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Although fees are an important factor to consider when choosing a super fund, there are other considerations that people should be aware of. On top of fees, I’ll also be comparing index & market exposures and ESG implementation. I’ll also be explaining how Rest achieves 0% fees for their indexed options.
Fees
Below are tables taken from my spreadsheet :
The table assumes an allocation of 40% Australian shares and 60% International shares.
Index & market exposures
Although the super funds generally invest in the same companies, there are some subtle differences because of the indexes they follow. The indexes the super funds follow are listed below:
| Name | Australian shares | International shares |
|---|---|---|
| Aware Super | Aware Super Custom Index on MSCI Australia Shares 300 | Aware Super Custom Index on MSCI World ex-Australia |
| ART | MSCI Australia 300 Shares | MSCI ACWI ex-Australia IMI with Special Tax Net in $A |
| Qsuper | S&P/ASX 200 Accumulation Index | MSCI World ex-Australia Index, hedged |
| Hostplus | S&P/ASX 200 Accumulation Index | MSCI World ex-Australia Index |
| Rest | S&P/ASX 300 Accumulation Index | MSCI World ex-Australia ex-Tobacco Index |
Notes:
- Aware Super’s indexes are custom as they changed the index for sustainability and ESG considerations.
- “Special Tax” in ART’s international shares option means that the index takes into account the favourable tax environment that exists in super funds.
Below is a table of how much of the market someone can capture when using the DIY options in each super fund, where green are markets that are covered by Australian shares and International shares, yellow are markets that can be covered with another investment option, and red are markets that are not covered:
Notes:
- Qsuper's international shares option is hedged. Qsuper doesn't have an unhedged version.
- Hostplus has an emerging markets option; however, it is actively managed. This is not as bad as it seems, as there is evidence that active management fairs a better chance in emerging markets, which I show here.
- Hedging international shares to the Australian dollar mitigates currency fluctuations. This could be desirable in the short term to reduce portfolio volatility, for example, close or in retirement. It should be noted that hedging is undesirable over longer time horizons, as hedging costs more than unhedged. On top of this, Anarkulova, Cederburg, and O'Doherty (2023) found using historical data that hedged investments are riskier than unhedged over time horizons of four years or longer after taking inflation into account.
ESG
ESG investing aims to overweight companies that have favourable Environmental, Social, and Governance characteristics and underweight companies that show unfavourable characteristics. However, the drawback to ESG is the expected lower return and risk, as detailed in this article. This type of investing deviates from a pure passive portfolio, but can suit those who prefer to overweight towards "greener" companies. Although, there is evidence by Hartzmark and Shue (2023) that ESG investing may be counterproductive to making "brown" firms more green.
The table below shows how the super funds handle ESG:
| Name | ESG |
|---|---|
| Aware Super | Restrictions/exclusions to tobacco, thermal coal, and controversial weapons. Also excludes or has a reduced weighting to carbon intensive companies. More information can be found in their Investment and Fees Handbook. |
| ART | Exclude companies that manufacture tobacco and companies with any involvement with cluster munitions and landmines. They also aim to reduce their carbon exposure. More information can be found here. |
| Qsuper | Almost identical ESG implementation to ART super. |
| Hostplus | Excludes investment in controversial weapons. This can be found in their Member Guide, found under the Responsible Investing section. |
| Rest | No ESG integration with no other negative screenings apart from tobacco. |
How Rest achieves 0% fee indexed options
Most indexed options follow their respective index by investing directly in the companies described by the index. Rest Super is the exception to the other super funds mentioned, where they use Macquarie Bank’s True Index funds, which use derivatives to follow the index. Derivatives have counterparty risk involved, where there is a risk of Macquarie Bank defaulting on their derivative contracts.
The uncertainty of how much counterparty risk there is and how comfortable one is with the risk should be considered when using Rest’s indexed options, even if Rest is comfortable with the risk that comes with using derivatives. The funds by Macquarie do have about $2 billion in assets (as at 31/12/2023), and so these funds are unlikely to close. Below is a screenshot of how the derivative contracts work, taken from Macquarie True Index International Equities Fund's PDS (additional detail found by u/UnnamedGoatMan, the Macquarie funds aim to get pre-tax returns that equal the returns of the underlying index. Rest Super then subtract fees and charges from the performance):
Article link: https://lazykoalainvesting.com/comparing-indexed-options-between-industry-super-funds/
Thanks for the great analysis.
Do you know what motivates Rest to use this option? I'm curious about their risk assessment, the cost of having Macquarie design this and whether they are the only users of this.
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