Australian superannuation - advice for a beginner

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AlBorland
Posts: 4
Joined: Sat Jul 29, 2017 9:09 pm

Australian superannuation - advice for a beginner

Post by AlBorland » Sat Jul 29, 2017 11:06 pm

Hi all,

I am new to investing but have been trying to learn as much as possible over the last few months by reading the forum and other Boglehead resources, so many thanks for making this insightful info available.

My question relates to superannuation in Australia. I have decided to take a new approach with my super (focussing on low cost index funds), but would like to know if you think my proposed approach (described in detail below) seems reasonable….

Proposed approach:
1. Fund: AustralianSuper (using pre-mixed investment options)
2. Contributions: max out pre-tax contributions (25k/year)
3. Asset allocation:
(a) Indexed Diversified fund – 70% of total contributions - this is a pure index fund (29% Australian shares; 35% international shares; 6% listed property; 20% fixed interest; 10% cash) AND
(b) Balanced fund – 30% of total contributions - this fund is actively managed (24% Australian shares, 31% international shares, 9% direct property, 10% infrastructure, 4% private equity, 10% credit, 7% fixed interest, 5% cash)
4. Fees: Admin fee $78/year; contribution splitting fee $70/year; management fees (0.1% for Indexed Diversified portion, 0.57% for Balanced portion)

Justification:
1. I chose AustralianSuper after reviewing industry funds that offer indexed options (e.g. SunSuper, Hostplus, First State). While AustralianSuper option wasn’t my preferred in terms of investment options, I’ve decided to go with them based on insurance reasons.
2. I have suggested splitting my contribution between an index fund (70%) and an actively managed fund (30%) because this allows me to diversify a small portion of my super into unlisted assets (e.g. direct property, private equity, infrastructure) with a reasonable fee (30% x 0.57%) while keeping most of it in a more typical Boglehead-style low cost pure index fund (70% x 0.1% fee).

Personal info:
Debt: none
Country: Australia
Age: 34
Relationship: defacto with a child on the way
Income: 150k/year
Cash: 250k for a house deposit (live in expensive Sydney – don’t know when we’ll buy… hoping for a slowdown in prices but leaving Sydney is not an option for us)
Emergency funds: included as part of cash
Other assets: 80k super

Many thanks for your advice.

Valuethinker
Posts: 32264
Joined: Fri May 11, 2007 11:07 am

Re: Australian superannuation - advice for a beginner

Post by Valuethinker » Sun Jul 30, 2017 9:26 am

AlBorland wrote:Hi all,

I am new to investing but have been trying to learn as much as possible over the last few months by reading the forum and other Boglehead resources, so many thanks for making this insightful info available.

My question relates to superannuation in Australia. I have decided to take a new approach with my super (focussing on low cost index funds), but would like to know if you think my proposed approach (described in detail below) seems reasonable….

Proposed approach:
1. Fund: AustralianSuper (using pre-mixed investment options)
2. Contributions: max out pre-tax contributions (25k/year)
3. Asset allocation:
(a) Indexed Diversified fund – 70% of total contributions - this is a pure index fund (29% Australian shares; 35% international shares; 6% listed property; 20% fixed interest; 10% cash) AND
(b) Balanced fund – 30% of total contributions - this fund is actively managed (24% Australian shares, 31% international shares, 9% direct property, 10% infrastructure, 4% private equity, 10% credit, 7% fixed interest, 5% cash)


Expense ratios matter in all of this. Not sure how Australian imputation of dividend tax works, but you are way overweight in Australian shares (less than 5% of global developed markets). This will matter, because Australian market is basically financial institutions + natural resource stocks (mirror of Canada). And the level of the Australian dollar is directly linked to those factors. As and when the housing crash hits (and I am as sure of that as I, a Canadian, can be that Toronto and Vancouver will also blow up, and they will blow up) the AUD will probably fall. And there is little or no sign that commodity prices are going to save either economy-- in fact, looking at Chinese slowdown in construction (which will be a many year thing, they have too many physical structures) I am not super bullish on commodities.

So your financial well being in terms of currency and of health of the Australian economy is linked to the same factors that affect Australian stock market. The one nice thing is that a lower AUD increases export revenues (commodities are priced in USD) but it's still going to be unpleasant.

I have gone through the same thought process many times re Canada (as you can see). For boring reasons, I can't really hold (in one retirement account) non Canadian stocks, so I have focused on 1. reducing my financials exposure 2. stocks that are international in nature/ not dependent on the Canadian consumer (who will get slammed when housing prices fall 30-50%) and have a degree of natural hedging against CAD (which I think will fall to around USD 50 cents ie USD: CAD $2.00, previous low in early 1990s was around 61 cents).

4. Fees: Admin fee $78/year; contribution splitting fee $70/year; management fees (0.1% for Indexed Diversified portion, 0.57% for Balanced portion)


In the long run, that 47 basis points (0.57-0.1) will have a significant impact on your returns. Do you need it?

I'd rather see you hold a higher weighting in non Australian equities if that is possible. Not currency hedged (if commodities prices go the other way, ie up, that will of course hurt because USD AUD rate tracks commodity price expectations).

Bonds it matters less because your liabilities like taxes are in AUD (not everything is imports or foreign travel). Generally it's better to take the currency risk on the equity side, not on the bond side. Australia is a AAA credit country so even in a bad housing bust you are not bearing credit risk on Federal government bonds.

Justification:
1. I chose AustralianSuper after reviewing industry funds that offer indexed options (e.g. SunSuper, Hostplus, First State). While AustralianSuper option wasn’t my preferred in terms of investment options, I’ve decided to go with them based on insurance reasons.


OK this has a big impact and I don't know anything about it. If this is the best you can do, it's the best you can do.

2. I have suggested splitting my contribution between an index fund (70%) and an actively managed fund (30%) because this allows me to diversify a small portion of my super into unlisted assets (e.g. direct property, private equity, infrastructure) with a reasonable fee (30% x 0.57%) while keeping most of it in a more typical Boglehead-style low cost pure index fund (70% x 0.1% fee).


I wonder though whether fees are fully disclosed? Because those types of managers typically charge "2 and 20" ie 200 basis points on committed capital for Limited Partners (the fund investors, i.e. typically a fund like yours is one LP) plus a 20% performance fee above a benchmark return (say 6-8% p.a.) the "carried interest".

So is your fund getting net returns from Alternative Asset Managers of paying fees like 2 & 20? Analogies to owning shares in a REIT. The return you get as a shareholder on the properties is after the REIT has taken off a charge to the management company. BTW owning a global REIT index fund is a good way to get a low cost exposure to property-- in the long run, returns should be similar (albeit share prices much more volatile) than direct investing.

My suspicion is that the amount of alternative assets exposure you are getting isn't enough to make a big difference. Do you know if those Alternatives are investing in Australian assets only? Global diversification would be helpful.

Personal info:
Debt: none
Country: Australia
Age: 34
Relationship: defacto with a child on the way
Income: 150k/year
Cash: 250k for a house deposit (live in expensive Sydney – don’t know when we’ll buy… hoping for a slowdown in prices but leaving Sydney is not an option for us)


I believe Cap rates (net rental income/ property value aka "yield" in the UK) in Sydney and Melbourne are down around 2% for rental housing? They are below 2% in Vancouver (and 4-5% in Seattle, which is a city with much stronger economic fundamentals, big employers like Amazon and Microsoft, higher wages etc.). If true, this is an indication of fundamental overvaluation in the Australian housing market (Syd & Melb anyways). And if you look at price rises since the 2008 crash, and personal debt to GDP levels (a warning sign of trouble to come) Canada, and I believe Australia, now look worse than the USA did in 2006 (see various articles and charts in The Economist re housing prices). Even in San Francisco (where both the housing land shortage and the tech boom are quite real factors) I don't think you see cap rates that low.

I have read that Australian housing rents are actually falling? Another warning sign.

Philip Soos is a guy I track on Twitter re dangers of Australian housing market. And Hilliard Macbeth in Canada (also a good Twitter follow) -- his book is eminently readable, on a coming Canadian property crash, maybe you can get it cheap on Kindle? Maybe one just has to be old enough to remember the last one-- housing prices in Toronto peaked in 1989 and took 22 years to reach their previous peak (adjusted for inflation). The current generation of 30 and 40 somethings only remembers housing going up in price in Toronto and Vancouver. Canada and Australia (and Auckland) seem to be tracking each other, and Hong Kong. HK is a special case, the government there limits new housing land supply whenever the market looks saggy-- it controls all the land and sells it to 5-6 companies by periodic auction to build housing. But the financial factors are the same (or even crazier).

For a longer term view, and quite a nice summary of Australia's historic housing boom and then 70 year bust (all those fine Victorians in Melbourne and Sydney were built in that boom) Neil Monnery's "Safe as Houses: 8 centuries of housing prices" draws together historical evidence on housing bubbles from many many countries. The bottom line is that housing is a pretty lousy financial investment, over the long termm particularly once you take into account repairs & maintenance, necessary modernizations & property taxes. Robert Shiller's Irrational Exuberance is another good read-- the first edition was about the dot com bubble, and it's funny to look back at that, and connect it to his description of bubble phenomena and the later US housing bubble (the second edition). No doubt the third will include a mention of Canada.

Emergency funds: included as part of cash
Other assets: 80k super

Many thanks for your advice.
[/quote]

Main thoughts are:

- try to get more foreign equity exposure although fund choice may not permit that

- alternative assets in that fund may not be worth the cost, in terms of having a big impact on your final wealth

- if you are going to go with that active fund, 70/30 split is probably reasonable re costs (30% of 0.47 is not so huge) and risk

- wait on housing-- as above- a Canadian subprime lender (Home Capital Group) is in deep water (Warren Buffett has invested but on terms which totally protect his downside, confusing the hell out of people who don't read the detail) and I think that's the thin edge of the Canadian wedge to what's going to happen in the next 3-5 years in Greater Toronto Area and Greater Vancouver Area

AlBorland
Posts: 4
Joined: Sat Jul 29, 2017 9:09 pm

Re: Australian superannuation - advice for a beginner

Post by AlBorland » Mon Jul 31, 2017 6:34 am

Valuethinker, thanks very much for the considered response. I have made a few follow up comments below.

Australian vs international shares

I appreciate your comments on being overweight in Australian shares and largely agree that it would be sensible to increase my foreign equity exposure.

While my chosen super fund has an option to allocate a portion of my contributions to single asset classes, including foreign equities, this part of the fund is actively managed and has high fees (0.45% management fee + 0.18% performance fee). I am a bit hesitant to go down this path, given the high fees.

An alternative would be to join a second super fund with has options to invest in indexed single asset classes (e.g. SunSuper has indexed international shares – both hedged and unhedged – with investment fees of 0.09% + admin fee 0.1% + $1.50/week). However, this starts to get a bit messier (due to splitting my contributions etc.) and the $1.50/week would actually be a decent % of my total balance of foreign shares, which is likely to be a few '000, at least initially.

Another option would be to invest outside super in unhedged international shares (Vanguard has an ETF fund on the ASX), but, even with the best intentions, I fear I wouldn’t be consistent with this approach because I’m trying to hold most of my savings as cash in case we decide to buy a property. This would also involve more tax and is more expensive to rebalance as the balances within my super fund change.

My only other thoughts on Australian : foreign shares come from searching this forum. It seems many Australians have ‘home country bias’ and favour Australian shares, with bloggers generally saying it’s ok to have up to 50% of total equities being Australian (with a bit lower being better). The other thing people mention is that there are tax advantages for holding Australian shares (franked dividends), but people debate whether this tax advantage is already priced into the cost of the shares so it’s unclear how much of an advantage this really is.

Are the super fund fees fully disclosed?

This is a good question and I have wondered myself, ON another forum, I’ve read that AustralianSuper, which is the largest super fund in Australia, has the market cap to achieve a flat fee of 0.1% on its indexed product, and that most superfunds ‘look through’ to the underlying fund manager fees (Vanguard in this case) when advertising their fees to the customer. Nevertheless, this is something I will check with the fund directly before I join.

Alternative asset exposure

It’s a bit unclear if/how much of this is global – I will check directly with the fund. In any case, I take your point that the diversification benefit is likely to be small and will give this some further thought.

Housing market

I just checked out Philip Soos’ stuff, and it seems like a useful resource. Thanks for the tip.

In any case, I find this a tricky one. I’ve been sitting on the sidelines for a few years now thinking the market was overheated. But, instead of stalling, it’s just gone up and up.

Having weighted so long, prices are sooooo high, I’m looking at the prospect of being a long term renter, which also costs a lot of money. I get plenty of advice in this space, but its all very mixed ranging from the doomsayers to those who think you just need to ‘live in the times your living in’/can't time the market and should just buy something you can afford (which means a shoe box in Sydney). I’m hoping things cool off this year, but if they keep going up for another few years, I don’t know how to best manage it…

Many thanks again for your comments.

Valuethinker
Posts: 32264
Joined: Fri May 11, 2007 11:07 am

Re: Australian superannuation - advice for a beginner

Post by Valuethinker » Mon Jul 31, 2017 11:50 am

AlBorland wrote:Valuethinker, thanks very much for the considered response. I have made a few follow up comments below.

Australian vs international shares

I appreciate your comments on being overweight in Australian shares and largely agree that it would be sensible to increase my foreign equity exposure.

While my chosen super fund has an option to allocate a portion of my contributions to single asset classes, including foreign equities, this part of the fund is actively managed and has high fees (0.45% management fee + 0.18% performance fee). I am a bit hesitant to go down this path, given the high fees.


Tough call. But 0.63% is not horrible-- it's not great, but in Canada you can easily pay 1.5-2.0%. Americans are spoiled for choice on low cost investment ;-).

I would try to get my Australian equity proportion down. Simply because if you look at an ETF that tracks Australia, you basically see banks & resource companies. Which also happen to be the 2 big drivers of your economy: natural resources and property lending. It's a lot of risk-- and the same reason I have caution about Canada (which has the same pattern). Generally I think you have more mining & natural gas, we have more forestry (of course) & oil (tar sands, the dirtiest most costly oil in the world). Your location is better for Asia (sea transport is way cheaper than railways across the Rockies). But very similar otherwise.

Getting down to 20% Australian equities, if possible, would be good. That is still 5x world weighting I believe.

An alternative would be to join a second super fund with has options to invest in indexed single asset classes (e.g. SunSuper has indexed international shares – both hedged and unhedged – with investment fees of 0.09% + admin fee 0.1% + $1.50/week). However, this starts to get a bit messier (due to splitting my contributions etc.) and the $1.50/week would actually be a decent % of my total balance of foreign shares, which is likely to be a few '000, at least initially.


And it adds complexity which is always bad.

Another option would be to invest outside super in unhedged international shares (Vanguard has an ETF fund on the ASX), but, even with the best intentions, I fear I wouldn’t be consistent with this approach because I’m trying to hold most of my savings as cash in case we decide to buy a property. This would also involve more tax and is more expensive to rebalance as the balances within my super fund change.


Almost certainly not worth doing given you would not be fully using your tax advantaged space.

My only other thoughts on Australian : foreign shares come from searching this forum. It seems many Australians have ‘home country bias’ and favour Australian shares, with bloggers generally saying it’s ok to have up to 50% of total equities being Australian (with a bit lower being better). The other thing people mention is that there are tax advantages for holding Australian shares (franked dividends), but people debate whether this tax advantage is already priced into the cost of the shares so it’s unclear how much of an advantage this really is.


That's about how it falls. Human nature makes "50/50" seem reasonable. But it's not. Australia (like Canada) is a small economy and stock market on the outskirts of a very big world. Home Country Bias is a real thing in investing, but whereas Americans can have it and not do too badly (US is c. 55% world markets) Canadians & Australians cannot afford that mistake.

Are the super fund fees fully disclosed?

This is a good question and I have wondered myself, ON another forum, I’ve read that AustralianSuper, which is the largest super fund in Australia, has the market cap to achieve a flat fee of 0.1% on its indexed product, and that most superfunds ‘look through’ to the underlying fund manager fees (Vanguard in this case) when advertising their fees to the customer. Nevertheless, this is something I will check with the fund directly before I join.


I would be almost certain they are acting as an LP into the funds raised by specialized managers (Macquarrie aka The Millionaire Factory in infrastructure). Who will be charging on the order of 150-200 basis points (1.5-2.0%) plus a performance fee. Maybe the fund gets a discount, but these managers don't do this for free.

The exception is where they just invest in the quoted securities in those areas like an Exchange Traded Fund does. That works well with REITs (think Westfield) but in Private Equity and Infrastructure it is much harder.

Alternative asset exposure

It’s a bit unclear if/how much of this is global – I will check directly with the fund. In any case, I take your point that the diversification benefit is likely to be small and will give this some further thought.


It is not zero, but it is not huge.

Housing market

I just checked out Philip Soos’ stuff, and it seems like a useful resource. Thanks for the tip.

In any case, I find this a tricky one. I’ve been sitting on the sidelines for a few years now thinking the market was overheated. But, instead of stalling, it’s just gone up and up.

Having weighted so long, prices are sooooo high, I’m looking at the prospect of being a long term renter, which also costs a lot of money. I get plenty of advice in this space, but its all very mixed ranging from the doomsayers to those who think you just need to ‘live in the times your living in’/can't time the market and should just buy something you can afford (which means a shoe box in Sydney). I’m hoping things cool off this year, but if they keep going up for another few years, I don’t know how to best manage it…

Many thanks again for your comments.
[/quote]

I am having this very debate, and this minute, with an ex colleague who is sitting in Sydney. He owns property in London, is holding off buying in Sydney, and is wondering whether to keep his spare cash in AUD.

We should start by knowing that I have been wrong about this for years, wrt Toronto & to London. By my rights, after 2008 both of those markets should have imploded. Had there not been the scale of the bank bailouts we saw, they probably would have. And I lived through housing crashes in both of those (associated with high interest rates) in the early 1990s.

But I shall stick to my guns. London is a tricky one, because like NYC & San Francisco, there are structural reasons why prices are so high. Basically an absence of new development land*, restrictions on the new housing (or even skyscrapers) that can be built, and basically just a *lot* of money arising from their dominant industries (tech, finance) and their fundamental attractiveness to foreign buyers. Seattle also comes to mind for strong economy and attractive location yet prices are still much more affordable than Vancouver.

*London builds fewer new housing units every year than *Toronto*-- the Greenbelt restrictions mean there is no new housing land except "brownfield" ie ex industrial sites. And, in fact, at one point TO had more condos under construction than New York and Chicago "combined". There's a tall crane index someone compiles, and I think TO is still number one in North America. Remember GTA has c. 6m people, so less than Atlanta, greater NYC, Los Angeles, similar to Bay Area CA or Chicago. London itself has 9m people and rising, and the equivalent physical area to GTA has about 18 million people (only Ile de France in France, around Paris, has similar numbers; maybe also Ruhr/ Rhine Valley in Germany).

Toronto? This is not anything like the world's top 3 financial centres. A lot of its economy is derivative (eg housing related), and the Ontario economy has badly deindustrialized in the last 15 years so the hinterland is not doing well. Toronto to my mind is living on borrowed time. Vancouver? They get rich selling each other houses (just like Ireland before the crash). Any other promising industry has been squeezed out (the number 2 location for corporate HQs in Canada is Calgary, not Vancouver).

On any measure, Canada (and Australia is not far behind) looks worse than the USA in 2006. Housing affordability (in Vancouver and Toronto), personal debt to GDP, rise in housing prices since 2000 or 2008, stagnation of personal incomes etc. The numbers on percentages of families that are struggling to service their debts/ live at these interest rates, the lowest ever, are quite striking.

Of course there is always the "Chinese buyer" who is invoked to justify all valuations. The data in BC says this is 9% of purchasers (ie non resident) and Ontario 5%. Even granted some families (where the university age child has landed immigrant status, or other reasons) won't show up in those stats, that's not overwhelming. I suspect at the margin this is/ was pretty important in Vancouver, but less so in TO (geography is much less of a constraint).

But houses are just way way outside the affordability of the average family. And personal leverage is huge. This cannot keep going on--indeed prices in outlying areas of Greater Toronto Area are down c. -13% year on year.

Something will kick it over. What, I do not know. Maybe Central Banks unwinding Quantitative Easing and thus rising interest rates. But looking back at the dot com crash, it was "obvious" but no one can really tell you what kicked it over-- the IPO of Lastminute.com? The Barron's article on dot coms running out of cash? The next few years in tech were absolutely brutal (Nortel, the world's largest telecoms equipment company at one point, went bust, devastating the retirement savings of thousands of middle class Canadians).

1.8% of the economy is fees for selling RE right now. That's a stunning number when the postwar average (when Canada's immigration was higher and population rising a lot faster) is probably c. 0.9%. And the Canadian Baby Boomers are heading into the downsizing years, just as immigration has dropped off and the birth rate is low.

Sydney, Melbourne, Auckland? On The Economist stats, they look like GVA & GTA, on some even worse. All the same factors at work. The same issues re the economies (distortion towards real estate, construction, renovation sale & finance). Same buildup of personal debt.

Granted you are closer to China. But nothing I have heard coming out of China makes me sanguine re their own domestic debt-property problems.

Soaring commodity prices would of course solve a lot of your problems (although, again, for us it is Alberta which would really benefit, for you it is probably WA & Queensland?). But I just don't expect that to happen.

I am just some guy you read on the internet. But I think the next 1-5 years in Canada are going to be horrible, and just as for some of my peers (the last Baby Boomers, who bought their first homes in the late 1980s) the effects have scarred them for life, long after the financial pain is gone, so too I think it will for the last few years of buyers in Toronto and Vancouver.

My own gut is that Sydney and Melbourne have pretty much the same dynamics. And isn't the long run population flow north to Queensland in any case?

AlBorland
Posts: 4
Joined: Sat Jul 29, 2017 9:09 pm

Re: Australian superannuation - advice for a beginner

Post by AlBorland » Sun Aug 13, 2017 2:31 am

Thanks for the follow up response, and apologies for my delay in responding. You’re comments are interesting, and certainly in line with what a lot of commentators are saying atm.

On a related note, NSW auction clearance rates have (finally) started to stabilise at around 70% (for the last few weeks at least), so we’ll just sit tight and watch what happens to the market over the next 10-12 months. Hopefully that’ll give us a enough time to see where the market’s heading, whilst also buying us a bit more time to save and get ‘educated’ about purchasing a property.

But in any case, and as you mentioned, one never knows what’s actually going to happen… prices could keep booming for the next few years, which means we’ve spent even longer on the sidelines!

Thanks again for your detailed and insightful thoughts.

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