Australian Super member direct

Thanks @dunno, are you able to explain why pooled super CGT is an issue for passive but not active?

 

Yes, It is an issue for both. But if you are going to be part of a pooled fund……

My thinking is that they can do active more extensively and cheaper than an individual can, yet an individual can do passive simply and tax effectively, so the pragmatic allocation becomes pooled super for active and individual for passive.

Additionally, any opaqueness or discretion arising from earnings and allocations arising from the funds that represent the deferred tax liability are more likely to find their way into flagship active option returns rather than passive returns. After all passive is only expecting to match the index, sure the passive management fee can be subsidised and is in many case hence the zero / low fee offerings, but that seems to be the full extent of discretionary allocation likely to be directed back to the passive options which seems hardly proportional when you consider how little an inactive passive investor is likely to create in realised gains compared to what their holdings generate in provisions for unrealised gains. You don’t want to be frugal and splitting the bill with gluttons. If your going to split the bill, get your share.

 

Following up on this active vs direct ETF strategy for superannuation, I’ve been doing some backtesting using ETFs within the HostPlus Choiceplus limitations of 20% per ETF.

I chose HostPlus over Australian Super as the latter has 0.04% AUM fee during accumulation jumping to 0.11% when converting to pension. Both require a minimum of 20% of total funds in their Premixed options, and frankly Australian Super doesn’t have any useful low cost premixed options.

Allocation under test
20% IFM - Australian Shares (0.03% MER VAS equivalent)
20% VAS
20% VTS
20% VEU
20% VGS (or IOZ for the 40% International allocation)

Total MER 0.084%
Effective MER 0.16% (with VEU tax drag)
UniSuper High Growth MER is about 4x more expensive at 0.62%

Notes

• ETF performance using Vanguard Portfolio Builder with wholesale versions of VAS and VGS and assuming IFM tracks closely to VAS
• UniSuper High Growth currently only has 40% International exposure with 50% Australian Shares Allocation + 5% Property + 5% Infrastructure & Private Equity.
• My current allocation in UniSuper includes a 15% tilt to each of Global Companies in Asia (GCA) and Global Environmental Opportunities (GEO), both of which have out performed. This lowers the Australian exposure to around 35%

Timeframe | UniSuper HG | UniSuper GCA/GEO tilt | ETF (60% Intl) | ETF (40% Intl)
3y 9.07% 10.92% 8.17% 6.87%
5y 10.19% 11.41% 8.95% 8.35%
10y 9.96% not available 10.23% 8.96%

So what does this tell me?

• Obviously International equities have done better than Australian equities in the past 10 years.
• A GCA/GEO bet in the past 10 years has been a good one, although similar tilts could have been achieved using ETF’s like VESG, NDQ, IAA etc.
• UniSuper does appear to have outperformed in the past 10 years with a basic 60/40 Australia/International allocation 9.96% vs 8.96% pa
• However I still have in the back of my mind that past performance is no indicator of future performance and the only thing we can control is fees. A 0.46% MER saving on 1.6M is $7,360 p.a. fee saving

Going to continue to consider this while we await Vanguard’s launch of a superannuation product.

 

UniSuper performance above is after tax. Update below using zero tax (Pension phase) performance. Widens 10y UniSuper active outperformance to 2.1% (11.06% vs 8.96%).

Timeframe | UniSuper HG | UniSuper GCA/GEO tilt | ETF (60% Intl) | ETF (40% Intl)
3y 9.99% 12.00% 8.17% 6.87%
5y 11.22% 12.52% 8.95% 8.35%
10y 11.06% not available 10.23% 8.96%

I'm not really selling the passive direct ETF approach am I. Those boffins at UniSuper appear to know what they are doing.

 

Apologies for continually replying to my own posts. Editing appears to timeout after a period.

There are a couple of issues with the data above.

1) Vanguard Portfolio builder was using calendar year vs UniSuper using 30 September - 30 September
2) I'm not sure how to best compare performance. My first post used Super phase performance which would be net of both income tax and deferred CGT. The second post used Pension phase performance figures which are tax free.

On further thought, neither are really apples with appIe comparisons. The ETF structure would benefit from compounding of deferred CGT but would still need to pay taxes on yield and any capital gains reported within the ETFs, so the real comparison is somewhere in between Super vs Pension performance.

After fixing the time periods to align to Sep - Sep we have

Timeframe | UniSuper HG (Super) | UniSuper HG (Pension) | ETF (40% Intl)
3y 9.07% 9.99% 7.24%
5y 10.19% 11.22% 8.52%
7y 9.95% 11.02% 8.72%
10y 9.96% 11.06% 9.63%

Timeframe | UniSuper GCA/GEO tilt (Super) | UniSuper GCA/GEO tilt (Pension) | ETF (68% Intl)
3y 10.92% 12.00% 8.94%
5y 11.41% 12.52% 9.28%
7y 10.95% 12.10% 10.64%

In every instance the passive ETFs are still trailing the active in every time period with the gap widening once taxes are paid on the ETFs yield and internal capital gains. Whether this continues in the future is anyones guess.

 

Hi Folks,

Just checking in with a couple of lessons learned since the last post.
1) When comparing Australian Shares returns against the index, it is important to factor in franking credits. Eg S&P/ASX300 Total Return Index Adjusted for Franking Credits (SPAX3F0)

Thanks to this article for that tip Large super funds struggle to match index in Aussie equities

2) When comparing any returns for pooled funds, deferred capital gains can have a big impact.
For example UniSuper International Shares has a 10y p.a. return of 13.12% in the untaxed pension phase compared to 11.98% in the accumulation phase, a drag of 1.14%
International Shares

Vanguard International Shares Index Fund on the other hand has a 12.58% total return or 12.29% after (Super fund) taxes, a drag of 0.29%
Products

That's quite a difference in taxes and deferred capital gains (0.29% vs 1.14%) and ends up going from UniSuper appearing to outperform the index to actually underperforming.



Looking at the direct ETF options, HostPlus ChoicePlus looks the lowest cost offering right now with annual fees of $378 ($78 + $180 + $20 brokerage x 6) assuming bimonthly trades.

When I compare, a simple passive IFM Australian Shares/VTS/VEU/VGS/VESG at 20% each appears to outperform even the mighty UniSuper TopCat fund. Industry funds really should be benchmarking themselves to an Index Benchmark rather than some silly Median of other funds.

Mid 2021, Vanguard is reported to be releasing their retail superannuation offering. If Vanguard sticks to the VPI 0.2% pa fee capped at $600 with zero cost brokerage, this might tilt the balance.
- Removing the 80% max in equities, 20% in single equities
- Zero cost transfer into the fund (compared to 0.11% brokerage with ChoicePlus)

 

This is what I've been waiting for. If the Vanguard super product is poor value, I will go with one of the super direct ETF products.

 

One aspect of the DIO options I hadn't realised is that they don't support partial transfers from super to pension phase. That is 100% of the direct shares/ETFs/LICs must be transferred in a single action and if you are over the 1.6M transfer cap you must first sell, realising capital gains.

Pinning my hopes on Vanguard offering at this point. It will be a killer offering if they have
- Fees that a capped across shared super and non super assets. Can they maintain 0.2% capped to $600 with superannuation compliance costs?
- Zero cost brokerage for Vanguard ETFs
- Without any silly single security limits, so for example a simple 3 ETF portfolio of bonds/domestic/international is possible
- Supports partial transfers from super to pension phase

Otherwise it is off to one of the retail wrap offerings. Really want to avoid an SMSF.

 

Is my understanding correct that assets in an SMSF cannot be segregated between members?

For example If a husband and wife are both members of a SMSF with only one of them in the pension phase and they sell an asset, then a portion of the sale from the partner still in the accumulation phase will be subject to capital gains tax.

For couples each expecting to exceed the 1.6M transfer balance cap, a wrap might be the best option.

So many pitfalls in superannuation

 

@Hockey Monkey Where a member has more than 1.6 million in super (including all super funds) and takes a pension (again from any fund). Any SMSF they are part of can no longer choose segregated method. It was part of the cap changes introduced a few years back.

 

Thanks for confirming my understanding. Where does that leave couples planning for high super balances and wanting to avoid deferred capital gains tax in pooled funds?

Some options that spring to mind
1) Use a retail direct investment option and ensure the direct portion never exceeds the transfer cap. Difficult to manage as future returns are not known.
2) Use a separate SMSF per person (costly)
3) Use a wrap platform which allows partial transfers to pension (BT Panorama, Netwealth etc). This is probably the best option today.
4) Pray Vanguard Personal Investor solves the issue

 

It’s not really a big deal unless you had some sort of scenario like lumpy commercial assets and/or wanted to take a large lump sum before second member retired.


You still get the tax exemption for the retired member and you can select optimised tax parcels if you need to realise assets to pay pension, so as not to force unpleasant CGT on the non-pension member who would still be taxed at 10% for a long term asset. (as will any other assets of the pensioner abov 1.6M)


What disallowing segregation did is to stop washing ALL capital gains through the tax exempt account. It was more an integrity measure so that excessive CGT couldn’t be washed(cycling assets through the tax exempt segregation at time of realising gains to make all capital gains tax free even if you had a total balance of way more than 1.6M…... Boohoo, but fair enough.

 

Fair enough. I'm in a less common situation where there is a 10 year age gap between between us so there is going to be a significant period where one member is still in the accumulation phase. I guess a large portion of the pension can be funded by dividends rather than having to sell down assets.

 

For a 10 year period it is worth considering.

The gold standard for me is 'individual tax consequences' especially for someone inclined to be a passive investor and harvest the tax benefits of low turnover. Loosing the ability to segregate once a member reaches 1.6M means a SMSF can then only manage tax at a "family economic unit" level not at an individual level. Super wraps weren't around when I started a SMSF and hence I don't know much about them but they may be a better alternative for your circumstances.

How do they stack up on a fees basis? I'm assuming the new Vangaurd super option when it arrives will operate as a low cost wrap but may be limited mainly to their funds and some direct shares.

 

For two people, administration costs range from
$516 - HostPlus ChoicePlus
~$1200 - Vanguard Super (assuming a 0.2% fee capped at $600)
~$1200 - SMSF including annual audit and ATO fees
$3k+ - Wraps

The wrap fees scale with AUM, however often have caps that factor in total assets across the family.

Look like I might need to open up my mind to a SMSF.

We are quite tolerant to high growth assets with 100% equities in super. SMSF might allow us to manage sequence risk and stay in 100% equities long term by using the combined assets to fund the pension of one member via dividends.

 

New article from Passive Investing Australia that references this thread The problem with pooled funds - Passive Investing Australia

 

Hi @Hockey Monkey

It is great to see the topic getting some traction by those that will eventually be able to communicate the full extent of the issue well.

I have always felt limited in my ability to try and communicate the issue sufficiently even though for long term passive holders its is a significant issue.

The passive Australia article so far seems to have missed the elephant in the room which is how pooled super funds are required to provision for unrealised capital gains and the compounding effects of that. The article by Pat the Shuffler that is linked has done a better job on the provisioning issue. My rough calcs align with Pat that the issue could represent 100K+ foregone for a long-term passive investor.


Ps. Bit short on time but will get back to your PM soon.

 

Your run down on costs has prompted me to try and summarize my thoughts to date.

The seemingly cheep indexed options offered by pooled super funds come with an almighty tax drag because of the way pooled super funds need to provision for un-realised capital gains.

If you want to stay with a pooled fund I think the best option is to go with their highest profile active option. You are aligning your interest with theirs.

If you don’t accept that their active endeavors will outperform the costs they incur (the passive argument) and want to go the indexing route, the low-cost index options they offer are a bad choice even if the fee is zero (like REST) because of tax inefficiencies.

So, what are the options?

Direct investment options:

Lowest cost – mimics individual tax arrangements. But you are reliant on superfund rules which introduces limitations (ie 20% still in pooled funds, limited individual ETF exposures etc) and discrepancies against actual tax legislation. Rules subject to change at superfunds whim. Nothing uniform between funds so research needed into each offering especially around things like pension boosters etc. This synthetic approach to individual taxation offered by many super funds might be the best option for most people, especially if you don’t anticipate exceeding the retirement cap. But do your due diligence and understand the rules, they are fund specific and realize they are open to change at the discretion of the fund.


Retail super wraps:

Somewhat expensive but seem to be governed by actual individual taxation legislation. I see these suiting, reasonably high wealth executive decision maker types. Happy to pay the fees to get a good product and get on with other things. If these people had a SMSF they would probably pay similar fees to get trusted help managing the details of the fund.


Vanagaurd super:

No details yet but the hope is a budget version super wrap but with limitations to mainly Vangaurd products and ASX 300 companies. If the product is good, it may be more suited than traditional super fund direct investment options as the individual taxation treatment will be the real deal not synthetic equivalent.


SMSF:

Good if you have out of the ordinary requirements like commercial real property etc or for estate planning considerations etc but unless you are a financial wonk they are probably no longer necessary if you just want plain vanilla index investing (especially if Vangaurd comes through as hoped) If you are a financial wonk though they are still the bees knees and can be efficiently run for less than 1K for unlimited balances.


There is a fair bit of balancing between time, knowledge and tax efficiency in making the right decision at the moment. Come on Vangaurd! the run of the mill diligent Australian passive investor needs an efficient individually taxed super option.

 

Exactly. I'm with Hostplus in a couple of their indexed options. Feel like I could be in something better but have been waiting for what feels like an eternity for Vanguard to come through as I don't want to have to change things twice!

 

Thanks, everyone for your input into this one I am with Aus Super with Member Direct currently holding few direct holdings and few ETF's I have been wondering if worth moving my pooled allocation which is simply AU & INT Index options into member direct into ETF's - so this has been really helpful