Some last words

I've recently accepted a job within the Superannuation sector.  While this is great news, it does mean I have a conflict of interest and am not able to continue writing this blog.

I hope you've found the posts useful, and I suspect they'll continue to be relevant for some time to come. While costs have fallen gradually, there are still plenty of overpriced products out there and over the two years since I started, I have seen very few "game changing" products.  For now, I'm grateful for the iterative improvements we have seen and I hope to see further improvements, particularly in terms of low-cost advice.

Some parting suggestions:

1) Costs matter: Keeping costs of investment low means we keep more of the returns

2) If you pay more, know what you are getting: Sometimes there may be value in paying for an asset class or segment you cannot cheaply access (for example, unlisted property and infrastructure).  But if you go down that path, make sure you understand the benefit in terms of your portfolio - if your expensive actively managed Global Share manager ends up buying you largely the same international shares as Vanguard would then you are paying too much but getting little in return, impacting directly on your income and lifestyle in retirement.

3) It's not too late: Percentage fees matter more when you have a bigger balance.  So even if your Super has been held back by high fees in the past, there is still time to take advantage of the low-cost options now available.

Quick Spotlight on First State Super

I've been meaning to write a quick post on First State Super having recently noticed their extremely low cost asset class choices.  A reader recently wrote asking about them, so here it is!

Their fees for the various diversified options are consistent with other industry funds and are more actively managed (keep in mind they add 0.15% p.a. as part of their administration fee).  But their Australian Equities, International Equities, Australian Fixed Interest and International Fixed Interest options are all managed by Vanguard and cost 0.05% - 0.15% p.a. (adding that 0.15% p.a. in administration fees brings it up to 0.20% - 0.30% p.a. in total % fees).

This provides another option for constructing your own asset allocation within Super.

Always remember to check your insurance needs and costs before switching, though.  I note that First State Super's Personal plan (i.e. if your employer doesn't automatically put you with them) does not appear to auto-approve Life and TPD Insurance, so if you want insurance from them be careful to make sure any existing insurance is kept until your new insurance is approved.

First State Super: 
Fees and Costs
Who Manages Your Super

Also a quick note to remind you that many super finds have recently updated their investment costs to reflect the year to June 2015 (or will do so soon).  There are mostly small changes with the couple of old favourites I checked but I do note that the HostPlus Indexed Balanced fund was down to 0.03% p.a. in fees last financial year.  Such value!

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