax-efficient.

The alternative was an all-in-one international ETF such as WXOZ (World ex Australia) or IOO (Global Top 100).  Unfortunately both of these come at a higher cost (around 0.4% p.a.) and are less diversified in their holdings.  IOO is also a US-listed fund.

Vanguard have now made their International Shares Index Fund (excluding Australia) available as an ETF.  This comes with a low expense ratio of 0.18% p.a. (0.21% p.a. for a currency hedged version), around half the price of competing ETFs.

ETF	Code
Vanguard® MSCI Index International Shares ETF	VGS
Vanguard® MSCI Index International Shares (Hedged) ETF	VGAD

The underlying International Shares Index Funds have been running since 1997 with a strong record of tracking (or even exceeding) their index.  The funds track an index of over 1,500 stocks across 22 developed countries.

Liquidity of the ETF is not great, with spreads around the 0.25-0.3% mark.  However this is already comparable to WXOZ and also to the buy-sell spread of the underlying index fund.

Overall this is great value.  It may not suit everyone; for example, some may prefer separate allocations to the US and other countries, and it does not include Emerging Markets or Small Cap stocks.  But I view it on balance as the lowest-cost product overall in the market for international shares available today, so much so that I'll be editing my most recent post to include VGS.

Links:
Vanguard Exchange Traded Funds
MSCI World ex Australia Index

Everything you need to know about financial planning (Australian Edition)

Scott Adams, creator of Dilbert, has a one-page summary on everything you need to know about money in his Dilbert and the Way of the Weasel (2002):

Everything you need to know about financial planning

• Make a will.
• Pay off your credit cards.
• Get term life insurance if you have a family to support.
• Fund your 401(k) to the maximum.
• Fund your IRA to the maximum.
• Buy a house if you want to live in a house and you can afford it.
• Put six months’ expenses in a money market fund.
• Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

With a little translation this is entirely applicable to Australians.  I'll focus on unpacking the investment side but first do some of that translation and highlight some resources for those not on top of the personal finance side yet.  This guide will start out much more prescriptive for those who just want a simple solution before discussing more diverse choices for those who want to exercise them.

There are three levels of investing complexity I'll discuss.  Levels 1, 2 and 3 are not necessarily any better than each other.  Which you should take depends primarily on your goals and level of interest.

• Level 0: Personal Finance: A pre-requisite before investing
• Level 1: Investing automatically: I want to retire at the usual age using my super
• Level 2: I might want to retire before 65: I probably need to save and invest outside super
• Level 3: I love spreadsheets and want to (try to) optimise

Level 0: Personal Finance:

Before investing, get your house in order.  Paying off your credit cards is a must (and then make sure you have money set aside in advance to cover recurring bills like car insurance and save towards goals like a house deposit or the next holiday).

Having an emergency fund gives you a better chance of riding through life's ups and downs (Scott Pape suggests starting with at least $2,000 before attacking any other goals and then building up to 6 months). Life insurance is indeed particularly important if there are others depending on you.

If you find you need more detail or more support there are lots of free resources out there.  A good place to start is www.moneyminded.com.au.  For someone starting out, Scott Pape's book is good on personal finance (a bit dated on the investment side).  The UK edition is still available to purchase online (the Australian edition is out of print but the main differences are the links and resources at the back, and if you email them they'll send you the corresponding page.  You may be able to find the Australian edition at the library).  Similarly, Dave Ramsey's books are supposed to be good for those struggling with debt (but I wouldn't recommend them for investment advice).

Level 1: Investing automatically:

Once we've got our personal finances under control we can start to think about investment.  For any short-term goals such as a replacement car or a house deposit, stick to high interest online savings accounts (For the last year or so UBank USaver with Ultra has been the highest interest rate product I've found. If you have a mortgage you should use your offset account, so long as it won't tempt you to increase spending).  For "Level 1" let's assume you don't want to have to think about investing and your goal is to retire at normal retirement age.

When Scott Adams talks about funding your 401k or IRA, in Australia that would mean putting money into Superannuation.  For those workers who are not self-employed you should automatically be getting 9.5% of your salary in Super.  If you're under 40 then you've had 8%+ Super contributions for most of your working life.  This is a good start.

At present the maximum most younger people can contribute through salary sacrifice (including the employer contribution) is $30,000 p.a.  That is a lot for most people so if funding your Super to the maximum is out of reach aim to hit at least 15-20% of your salary (so an extra 5.5+% above the current minimum).  If you're approaching 40 and haven't been saving (whether inside or outside Super), or are older still you may need to contribute more than that to achieve your goals.

If you don't want to think about investing but just salary sacrifice (or make an after-tax contribution and use the co-contribution if on a lower salary) into a single fund here are my suggestions until age 55 (closer to retirement you may want to dial down the risk). Choose one of:

• Hostplus Indexed Balanced
• AustralianSuper Indexed Diversified
• AustralianSuper Conservative Balanced

If you have a fund offered (or discounted) by your employer compare the insurance offered, fees and asset allocation.  If you're paying close to or more than 1% p.a. (before insurance costs) then it's too much.

If you have a current need for Life and TPD Insurance then I lean towards Australian Super (their costs are currently low and if you are eligible they let you increase the insured amount when you join with less messing around).  If you don't need (much) insurance then the Hostplus fund seems a very good deal.

Keep contributing 15-20% and ignore the ups and downs in the balance until age 55.  Once you're closer to the point where you'll need to access the money it may be worth looking for a financial advisor who can help understand the interaction between Super, taxes and age pensions. The industry funds above can refer you to a fee-for-service advisor or the information you can get from them over the phone or via your own online investigation may be sufficient.  You should make sure you're comfortable with the level of risk you're taking and may want to dial it down in the lead-up to retirement.


Level 2: I might want to retire before 65
The details of the Super system changes fairly frequently and rule changes understandably worry people.  It's not worth being too paranoid about it.  Just make sure some of your savings are outside Super if you think you'll want to retire before "retirement age".

If you want to retire around 65 my best guess is that Super will be the most effective way to save and invest.  If there's a chance you'll want or need to retire earlier then Super is still great for the later part of your retirement but you may not be able to access it at the start (for most people, at time of writing, the Super "preservation age" is currently 60 and there are rumours of it eventually increasing to 65.  I wouldn't expect people currently close to retirement to be impacted though).

2.1 The simple approach
If you are looking to retire a few years earlier (or at least have that option) but don't want to add much complexity here's the simplest approach:

• Figure out your likely annual expenses in retirement
• For each extra year of retirement before 65 save towards an extra amount equal your expected expenses in an online savings account.  For instance if you want to retire at 60 a reasonable target is five times your annual expenses.  
• [If you want to retire much earlier you should probably add a bit more complexity with some stock index funds outside super (see below).  This will hopefully mitigate the risk of inflation.]
• Keep saving in Super as above (or more, if you can)

If you have a mortgage, paying more off or putting more in the offset account is even better (so long as you don't redraw or use large chunks of the offset account for casual spending money).  While you have a mortgage prioritising that will likely be more financially effective than the other financial investments below.

2.2 A bit more complexity

Follow Scott Adams' advice modified for Australian conditions.  After setting aside our emergency funds and money for expenses coming over the next few years in an online savings account, for the investments outside super the lowest-fee all-in-one option I've found is:

• Colonial FirstChoice Wholesale Multi-Index Balanced

The fund automatically rebalances to 70% shares and 30% bonds and cash periodically. With this option you can set up a regular investment plan to automatically invest monthly.  You can also reinvest the distributions automatically (although you'll still need to pay taxes on the distributions).

An alternative is the Vanguard® LifeStrategy® Growth Fund.  The fees are higher for the first $50,000 but are lower after that point.  If you're looking at investing for the long-term and expect to have over $100,000 invested long before retirement age then this may actually be a more cost-effective option.

I'd like to mention investment bonds as another alternative here if you're investing for 10+ years in the future and in a high tax bracket. But if you use them, make sure you understand the product, don't pay more than 1% p.a. in fees and don't pay a percentage commission to an advisor.  They can be a bit complicated in the rules that apply so be even more careful if you go down this path.  A low-cost option with a similar balance of 70% growth assets and 30% defensive assets is the Austock Life Imputation Bond using the Dimensional Multi-Factor Growth Portfolio as the investment fund.

2.3 Lower costs with some more complexity
If you're willing to face investing in individual funds, for the savings outside super,

• Invest 70% in stock index funds
• Invest 30% in a high-interest online savings account (or an Australian bond fund)

For Australians, the best high-interest online savings accounts currently pay more than the expected yield of Australian Government bond funds, with a government guarantee up to $250,000 per person per bank and without any of the costs.  It may not always be the case that these have better expected returns than bonds but at the moment it's a good deal.

For the stock index funds if you're investing more than five thousand dollars per year in stock funds consider using Exchange Traded Funds (ETF).  These are purchased through an (online) brokerage just like regular Australian shares.  If you don't want to think too much about it a "good enough" option is:

• Half in an Australian Shares ETF such as Vanguard® Australian Shares Index ETF (VAS)
• Half in an International Shares ETF such as Vanguard® MSCI Index International Shares ETF (VGS)

If you're a fan of them you can replace the Australian Shares ETF with an old-school listed investment company like AFIC, Argo or Milton.  To keep costs down invest at least a few thousand dollars at a time (saving up in your online savings account). Also, rebalance using new money (invest new money and dividend payments into whichever fund has the lower balance to try to keep the relative proportions of different investments stable).

If you can kickstart your savings a bit ($5,000 starting minimum) but want to be able to invest in smaller amounts periodically, do the same thing with Colonial FirstChoice Wholesale Investments:

• Half in Colonial First State Wholesale Index Australian Share 
• Half in Colonial First State Wholesale Index Global Share

Like the Multi-Index Balanced fund you can set this up for automatic monthly investing. You could also use their Wholesale Index Australian Bond fund or even the similarly priced Wholesale Australian Bond fund to replace the high-interest online savings account.  As a helpful commenter pointed out, this will be beneficial during times of falling interest rates but will give lower returns when interest rates are rising.

If you really don't want to have to think about where to invest your share allocation, for about twice the price you can use an all-in-one investment (keeping the online savings account for your stable bond-like assets). Two all-in-one investments that are worth your consideration are:

• FirstChoice Wholesale Multi-Index High Growth
• Vanguard® LifeStrategy® High Growth Fund

The one cautionary note when separating out your share investments from your fixed interest is to keep in mind your appetite for risk.  Global share markets can drop quickly and substantially.  To date, in the US, UK and Australia they've always recovered in the longer-term.  But if seeing your available wealth fluctuate will impair your ability to sleep well at night, seek out strategies to help.  One I'm familiar with is to lower the percentage you put into shares and know that you always have the online savings account component safe. Another is to use more conservative all-in-one funds instead of separating out the cash and shares which will smooth out the fluctuations you see (but likely add some expense).  Options to consider in this case include the Colonial FirstChoice Wholesale Multi-Index Conservative, FirstChoice Wholesale Multi-Index Diversified or FirstChoice Wholesale Multi-Index Balanced.

Level 3: I love spreadsheets and want to (try to) optimise

If you've come this far you're really heading towards the domain of asset allocation.  If you don't want to get any more complex then call it a day with one of the simpler approaches. Keep in mind there's no guarantee a more precise asset allocation or asset location will actually lead to better results.

A starting point is one of my posts on Asset Allocation.  However if you really want to make a (positive) difference with a detail-oriented approach it's important to learn more about the history, theory, psychology and business of the market.  My favourite book covering these is The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein.  A good free resource online is investingroadmap.wordpress.com.  You'll also need to figure out how best to apply the usually US-focused  (or Canadian) resources to Australia.  I'm not a tax expert and can't give tax advice. But I can point you in the direction of resources I've found useful and rules-of-thumb to consider further.  Some of my thoughts are below:

• Learn to think of all your savings and investments which are for a single goal (e.g. retirement) as one whole.  Psychologically separating your resources in Super and outside Super limits your ability to optimise, particularly in terms of taxation.
• Due to preferential tax rates, depending on your particular tax situation, it may be advantageous to hold more of your defensive assets in Super (franked dividends, foreign tax credits and capital gains discounts all work similarly inside and outside super for shares, while cash and bond interest tends to get a better tax treatment in super for those on average or higher incomes). Similarly, consider where you put any diversified property allocation for taxation purposes.
• Diversify across asset types (cash or bonds and shares) and diversify internationally.
• The Vanguard 2014 Index Chart and Index Portfolio Calculator can give you an idea of how different assets have performed historically.  But when they say "Past performance is not an indication of future performance", it's not just a line.  For example, with government bond (fund) yields currently close to 3%, expecting the 8.5% earned on average since 1970 is unrealistic.
• The enemy of a good plan is the dream of a perfect plan.  Find a plan you can stick to for the long term.  On average, constantly adjusting your portfolio is a costly game.  And allocating that last 2% to small cap frontier emerging market value stocks will have far less impact on your overall results than the basic split between fixed interest assets like cash vs. more volatile, higher expected growth assets such as shares.

I'll add to this list and the resources below as I realise things I missed but, since most of my posts are about the more granular details, I wanted most of this post to be more helpful for those who don't want investment to be so complex.  As always, feedback is greatly appreciated.

Further reading

If You Can: free booklet by William Bernstein (US-oriented but the same principles apply)
A valuable free guide investingroadmap.wordpress.com (again US-oriented)
Helpful places to discuss asset allocation and get input from others are the forums:
Bogleheads.org
mrmoneymustache.com/forum/investor-alley/

Asset Allocation redux

I've posted some of this before but was about to use it elsewhere.  I thought it might be a good summary to keep here too.  I greatly appreciate any feedback - I know it's not the easiest read.