In this episode, Mark and Shani run through the circumstances that triggered Mark to change his super fund investments.

Mark explains why he moved away from a traditional pre-mixed super option and how he evaluated DIY super options, Member Direct investing and starting an SMSF.

Instead of jumping straight to a self-managed super fund, Mark built a decision hierarchy focused on:

  • Asset allocation
  • Contributions
  • Investment selection
  • Fees

Read the full article here.

We’ve got a few more super resources below:

How an investment professional invests her super (Annika Bradley): One of the most common questions that we get is how and what do we invest in personally? Annika shares her approach and how investors should reflect on what works best for them. She has also taken a closer look at UniSuper and AustralianSuper – and how they stack up against each other.

Never reviewed your super? Here are a few steps to get you started. If you’re reading this email, it’s likely that you’ve been investing for a little while. Many of us that invest have been asked at some point by friends and family how to get started, and super is a great place to make a large difference. This is a great article to send to someone looking to get started.

Not sure if super is the best place to put your next dollar? Shani runs through a framework that helps you to find the right investment.

How much do you need for retirement if you don’t own a home? Shani runs through whether a comfortable retirement possible without owning your own home, and how much you would need in super.

Avoid paying extra tax in super. High income earners should plan ahead for their Div 293 liabilities.

Who gets your super when you die? And how much tax they’ll pay.

Avoiding the superannuation death tax. How to optimise tax savings on superannuation inheritance.

The fatal error with super. Don’t fall for predatory companies encouraging you to pillage your retirement savings.

The 4 ways to invest your super. Which one suits you?

Should I have insurance in super? Insurance is a necessary evil of a holistic financial plan. I go through the best ways to protect yourself.

Young & Invested: How to pick the right super fund. Confused about your super? Here’s where to start.

Young & Invested: Should young people care about their super? Better late than never to review your super.

Future Focus: Should I stop salary sacrificing to my super? High income Aussies are going to hit the new super cap - easily. Should we bother?

See the transcript of the episode below:

Mark Lamonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances, or needs.

So, Shani, I went to an event recently that I think was much better suited for you.

Shani Jayamanne: Okay.

Lamonica: Because it was about cricket and about Sri Lanka.

Jayamanne: Tell me more.

Lamonica: I mean, I’ve already told you. So, it’s something called The LBW Trust. So, my wife got tickets through her work and it is a cricket charity for helping with education in cricket-playing nations, one of which that they concentrate on is Sri Lanka.

Jayamanne: There you go. And cricket-playing nations is a nice way to put it. Did they have an auction? Did you bid on anything?

Lamonica: I did not bid on anything. First of all, the auctioneer – so they had like a live auctioneer going around the room – was going in $1,000 increments with all of this stuff. But there was some cricket memorabilia.

Jayamanne: Okay. Was there anything you think that I would have liked?

Lamonica: I don’t know. I mean, how do you feel about – there were a lot of signed things from the Australian cricket team, signed hats and things like that. I don’t know where that ranks in your…

Jayamanne: Take it or leave it. But…

Lamonica: Okay, so maybe not. There was some artwork that was made out of deconstructed cricket balls.

Jayamanne: That sounds like more of my vibe.

Lamonica: Once again, with Australian cricket players.

Jayamanne: That’s okay. I like Aussie cricket.

Lamonica: The other thing that was related to you was – so it was black tie.

Jayamanne: That’s what was related to me?

Lamonica: Your wedding was black tie.

Jayamanne: It was.

Lamonica: So, my wife was trying to wear a dress that she had not worn since your wedding. And she ended up burning it, burning a hole in it with an iron.

Jayamanne: Well, that’s not great, but also you were telling me before the gala that you had holes in your tuxedo pants.

Lamonica: Yes.

Jayamanne: So, you showed up with holes in your dress and your tuxedo pants?

Lamonica: Okay, I didn’t wear a dress. She wore a different dress. They’re very small holes and they were not noticeable.

Jayamanne: Okay.

Lamonica: Anyway, let’s get into the episode.

Jayamanne: All right. So today we’re going to talk about super and a change that you made to your super, Mark. So, you wrote an article about this, which is in the episode notes, but I know you got some questions from readers after the article. So, you’ll be adding some more details. So, let’s go through what you did and why.

Lamonica: Well, the background is, late last year, I wrote an article basically just saying that I was sick of my pre-mixed option with Aussie Super for a couple of reasons. I was tired of the lack of transparency. I was tired of the fees. So, I wanted to make a change but after complaining about it – and you’re probably very familiar with this behavior – after complaining about it, I was just too lazy to do anything for a while.

Jayamanne: Well, one of the things that you talked about in the article was trying to add structure to your decision-making and you came up with a hierarchy to make this decision. So, can you walk through that?

Lamonica: I try to think of the different things that would impact the outcome I got out of super and you were my inspiration, Shani, like with everything else in life. So, you wrote this fantastic article. So, I have a couple of articles that are my favorite that you wrote.

Jayamanne: What’s the top three?

Lamonica: I love that Gold Bangles one.

Jayamanne: Okay.

Lamonica: I thought that one was great because I like the ones where your personality comes out in them. So, the Gold Bangles one was incredible. The article you wrote that was inspired when you taught the financial literacy course to the high school girls, that one was awesome. And then I really liked this one. This is probably my third favorite because it had less of you in it. But what it talked about – you wrote this for Firstlinks and you went through how you think about investing and how you prioritize things that have the biggest impact. So, I tried to do something similar in my article and I started with asset allocation because as we talk about often on this podcast, that is the biggest driver of returns. After that, I talked about contributions or how much you save, then comes security selection and then fees.

Jayamanne: And those were the four categories that you used to assess the different options for your super, and those options were a self-managed super fund, the do-it-yourself option from AustralianSuper, and the member direct option from AustralianSuper.

Lamonica: That’s right. Just a spoiler alert, I decided very early in this process, I was not going to open a self-managed super fund at this point and basically, I just didn’t want to deal with all the admin. So that leaves two different options. So, the do-it-yourself option, the member direct option from AustralianSuper. And the reason I was considering those is because I was already using AustralianSuper. So, it just makes it easier for me to move into one of those options.

Jayamanne: And it’s probably worth explaining what those are, because each super fund has some version of these options, but they have different names. The do-it-yourself option gives investors the opportunity to select their own asset allocation from a mix of Australian shares, international shares, diversified fixed interest and cash. And instead of the premixed option where the asset allocation is decided by Aussie Super within defined bands, you get to pick it yourself. The other big difference is that you don’t have access to all the private assets.

Lamonica: So, the next option that I consider that I mentioned was what AustralianSuper calls the member direct option. So that is the option you get to choose what you invest in. So, you can invest with AustralianSuper, you can invest in shares directly that are within the ASX 300, and then there are selected ETFs and LICs you can buy as well.

Jayamanne: So why don’t we run through the hierarchy that you outlined? The first was asset allocation. So how did you evaluate your options there?

Lamonica: I mean, in this case, there wasn’t really any difference because in both cases, I could select whatever asset allocation I wanted. So, the only slight difference is with member directs, you do need to keep some money in cash and that’s basically just to pay the fees. But given my super balance, the minimum that you need to keep in cash really doesn’t make a meaningful difference in my asset allocation.

Jayamanne: And what about your target asset allocation? Because you were in the high growth option, which has about 86% invested in growth assets.

Lamonica: Okay. So, one thing I will mention a couple of times – I did get some questions about this – but one thing I will mention a couple of times during this podcast is a mistake that I think we both think that investors make is not looking at their finances holistically. So, people tend to compartmentalize things like super. So, in my case, most of my investments happen to be outside of super and that’s a bit of a legacy of moving to Australia in my mid-30s and also just the fact that I have investment goals that are not retirement related. So, as a result, I want all of my super in growth assets. I’ve got cash outside of super, so I don’t see any need to hold cash within super, and I do want to take advantage of the lower tax rate in the timeline that I have till retirement.

Jayamanne: All right, how about the next category, which is contributions?

Lamonica: There’s no difference there either, because obviously I can – whichever option I select, it doesn’t have any impact on how much I contribute to super.

Jayamanne: The next category is investment selection and there has to be a difference obviously with this one.

Lamonica: I mean it would be pretty boring if we just went through and I said no difference and then randomly picked one. So, the first thing is that the only way that I can look at these two different options and see what works best for me is by having an investment strategy in place. So, you need to understand what you’re trying to accomplish and how investments will help you achieve your goal in order to assess whether they’re right or not.

Jayamanne: And Mark, you speak a lot about being an income investor obviously on the podcast but also in your articles as well. Does that come into play at all here?

Lamonica: So, it actually doesn’t. So, I am very vocal about being an income investor mostly because it makes you roll your eyes a lot, Shani, and call me an old man. But that is for my non-super investments. So, I’ve often said that the goal for those non-super investments is to generate income to supplement my salary and potentially replace it if I want to try and retire early. But in super, I’m much more comfortable just taking a passive approach.

Jayamanne: And I think this is a good time to remind people that the investment strategy that you pursue should be linked to the goal that you’re trying to achieve. And as we often say, investing is a means to an end. That means that if you do have two different goals, it is perfectly reasonable to take investment strategies that are different for either of them.

Lamonica: That’s right, Shani. And that will, of course, inform how I view the different options within Aussie Super.

So, for the do-it-yourself option, we can turn to our analysts for their description of the different investment approaches taken. So, I’m only personally interested in the Aussie shares and the global shares, so we can look at what our analysts say about that. So why don’t you take us through it, Shani?

Jayamanne: All right. So, for Australian shares, they say the following. Australian equities are primarily managed in-house using an active low turnover approach focused on the top 20 ASX-listed stocks. However, the portfolio is nearing capacity, which may limit alpha potential if allocations increase. Most international equities remain externally managed, though the structure is evolving towards a more diversified strategy with internalization expected to rise over time.

Lamonica: So, there’s a little bit of analysts speaking there. So, let’s add some context and try to describe what they were saying.

So, some of the giant super funds are running into a problem, especially with Australian shares. And that problem is they’re just becoming too big. That means that they can’t invest in many of the smaller companies, which is why our analysts were saying AustralianSuper are focused on the top 20 ASX shares and why our analysts point out that the portfolio is nearing capacity. So, what they are essentially saying is the size of the portfolio may limit alpha potential, which means that the portfolio is too big to try to exceed – well, you can always try but the portfolio is too big for them to have a reasonable chance of exceeding the market returns and slowly it’s just becoming more and more passively managed.

Jayamanne: And does that change your thinking at all?

Lamonica: I mean, it doesn’t. I’m fine with passive, as I said, but it does make me very focused on fees. So, I don’t want to pay somebody to try to beat the market if there are structural impediments to them actually doing that.

Jayamanne: All right, so why don’t we move on to the member direct options? What are your thoughts about those options?

Lamonica: I think my plan is just to invest passively in ETFs. So, I don’t really care about those ASX 300 individual shares or the LICs. And I’ve gone through the list of ETFs that are available and I’m good with them. So, they have low-cost passive options in both Aussie shares and global shares.

Jayamanne: So why don’t we move on to costs? That’s the last in your hierarchy. What about the do-it-yourself option?

Lamonica: Okay. Well, one of the big things that we do talk about on here is a big part of super fees is admin fees. And the admin fees are the same. So, I can ignore those for the two options. For the do-it-yourself option, I will pay an investment and transaction fee, so the combined investment and transaction fee is 0.16% for Aussie shares and 0.36% for global shares.

Jayamanne: And what are your thoughts on that?

Lamonica: I mean, they could be cheaper. So, they’re not outrageous in any way and they’re pretty good considering they’re actively managed. But as our analysts point out, the Aussie shares portfolio is reaching capacity and you can get cheaper fees investing passively. But what’s important is comparing that to the fees of the member direct option. Member direct option charges $13 for each trade. My plan is to trade once a month. So that’s just going back and forth between a global and Aussie shares ETF. And once a month is when my employer makes a contribution. So that’s $156 a year. They also charge a portfolio administration fee of $180 a year.

Jayamanne: So, it seems like the difference here is going to come down to the ETFs that you would select. But you’ve said passive and just a scan of passive ETFs shows fees are lower than the DIY options. For Australian shares, you could pay 0.07% to invest in the Vanguard Australian Shares ETF, ASX ticker symbol VAS, which tracks the ASX 300 or you could buy an ETF that tracks ASX 200 and pay 0.05% for the iShares Core S&P ASX 200 ETF with the ticker IOZ, or 0.04% for the BetaShares Australia 200 ETF with the ticker symbol A200. On the global side, you could pay 0.18% for the Vanguard MSCI International ETF, VGS, which tracks the MSCI World ex-AU Index, or 0.08% for the BetaShares Global Shares ETF, BGBL, which tracks the Solactive GBS Developed Markets ex-AU Index.

Thanks for making me say all of that.

Lamonica: Exactly. You can add that to the list of reasons you don’t like me. Ultimately, the fees would be lower for me, for the member direct in terms of the way I would want to use it, but it’s not dramatically different.

Ultimately, I did decide to go with member direct. It just makes me more comfortable, just invest passively and the lower fees will continue to make a difference over time as my super balance grows. And I think the other thing that I do find attractive is that I can control my tax outcomes, which should also make a difference over time.

Jayamanne: And this is probably worth explaining. For premixed options or for the do-it-yourself option, the super funds are essentially taxing unrealized capital gains. Anytime you are in a pooled investment, the super fund will calculate a daily unit price that includes the provision for unrealized capital gains.

Lamonica: And there’s a reason they do this. They do this so that it’s fair for all investors. So, if somebody exits the fund, they are not leaving tax liabilities for the other investors that are still in there. And the way you can see the impact is to look at the difference between super returns and pension returns. And these are all published by the different super providers. So, for instance, for AustralianSuper, the balanced premixed option, the 10-year return for people in accumulation where you still pay taxes on capital gains and income is 7.94% a year. For pension, the return is 8.62% a year and that’s where there are no taxes.

Jayamanne: The good thing about this is that if you switch your super option, you are not triggering a taxable event because you have already paid it and it’s important to say that just because you are owning ETFs doesn’t mean that you won’t pay taxes. Those taxes will be due if unrealized capital gains or income is distributed by the ETF or when you trigger a taxable event by selling the ETF.

Lamonica: So that’s right, but it does allow you to delay those taxes if you are a buy and hold investor and there is value in that. So, it is just something else to consider.

Jayamanne: And I know you got a question about this with your statement about not starting an SMSF yet. Why don’t you mention why you wouldn’t still start an SMSF?

Lamonica: Obviously, I talked about the admin side of things, but also I do want to explain why it may make sense from a fee perspective. So, as my balance continues to grow, I can start saving on those admin fees because they are charged as a percentage of assets in general for something like Australian super where SMSF fees are flat fees. But the question I got pointed out the issue with eventually moving to a self-managed super fund. So that would trigger capital gains because I would have to sell the ETFs to then move the money.

Jayamanne: And what do you think about that?

Lamonica: I think it’s a really valid point. I mean, I don’t have a good answer other than to say it is a downside of my approach and it will factor into my decision if and when I start a self-managed super fund.

Jayamanne: The other question I know that you got was around asset allocation in your super fund between global and Aussie shares. So, what’s your thinking on this?

Lamonica: I think once again, this is a case where I’m trying to look at asset allocation holistically across all of the investments that I have. So not just within my super, but also of course, money outside of super. So personally, I’m comfortable about 25% to 30% of my equity allocation to Australian shares. But I’m not there yet, and given how well the US market is doing and the fact that that’s where I was saving and investing when I was younger, I still have more room to run before I get there from an Aussie share perspective. So, for me, I’m comfortable with a 50-50 mix in my super which also helps me because I only really have to execute one trade a month. Now obviously there could be cases where I’d have to rebalance, but I try to do that with new money going into super to minimize those transaction costs.

So that’s my super, Shani.

Jayamanne: Well done.

Invest Your Way

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