Looking for the “Ideal” Super Fund?

MELBOURNE AUSTRALIA 5 February 2007 - The All Ordinaries edged up to another record close on Friday, finishing at 5,814.30, the first time the index has ever closed higher than 5,800 points. The bullish state of the market continues to advance. "So what if copper prices could be lower this year" the market screams, "we'll sell Rio Tinto and buy the banks instead." And on, and on the party goes.

According to a report from News Ltd, it is destined to go on for some time to come. "Super laying a golden nest egg" says News, it goes on to say, "Booming super contributions could soon be competing with buying land as our favourite investment."

Perhaps not surprisingly they were taking the lead from an interview with Dr Brad Pragnell, policy director of the Association of Superannuation Funds of Australia Limited.

Dr Pragnell said, "What's partly driving it is interest in terms of people putting it in [contributions] before the new limits are introduced. That and very strong investor returns - over the past couple of years there's been double-digit returns."

The report also quotes Commonwealth Bank economist Craig James as saying, "The new rules are extremely beneficial for someone at or near retirement. If you are in your 40s and 50s working to 60, then they're remarkable, but if you're in your 20s or 30s and squirrelling money into super you're not going to see the value of your investment for a considerable length of time."

"They should be adopting a much more diversified approach to shares, super, property and fixed interest, for example. They should obtain growth assets rather than those that are defensive in nature."

Arguably it has been the compulsory investment in superannuation that has contributed to the performance of super funds. So perhaps what we have is the chicken and egg scenario. Is money going into super due to the fantastic returns? Or are the returns due to the money being invested in super funds?

The latter would seem more likely given that the majority of working adults have 9% of their salary automatically invested into superannuation on their behalf. The employee has little participation in this, or at least that was the case until last year when employees could not only choose the range of investments but could also nominate their own fund.

There would be a sizeable number of employees that choose to contribute more than the compulsory 9%, but we would think that the majority take the opinion that investment returns in a super fund can't be enjoyed until retirement - why wait until then?

However, maybe it isn't all quite as rosy as the ASFA would have us think. News Ltd also reports that asset consultants InTech believe investors in super funds should "take a cold shower."

In their report InTech tells us that "Over the past 12 years, the Australian share market recorded 11 positive years and just a sole negative year in 2002, this is in direct contrast to the long-term experience of our share market, where the frequency of negative years is about one in five."

InTech chief executive officer Ron Lilling said: "If the market were to return to this long-term range over the next five years, its return would be of the order of minus 2 per cent a year - a sobering contrast to the current golden returns. Even if the market were to return to the long-term range over the next 10 years, this would suggest a compound return of just 3 per cent a year over the next decade."

Let's not forget that it wasn't that long ago when investors were leaving managed funds in their droves to do it themselves with online brokers. Investors became fed up paying the 5% management fees when the value of their funds was falling.

Could history repeat itself? Well, maybe investors will get fed up of being spoon fed any old excuse for a fund that is labelled as "ideal" for a super fund. Macquarie Bank's (ASX: MBL) wholesale farming fund could very well fall into that category. We shall see.

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