Nick Bruining Q+A: Why you should think twice before switching superannuation funds to chase high returns

Question I just received my half-yearly superannuation statement and my balanced fund has returned about 3.5 per cent for the six-month period. My partner’s super fund statement shows that his balanced fund shows a return of 6 per cent over the same time. Should I be changing my super to his fund? What’s involved and are there any problems in changing funds? Answer Changing funds is a simple process and in most cases your new fund will often facilitate the rollover of your existing benefits and help you set up the new arrangement with your employer. One thing to be aware of is the transfer of the existing life insurance coverage. Before the changeover, make sure that you can transfer the existing insurance coverage to the new scheme. The bigger issue, however, is whether the move will in the long term deliver a better outcome. Use of the term “balanced” when describing an investment option can vary dramatically from one fund manager to the next. Diversified superannuation funds described as balanced, conservative and high growth try to explain the risk and return trade off of that investment option by using these titles. The fund itself will be investing in a mixture of growth-type investments which will include shares and property. Generally, these types of investments are regarded as riskier assets. While they provide good returns, they can also drop significantly in value over a very short period of time. Safer investments which include cash and fixed interest-type investments generate lower returns but are generally safer. Significantly, there is no legislative requirement that sets out how a particular diversified fund is structured or what label is applied to it. A conservative fund might generally have 30 per cent invested in the riskier, growth-type assets and 70 per cent of all money invested in the safer investments. Unfortunately, some conservative funds have up to 60 per cent invested in areas that many professional investors would consider risky. These variations are often more pronounced in the balanced investment option. Typically, you might expect a mixture of 60 per cent growth assets and 40 per cent safe assets, but there are “balanced” options with an exposure to riskier assets of more than 90 per cent. These can show very high returns when markets are booming but drop significantly if there is a market correction. Before changing funds, check to see what the actual mix of investments is within your current fund, compared to your partner’s underlying investment mix. You might find that the balanced mix of your partner’s fund is the same as the “high growth” option of your existing fund. Simply changing your investment option to high growth means you end up with a similar mix, which could generate a similar result. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association