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 under-funded pension plans.
But the average Australian didn't work for Mercedes-Benz in the '80s, won't get a pension and will rely on their super fund instead.
Let's have a look at that. The last Association of Superannuation Funds of Australia numbers tell us that self-managed super funds (SMSF) 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 and you might also work out that about 68.5 per cent of super money, about $1 trillion of Australian super money, is being managed by a professional fund manager other than the beneficiary.
That's fine, but there are implications. The motivation of a fund manager is performance relative to other fund managers and fees. The motivation of the SMSF manager is performance alone.
The main issue is that 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.
It's quite remarkable really, but leave your money to someone else to manage and they hold a heck of a lot less cash, buy a lot more bonds and put a huge amount of money overseas. It is quite incredible the difference between what someone motivated by relative performance and fees invests in, compared with someone who is investing their own money and is only interested in actual performance.
Why has an investor left to make his own decisions, tucked 28 per cent in cash and term deposits while the professional fund managers are happy with 8 per cent. 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 the main issue is the professional fund manager's obsession with international shares and bonds. Whereas the Aussie battler running his own fund has no interest at all, the professional puts 24 per cent of the money in international shares and 6 per cent in international bonds. Madness.
When you consider that the Aussie dollar has doubled in the past 10 years and the US, British 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? By the time you've bought them, and especially if you hedge them, the returns are pitiful when you can get 3 per cent to 5 per cent here without a currency risk and almost without risk.
The motivations of a managed fund manager are different from those of an individual looking after their own money and it manifests itself in higher exposures to international shares, international bonds and a lot less cash. It's a great advertisement for knowing what your fund manager is investing in and making appropriate asset allocation elections where possible.
It's also a great advert for the SMSF industry.
After all, when the last organ that still pumps blood is your brain, what better way to spend the twilight years than pitting yourself against the intellect of the market in pursuit of actual performance rather than relative performance, plus fees.
Marcus Padley is a stockbroker with Patersons Securities and the author of stockmarket newsletter Marcus Today. His views do not necessarily reflect the views of Patersons.