Asset allocation can be the decider in super funds
There's a lot to consider when picking a super fund. It helps to choose one with low costs, for starters. A record of good performance doesn't hurt, even if it's not a guide into the future.
Ultimately, though, perhaps the most important factor is asset allocation: how your money is spread between different types of assets.
After all, a sharemarket rout will hit anyone who has invested heavily in shares, no matter how brilliant their fund manager or how low their fees.
With this in mind, it's worth looking at how funds have changed their asset allocation strategies in recent years.
Figures from research group SuperRatings show a big trend lately has been the embrace of an asset class known as "alternatives". This is financial jargon for a bunch of asset types that do not neatly fit into an existing category - things such as investments in private equity, hedge funds, or infrastructure.
As the graph shows, super funds' investments in "growth alternatives" have been rising rapidly.
Shares are still by far the most popular asset class for funds, making up about 50 per cent of the typical fund's assets. But alternatives are playing a much bigger part than they were a few years ago.
For-profit retail funds, for instance, have increased their allocation towards growth alternatives from just 2.2 per cent three years ago to 12.4 per cent today.
Union-linked industry funds, which have historically invested much more heavily in infrastructure, have also lifted their weighting towards alternatives, from 12.6 per cent to 16.8 per cent.
So why is a growing portion of Australia's $1.6 trillion in super assets going into this once-obscure asset class? And is the change justified?
The reason is simple: alternatives, particularly infrastructure, have performed well. Industry funds' investments in things such as ports have been a key reason why they have produced better returns than retail funds over the long term.
Australia is estimated to need $750 billion worth of infrastructure in the next decade, so funds are putting money into an area where there's likely to be growing demand. The fairly reliable returns from a piece of infrastructure are also well suited to the needs of super members.
But there's also another likely reason: the sheer volatility of shares.
The global financial crisis was a painful reminder for many that shares are a high-risk asset class.
With big economies in Europe experiencing a protracted slump, some experts think volatility will continue for years to come. Therefore, it seems sensible that super funds are investing in a wider range of assets.