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Big superannuation funds continue to lack transparency

Many Australians are invested in a large superannuation fund (or two), often by default. Indeed, duplication, which leads to multiple sets of fees, is one way that the industry gouges more than it deserves from Australian workers. Personally, I have two superannuation funds, one with Australian Super and another that I was compelled to open as part of an enterprise agreement.

My preference for an industry superfund is vindicated by both results and disclosure practices. One retail fund that has released its annual report is Colonial First State. Colonial is a subsidiary of Commonwealth Bank (ASX: CBA) and its fee structure makes it unlikely that members will ever beat the market.

Although Colonial hasn’t deigned to make it obvious what investment returns are for each ‘investment option’, it has reported ahead of most other retail funds. FirstChoice has reported that the exit price for units of the ‘FirstChoice Balanced’ option increased by about 12.2%, in FY 2013. Australian Super has highlighted the return on its balanced fund (15.63%). However, neither fund outperformed the S&P/ASX 200 Index (ASX: XJO), which appreciated by 17.29% in that time.

To be fair, the above comparison is not particularly helpful: balanced superannuation funds have a mix of assets classes, whereas an index fund holds shares. This asset mix meant that the FirstChoice Personal Superannuation Balanced Option easily outperformed the index in 2008 and 2009. Since 2002, that superannuation fund has returned 50% whereas the index has returned 60%. There are clearly risks involved with managing your own superannuation, although I do believe Foolish investing is one way to achieve superior results.

Sally Patten has argued in The Australian Financial Review that the big superannuation funds reveal in their annual reports “little or no willingness to give members more information than last year.” Indeed, many funds won’t even say how much they pay their investment managers and executives. There is very little information about the asset allocation and future strategies. By way of analogy, few investors would buy shares in a company that would not publicise how much it pays its management or explain its plan for the future.

In contrast, investment companies typically make a substantial effort to keep shareholders well informed. The newsletters and blogs of boutique investment companies are often useful sources of information, and the annual letters of Berkshire Hathaway (NYSE: BRK-A, BRK-B) CEO Warren Buffett are both detailed and educational. No such respect is shown towards the members of superannuation funds, who have invested their retirement savings with seemingly unaccountable money managers.

AMP (ASX: AMP) has also (just) released the FY 2013 Annual Report for its Superannuation Savings Trust. Notably, the management fee on its ‘Signature Super’ product will increase by 0.04% from 1 November 2013. However, the annual report does not state the investment return of the various options in 2013, and I cannot find the return for the year to 30 June on the website. However, none of its balanced options outperformed the S&P/ASX 200 Index in the year to 31 August 2013.

Foolish takeaway

Once investors have substantial superannuation savings, even very simple investment strategies such as owning shares in an index fund can justify the creation of a SMSF. Self-managed superannuation funds have an advantage over large funds because they are able to invest in stocks with lower liquidity, and can invest with a longer time frame. As a bonus, investors do not need to pay a management fee.

Looking for a strong dividend-paying stock for your SMSF? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

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