Understand your investment options
In this episode, Sunsuper's Dream Team explains the broad range of investment options Sunsuper offers members, including diversified and single asset class, and active versus passive options, and what you should consider in choosing the right investment strategy for you.
Voice-over: Welcome to the New School of Super, a fresh look at money matters, your super, and the things that could affect your financial dreams now and in future with Sunsuper's Chief Economist, Brian Parker and Head of Advice and Retail Distribution, Anne Fuchs.
Anne: Hello and thanks for listening. Welcome to the New School of Super, Sunsuper's podcast covering all things investment, money, superannuation and most importantly, making sure you reach your retirement dreams. My name's Anne Fuchs and I head up advice at Sunsuper for our 1.3 million members and we're all about making sure our members make the most of what they have, so that they can live the life that they want. Now sitting opposite me is a pretty special man, who's been around a very long time, though he does not look it. He knows everything about investment markets and the economy, he's our Chief Economist and his name is Brian Parker. Brian, nice to see you today.
Brian: Thanks Anne and what a lovely introduction.
Anne: So, we're here to talk today, about all things investing and what really is the right investment for you. There's so many products out there, how do you decide which one is the right one for you? So Brian, before we get started and you share your pearls of wisdom, what do those people upstairs need us to say, those compliance people upstairs.
Brian: Anne, they need us to inform the listeners, that this is general information only, it doesn't represent personal financial advice, it doesn't take into account your particular personal circumstances. But if something we say sparks an interest, it sparks something in you, which says I need to make change, we strongly recommend that you seek personal financial advice.
Anne: And great financial advice, wonderful financial advice, can profoundly change lives for the better.
Anne: So, if you're sitting here today, as a listener and wondering how on earth do you possibly pick the right investments for you, you're listening to the right session, because we're going to be unpacking all the different options available within superfund world and I think my one observation before we get started, Brian, is the one thing I've learnt, after twenty years of being in superannuation financial advice, is that members always remember if you've lost them money. They never remember as much if you've made some money. So really this is the most important decision they make around their retirement savings. So, I think a really good place to start, is single class assets versus diversified options, and that is for the ordinary member, I think a bit of jargon. We need to break this down, diversified single asset. What does that mean Brian?
Brian: Okay, a diversified option basically means that if I invest in a diversified option, I'm letting my super fund basically spread my assets across a range of different asset classes. Whether it be shares, cash, or bonds, or property, or infrastructure. Whatever, but it's basically letting the superfund do the work. They spread the assets across a diversified portfolio of assets for me, with a single asset class option, I'm making a decision to put my money into one particular asset class. Be it shares or bonds, or whatever. So, that's really the difference. It's whether, I suppose the best way to summarise it is, do I want the superfund to do the work, or do I want to do the work?
Anne: So, if I can ask a silly question, why is diversification important? I mean Australia has a great economy, why would I not just put all of my money in Australia shares? You know, there's a lot of craziness overseas, geopolitical risk. You know, maybe it's safer just to put it all in Australia?
Brian: It's really a good question and you think about the way Australian investors behave, we tend to actually favour the home front, a lot more than counterparts overseas. We tend to have what investors call a home bias and that's kind of unusual, given that we are one of the smaller economies of the world. You know, the Australian economy is only a few percent of global GDP. Our share market is only a few percent of global market value if you like. So, most of the investment opportunities, most of the universe of investment opportunities are beyond our shores. You raise diversification, there's an old adage that you shouldn't put all your eggs in one basket and that's really what it comes down to. It's that yeah, the Australian economic story is relatively solid, but I still don't want to put all my eggs into a basket labelled Australia. I want to try and pick the best universe of investment opportunities I can find, which means inevitably, I'm going to have to have some global exposure.
Anne: So why would somebody pick a diversified option, so I'm guessing that's a balanced option?
Brian: Well it could be a balanced option in other words, but there's a range of different diversified options that super funds offer. In the case of Sunsuper, we offer a conservative option which is, again, designed for more cautious investors. We offer our retirement, a balanced and then a growth option for those investors that are prepared to take more risks in search of higher returns.
Anne: So what does that mean it does that mean in terms of the exposure to these riskier assets of the further you go up the spectrum from conservative to growth the more exposed you are, and if you're doing that what's the stuff you need to be worried about? What should you be thinking about if you going to make that decision?
Brian: That's a really good point, and in fact it's a crucial point. I call it the sleep at night test. If you're doing something with money, anything at all, whether it's your super, your mortgage, any other investments you're making. If you're doing something with money which is causing you to lose more than about five minutes of sleep at night, it means you're probably taking too much risk and you're doing the wrong thing. Sleeping at night can never be overrated. Why would I want to take high risk? I take high risks because I'm prepared to do that because I believe I'll get higher long term returns. If, in search of those higher returns, I'm losing sleep at night, well something's got to give. Half the battle with the deciding where to put your money is working out what kind of investor you really are. What investment returns do you need in order to achieve your retirement dreams. What risk are you prepared to take in search of those dreams. And understand that that there's often a trade off.
Anne: So, the sophisticated investor would have heard of this term of alpha, which is the you know out performance, and there's a lot of talk around, certainly in financial advice circles, about just how expensive it is to invest these days with fees and everything else and try to find that great return that you were talking about and where is the alpha and there's a lot of financial advisors out there that are a big believer in passive investments because it's all about keeping fees low and that's where they believe they can find alpha. But Brian, you're the Chief Economist, what's your expert opinion on this concept of passive investing versus active investing.
Brian: Look, let's start by defining some terms, and you raised the point about active versus passive investing. If I'm a passive investor, what I'm essentially trying to do is to replicate the performance of a particular market index or benchmark. So let's take Australian shares as an example. Let's say I just don't believe that there are people out there who can do better than the market, so I'm going to give my money to an investment manager who'll basically give me a return which replicates the return of say these S&P ASX 300 index, and they'll do that for a very small fee. On the other hand, what if I believe there are managers out there who are genuinely good at what they do, who can actually add value over and above the performance of the index. Now I know that's going to cost more but if I could be convinced, if I could be really confident that those managers can deliver enough outperformance to justify their fee, then I'll invest in an active manager.
Anne: Ok, and that out performance is that alpha that I was mentioning earlier.
Brian: Correct, exactly. So if you deliver alpha you deliver a certain amount of outperformance over and above a particular market benchmark.
Anne: So we've spoken about passive, active, single asset classes, diversified – it's pretty overwhelming. How would you possibly begin to decide what is the right option for you.
Brian: Look, that's a really good question and it is hard. At Sunsuper, for example, we offer twenty different investment options. We've deliberately kept the size of our investment menu relatively small. What we found from a lot of the academic literature on what we call behavioural finance, is that if you give people too much choice people just find it overwhelming so what we're trying to do is provide our members with a nice range of options which will enable them to build a diversified strategy that will suit their particular needs, and what we also do is make sure that we provide our members with a range of both active options but also passive options so that they can choose whether their prepared to pay a higher fee in search of higher returns or not. There are certain asset classes also where we don't offer an active option and that's really come down to two things. One is demand and the other is our view of value for money. If we have an asset class where we don't believe that investment managers can deliver reliable outperformance to justify their fee, then we think members are best going passive and so we only offer a passive option in those particular asset classes.
Anne: So I still think that it's incredibly confusing. As much as you're an extraordinary communicator, Brian, I still think it's incredibly confusing and for the ordinary person they think it's too hard, I'm just going to put my superannuation statement in the bin every year that it comes in because I would rather stick my fingers in my ears, close my eyes and sing ‘la la la'. So how do we make sure as investment professionals we're helping those members.
Brian: Well that's a really good question and if you think about it most of our members, and I suspect most of pretty much every super fund's members are what we call default members, that they have chosen or have just literally defaulted into their particular super funds My Super default option, and that means it's really really important that your super fund constructs a default option that works for the majority of those members. And so at Sunsuper we've gone for what we call Sunsuper for life, it's what we call a lifecycle option and we think it's quite unique in the Australian market. Up until the age of 55 investors in a lifecycle option will basically be invested in our balanced option, in other words they will have about 70% of their portfolio invested in what we call growth assets, and that means somewhat higher risk but also a higher returning assets such as shares. At the age of 55, on the day of the 55th birthday the system starts to crank into action. Over the next ten years every month we will very very gradually reduce our members' exposure to growth assets such as shares, and we'll do it in 120 discrete monthly steps so that by the time our member in the default option reaches the age of 65 they'll no longer be invested in balance. They won't be anywhere near as exposed to share markets, they'll actually have 10% of the portfolio in cash and they'll have the other 90% of the portfolio invested in what we call that our retirement option. What is averages out to is that you'll end up with about 45% of your portfolio in growth assets. Why do we do this? We do this partly because we can. We have the administration systems to allow us to do this for members but also and more importantly we want to make sure that our members are not going to be as exposed to a major market downturn either when they're about to retire or just after they retire. Because if that happens and you're heavily exposed to the stock market, that can really put a serious dent in your retirement plan.
Anne: Certainly I know Brian, I couldn't agree more. In 2008, you know, a number of people that were too heavily exposed to stock markets and we're planning on retiring and then all of a sudden 40% of their portfolio vanished overnight.
Brian: Exactly, and they drawing down on that portfolio, they're drawing down on a pie that is shrinking.
Anne: Well they had to work longer and then that causes other impacts, you know, whatever else, and I think this is such a great feature for those people that choose just to leave it to the investment professionals. So Brian, we've had a really good natter today haven't we?
Brian: We indeed, we always do, Anne.
Anne: We do indeed. Well thanks again. We'll see you next time.
Brian: Thanks Anne.
Voice-over: This has been The New School of Super. For information and inspiration to help you plan your future, manage you super and enjoy your retirement, visit sunsuper.com.au/thedreamproject. Or if you've got a superannuation or investment question, you'd like Brian and Anne to discuss, then get in touch at the schoolofsuper.com, for it to feature in one The New School of Super podcasts.
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