There's a big gap in earnings between the best and worst that compounds over time, writes John Collett.
The performance of the typical balanced superannuation option, where most people have their money, was flat over the year to June 30. Super-fund members may be relieved it wasn't worse.
But the performance that gets widely quoted in the media is based on the typical, or median-performing, balanced option.
Look behind the headline number and it reveals a surprisingly wide range of returns. According to SuperRatings, the best performer returned 6.2 per cent over the 12 months the worst returned minus 3.9 per cent - a massive 10 percentage-point gap.
Even over the long term - say, 10 years - the average annual gap between the best and worst performers is 4.1 percentage points, SuperRatings says.
It highlights how fund members who don't pay attention to who is managing their super may risk missing out on returns.
The key to understanding the performance of balanced options is to appreciate the role of asset allocation, says Warren Chant, the co-founder of researcher Chant West.
Performance is mostly driven by what happens in major investment markets and especially sharemarkets, where balanced funds tend to have their biggest exposure.
"Balanced" does not necessarily mean an investment option will have a more or less even split between risky and defensive assets. Sixty per cent of one "balanced" investment option might be exposed to growth assets such as shares and property, while another may have 75 per cent or more in growth assets.
The director of research at Rainmaker Information, Alex Dunnin, says super fund returns have, in reality, been locked into equity market returns. There is a high correlation between what sharemarkets do and the performance of balanced options.
To break the nexus with equity risk, funds are putting more money into alternative investments, including infrastructure, private equity and hedge funds, and into fixed interest.
In recent years, the better-performing balanced options have tended to have a lower-than-average weighting to shares and higher exposures to alternative and unlisted investments.
"You want a fund that can actually deliver [returns] almost regardless of what is going on in the markets because that's what you're paying for," Dunnin says.
The founder of SuperRatings, Jeff Bresnahan, says one-year returns have too short a time frame to judge whether an investment option is successful or not.
"We go through cycles where listed markets [such as sharemarkets] rally or tank," he says. "Because funds have differing exposures to listed and unlisted markets, they will perform differently at various parts of the economic cycle."
Even the best-performing investment options over the longer term are not always, if ever, going to be among the best performers over short periods. But if an investment option consistently underperforms compared with the median return for similar options over five - and especially seven - years, it's time to reconsider whether it's right for you, Bresnahan says.
Most balanced options have long-term performance objectives of beating inflation by 3.5 percentage points. With inflation about 3 per cent, that's a return of 6.5 per cent.
Fund members will usually find the long-term performance numbers on the fund's website or in their annual statement.
Fee levels should always be checked by fund members as it is the after-fee returns that matter.
Generally, non-profit funds have had lower fees than the retail funds provided by banks, insurers and master trusts. But retail funds have been introducing cheaper products to better compete. "The retail sector has responded aggressively during the past two to three years with low-cost offerings, however, they have retained a significant book of legacy products," Bresnahan says.
The high fees of these legacy options can erode returns year in and year out, he says. "But cheap is not necessarily good."
Bresnahan says more expensive funds may offer a wider range of investment choices - or even higher after-fee returns - than low-fee funds.
When considering whether a super option is a good investment, performance is certainly important but governance and service also matter, Bresnahan says.
Another very important consideration before switching funds is insurance cover, he says. For many funds, there is automatic acceptance for insurance up to certain amounts, whereby members are covered for death and total and permanent disability without any need to disclose health information or submit to a medical examination.
In considering switching to a new fund, check whether it has automatic acceptance, or a lower level of cover for which acceptance is automatic.
How to compare returns
A limited amount of information comparing the returns of super funds is available free on the internet. Chant West, SuperRatings, SelectingSuper and Morningstar all provide various performance tables.
Rainmaker, on its SelectingSuper website, lists the top-50 default options available through workplaces by returns, and the top-50 retirement fund default options from the 120 it has on its database.
It also offers the top 50 of all other main categories of investment options.
SuperRatings offers the top-10-performing "balanced" default investment options. The typical performance for each type of investment option is given, so fund members can assess how well their investment stacks up against its peers. It also ranks the top-10 funds by fees and gives the top 10 by insurance.
Alex Dunnin, from Rainmaker, says long-term performance is "fairly predictive" of future returns. He says investors should focus on how the investment performs relative to other funds with similar asset allocations.
Chant West provides performance tables for "growth" option returns (which SuperRatings calls "balanced") and "conservative growth" options available through the accumulation phase and the retirement or pension phase.
More data and ratings are available from most researchers for those willing to pay for it.
SuperRatings has an "investors' club" named SuperSavvy, which, for an annual fee of $80, gives members access to most of its research.