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Superannuation: Why being passive adds up

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Cite as: Cite as: March 2012 86 (03) LIJ, p.78

Low-fee index investments appeal in volatile times.

Innovative super funds are offering an index investment option at a fraction of the cost of actively managed options.

Low-cost investment options are offered by a small but growing number of super funds. These index options have low fees, typically between 0.05 per cent and 0.15 per cent of the money invested, which amounts to between $25 and $75 per year for a $50,000 investment. Until recently a typical low-fee investment option would have been closer to 0.8 per cent1 or $400 per year for a $50,000 investment. Over 30 years the potential savings from index investments can amount to many thousands of dollars. According to the Australian Securities and Investments Commission, a 1 per cent saving in fees over 30 years could add an extra 20 per cent to your retirement balance.

The new low-cost options comprise index investments. In sharemarkets an index measures the changes in the value of a particular market sector. For example, the S&P/ASX 200 energy index measures changes in the value of the top 200 companies listed on the Australian Stock Exchange whose businesses are dominated by the construction or provision of energy exploration activities or production, marketing, refining and/or transport of energy. An energy index investment would therefore have a portfolio constructed to match or track the components of the energy index. Investments can be developed to track the performance of any index, within Australia or overseas. To track the index the portfolio contains investments in the companies listed in the index according to each company’s relative market capitalisation. The portfolio can be automatically adjusted to ensure it keeps track with the changing composition of the index.

Each index investment can be designed differently, with some tracking a single index while others track a combination of indices, with the proportion of shares divided according to an investment strategy determined by the trustee of the super fund.

Typical super fund investments are actively managed and require the services of an investment manager who makes specific investment decisions with the objective of outperforming an agreed investment benchmark index. The investment manager identifies and seeks to exploit market inefficiencies by purchasing shares that are deemed undervalued or by selling shares that are considered overvalued. This takes time, research experience and skills and involves more staff and systems, resulting in higher costs.

Index funds do not need to be actively managed and hence are also known as passive investments. They involve fewer trades which results in lower brokerage fees and capital gains tax being incurred in respect of trades. This keeps the overall costs of index investments lower than actively managed investments.

The timing of the launch of these new index investments could be as a result of recent sharemarket volatility. Typically index investments are less volatile and their low cost will appeal to investors seeking to maximise their return during the current period of volatility. There is a growing demand by superannuants for these characteristics.

Index investments are not designed to replace actively managed investments or their associated investment options. However, with some super funds now introducing index investment options, it is clear some members want a new low-fee method of diversifying their investments in the current financial environment.

legalsuper recently added its own low-cost index investment option to a portfolio of 11 actively managed investment options. An investment fee of 0.12 per cent applies for legalsuper’s low-fee index investment option.

ANDREW PROEBSTL is chief executive of legalsuper, Australia’s industry super fund for the legal profession. He can be contacted on ph 03 9602 0101 or via



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