Not so super when someone drives offshore with your cash

MY DAD spent a large part of his life working for Mercedes-Benz. When he retired he got a pension: a salary for life plus a few fringe benefits, and when he dies his wife will get a generous fraction of that salary for the rest of her life, and she's not much older than my sister (naughty dad!). No wonder DaimlerChrysler almost went broke with underfunded pension plans.

MY DAD spent a large part of his life working for Mercedes-Benz. When he retired he got a pension: a salary for life plus a few fringe benefits, and when he dies his wife will get a generous fraction of that salary for the rest of her life, and she's not much older than my sister (naughty dad!). No wonder DaimlerChrysler almost went broke with underfunded pension plans.

But the average Australian didn't work for Mercedes-Benz in the '80s, won't get a pension, and are going to rely on their super fund instead. Let's have a look at that.

The last ASFA numbers tell us that self-managed super funds hold about $441 billion, putting 31.5 per cent of total superannuation assets in the hands of just 3.8 per cent of the population. Flip that over and you might also work out that about 68.5 per cent of superannuation money, about $1 trillion, is being managed by a professional fund manager other than the beneficiary.

That's fine, but there are implications. You see, the motivation of a fund manager is performance relative to other fund managers and fees. The motivation of the self-managed super fund manager is performance alone. The main issue with that is the different motivations manifest themselves in very different asset allocations. Whereas investment in listed companies is about 30 per cent in both SMSF and professionally managed funds, there is a big difference in cash and international shares.

SMSF funds have 28 per cent invested in cash and term deposits and almost nothing in bonds, while the professional fund manager holds 8 per cent in cash, 10 per cent in Australian fixed interest and 6 per cent in international fixed interest. On top of that, while SMSFs allocate less than 1 per cent to overseas assets, the managed funds have 24 per cent(!) in international shares on top of the 6 per cent in international fixed interest.

Its quite remarkable really, but leave your money to someone else to manage and they hold a heck of a lot less cash, buy a heck of a lot more bonds and put a huge, let's say that again, huge amount of money overseas compared to the Aussie battler making the decisions on their own.

It is incredible the difference between what someone motivated by relative performance and fees invests in compared to someone who is investing their own money.

Why have investors, left to make their own decisions, tucked 28 per cent of their money in cash and term deposits while the professional fund managers are happy with 8 per cent in cash? Presumably it's because when it's not their money a professional has a much lower risk aversion than someone who needs the money and, let's be honest, the fees are a lot harder to justify on cash. But that's not the main issue. The main issue is the professional fund manager's obsession with international shares and bonds. Whereas the Aussie battler running their own fund has no interest at all, the professional fund manager puts 24 per cent of the money in international shares and 6 per cent in international bonds. It is madness.

When you consider that the Aussie dollar has doubled in the past 10 years, and the US, UK and Australian equity markets have done about the same thing, you can see that investing internationally has been an unmitigated disaster.

On top of that, what's with the international bonds? Have you seen the returns?

Bottom line, the motivations of a fund manager are different from those of individuals looking after their own money and it manifests itself generally in higher exposures to international shares, international bonds and a lot less cash.

It's a great advertisement for knowing what your managed fund manager is investing in and making appropriate asset allocation elections where possible. It's also a great advert for the SMSF industry, for taking control, for learning about the stockmarket.

After all, what better way to spend your twilight years than pitting yourself against the collective intellect of the market in pursuit of actual performance rather than relative performance plus fees.

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