Whatever happens in Europe, we can take comfort knowing that our money is being handled by experts who know what they're doing. They do, don't they, because it's about to become even more important.
Wilful blindness by the government and spinelessness by the opposition have ensured the amount of super we are forced to hand over to money managers will climb from 9 per cent to 12 per cent of our salaries by the end of the decade (unless we run our own funds, something that wouldn't happen on a large scale and would be unmanageable if it did).
Many of us will have to take out bigger mortgages and hold them for longer than we otherwise would have in order to feed the money-management machine we won't have the income we would have had to pay mortgages off.
Henry recommended against it. He didn't buy the fiction that the extra super contributions would come from employers (who would presumably get them from thin air). It will come out of future wage increases, giving us less control over what should be our own money and giving fund managers more.
The Coalition opposed the move for the right reasons: it is financially reckless, costing more in tax concessions than will be raised by the mining tax intended to fund it, and it is paternalistic on a scale that makes mandatory precommitment for pokies look inoffensive.
And then it backed down. It'll tear apart the carbon tax but, according to Abbott, "retirement incomes are a significant issue, particularly with an ageing population, and that's why the Coalition has decided that we won't rescind the legislation".
Which pushes us into the hands of fund managers, who might just be worth their fees if they could get us a better return than we could get by paying off our homes the latest SuperRatings table shows they can't.
For the past five years, the median balanced fund has returned an average of just 0.92 per cent per year. Over the past 10 years the return has averaged 5.16 per cent. Since compulsory super began back in 1992, the return has averaged 6 per cent. None match the return from paying off a mortgage.
Rewarded with generous fees and a legislatively directed flow of our money into their hands, it would be reasonable to imagine fund managers have something special. Nobel Prize-winning psychologist Daniel Kahneman calls it the "illusion of skill" and saves a special place for them in his new book Thinking, Fast and Slow.
He says when the University of California Berkeley professor Terry Odean examined the trading records of 10,000 private investors over a seven-year period, he found that, on average, the shares the traders sold did better than those they bought, by a very wide margin of 3.2 percentage points. Private traders sell good stocks to lock in gains and are reluctant to sell bad ones and realise losses.
The winners, on the other side of trades, are fund managers. But that doesn't mean they are especially skilled. As Kahneman says: "The diagnostic for the existence of any skill is the consistency of individual differences in achievement. The logic is simple: if individual differences in any one year are due entirely to luck, the ranking of funds will vary erratically and the year-to-year correlation will be zero. Where there is skill, the rankings will be more stable."
Study after study over 50 years has failed to find any significant year-to-year correlation in the performance of US fund managers. Some do well for a while, some do badly, but no more so than would be expected by chance. In Kahneman's words: "For a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker."
Fund managers don't see themselves that way. Like most of us, they think they're better than average. "The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty," Kahneman says.
But if their guesses turn out to be no better than blind guesses over time, I don't feel particularly good about entrusting my financial future to them, nor do I feel good about handing over more money.
peter.martin@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
What is the proposed compulsory super increase and how will it affect my take-home pay?
The article explains the compulsory superannuation rate is planned to climb from 9% to 12% of salaries by the end of the decade. Those extra contributions are likely to come out of future wage increases rather than employers’ ‘thin air,’ which could reduce take-home pay and mean some households need larger or longer mortgages to cover living costs.
Do superannuation funds deliver better returns than paying off a mortgage?
According to the SuperRatings data cited in the article, the median balanced super fund returned an average of 0.92% per year over the past five years, 5.16% per year over ten years, and about 6% on average since compulsory super began in 1992. The article states none of those figures match the effective, guaranteed return many people get from paying down a mortgage, so paying off a home loan may often be a better financial move than expecting superior returns from fund managers.
How do fees and legislation influence how much of my super ends up with fund managers?
The article argues that generous fees combined with legislatively directed flows of compulsory contributions funnel more of our money into fund managers’ hands. That means even if returns are modest, managers still receive fees, so investors should be aware of fee levels and how mandatory contribution rules affect where their savings go.
Are fund managers consistently skilled at beating the market year after year?
No. The piece cites Nobel laureate Daniel Kahneman and decades of research showing little or no year-to-year correlation in US fund manager performance. While some managers do well for a time, studies over 50 years suggest much of the apparent outperformance is due to luck rather than consistent skill.
What is the 'illusion of skill' and why should everyday investors care?
The 'illusion of skill,' a concept highlighted by Kahneman in the article, is the tendency to believe positive outcomes reflect real ability when they may be random. For investors, this means apparently successful fund managers might just be lucky, so relying on past short-term performance as proof of skill can be misleading.
Would running my own super fund be a practical way to keep control of my retirement savings?
The article notes that running your own super fund on a large scale is unlikely and would be unmanageable for most people. While self-managed choices exist, the piece suggests the majority will remain in managed funds and therefore should focus on fees, returns and the trade-offs versus paying down debt.
What evidence does the article give that private investors and traders often underperform?
The article references research by Terry Odean (summarised by Kahneman) showing that, over a seven-year sample of 10,000 private investors, the stocks traders sold did better than those they bought by about 3.2 percentage points. Traders tend to lock in gains and hold onto losers, which harms overall performance—benefiting the counterparties, often fund managers.
What practical factors should everyday investors consider before accepting higher compulsory super contributions?
Based on the article’s points, investors should weigh the reduced control over wages, the impact on take-home pay and mortgage capacity, the modest average returns from median balanced funds (0.92% p.a. over five years, 5.16% p.a. over ten years, ~6% since 1992), and the reality of fees and limited evidence of consistent manager skill. Comparing likely super returns with the guaranteed ‘return’ from paying down debt is one practical step the article suggests everyday investors consider.
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