Superannuation is big business as you may well know, with mandatory contributions at a current rate of 11.5% and many doing more via salary sacrifice, that can be tax effective. The industry is now worth over $3tn (fourth largest superannuation industry globally) and is expected to continue to grow exponentially.

Hopefully you have or will have a nice little nest egg at retirement however please note:

• it is taking longer to grow wealth in real terms that takes into account inflationary factors (this includes the cost of leverage inside investments, a projected increase in inflation spikes that can be expected over the next 10-15 years, and general erosion of value in present value terms)
• many do not review their (default super) accounts until much too late
• check your balance to ensure it is sufficient to meet future income needs that are required for a longer period of time
• it is still wise to have a contingency plan, such as home equity, cash or other

SMSFs

Self Managed Super Funds (SMSF) are one of the superannuation structures available. Confidence in that sector has seen the value surpass $1tn for the first time (ATO, 2024).

According to the CEO of the SMSF Association Peter Burgess, “this is testament to the value of ‘choice’ and benefits of SMSFs. They can provide a much higher level of control and flexibility which in turn empowers members and encourages a greater level of engagement. Dedicated advisers have played a critical role in guiding members through their own superannuation journey.”

Burgess said the sector had thrived despite a long-running campaign that asserted that SMSFs are costly, complicated, and deliver lower investment returns compared to their APRA-regulated counterparties.

“These were criticisms that the sector – and the Association – took extremely seriously, so it was gratifying when research commissioned by the SMSF Association showed that an SMSF with net assets of $200,000 can be competitive in terms of costs and investment returns compared with APRA funds,” he said. (Source Financial Newswire November 2024).

However SMSFs are not fit-for-all.

This can be seen at a fundamental and compliance level where trustees do not adhere to their Financial Investment Strategy (FIS) and deviate from their self-prescribed risk parameters. Ensuring trustees evaluate their time capacity and obligations will help meet the rules that are designed to ensure sustainability of future retirement monies. An ongoing commitment is required. As such many SMSFs are not only being set up but equally shut down as a result of non-compliance, in some cases realising material underperformance.

Government intervention in Super

In a small corner of the superannuation industry, the government is actively seeking to significantly reduce their superannuation pension liabilities. This may apply to members in military, army, navy and other similar organisations (e.g. police) who may be entitled to a generous CPI indexed income streams. Recent letters to members show a mandatory reversion date of superannuation benefits to lump sum that is lower than the net present value of the income streams. If you do not make an election by the prescribed time, the government will make a lump sum nomination on your behalf. In the ones that I have seen, the difference in value is up to $300,000 on conservative estimates.

Portfolios

Only the best multi-sector diversified funds work due to flows and scale, sometimes regardless of manager expertise and experience. Sector specific investments and managers are better placed. New investment opportunities have emerged, some have been dismal ( such as the ASX S&P Small companies total return has achieved 3.7% pa last 5 years compared to the larger cap ASX200 that has returned 7.26% pa, source Morningstar 30 June 2024). And wrap platforms that enable investment access are better, enabled through improvements in technology and cost efficiency.

News from the US. The US equity market now represents (or more accurately dominates) nearly 70% of the MSCI World Index. Earnings, innovation, scale, capital markets and spread have helped this to occur. If you have not held US equities whether it is a managed fund, ETF or direct, your portfolio is likely to have underperformed relative to most indices. We think the US is worth investing in outside of the mega tech companies and is fairly valued in aggregate terms.

The other opportunity we see is in private markets (private credit, private debt for example) that advisers and sophisticated investors by definition have access to. Adding alternatives to the portfolio can increase returns and reduce risk.

Good holistic advisers add value, follow the principles of finance, and ensure retirement wealth opportunities are maximised.

Uncertainty

We think some social and economic aspects have increased uncertainty however you may feel free to disagree.

As mentioned earlier, inflation is a bit sticky in parts (I’m using the trimmed mean). Yes it has fallen from 6.6% at end of 2022, to 5.6% in 2023 and 3.5% annualised in 2024 (however it has increased since the last quarter). Energy prices and services inflation remain high, however goods inflation has dropped markedly. Electricity subsidies have masqueraded the true reading of inflation since 1 July 2024 so can be hard to tell in the short term.

Real wage growth has also been affected by inflation. Real wages grew 0.7 % through the year to the September 2024. This is the strongest rate of real wage growth in four years. In contrast, real wages went backwards by 3.4% pa since June 2021 (source ABS and Australian Treasury Dept. 13/11/24).

New factors like US tariffs, balancing our relationship with our largest trading partner China and managing fiscal settings are evolving. That is uncertain but probably not as bad as the media likes to portray. There are no tariffs on services only goods, and only some goods not all goods will apply.

As such, cash and liquidity is important and a more defensive or preservation style may need to be considered depending on your time frame and goals.

Secularly, investment returns from asset classes should be a little lower than historical averages. For example, the ASX 200 is forecast to be 7.7% pa next 10-15 years, lower than 8.0% than we have seen for the past 10-20 years (source JP Morgan November 2024)

Inflation shocks are expected to increase to 15% of chance (that is 1 in every 6 years on average) although recession shocks should remain the same (10% or 1 in every 10 years).

Hopefully a recession is not around the corner and appears unlikely for 2025.

For More Information

For assistance or more information, please contact James Cavanough at Lantern Advisory on (07) 3002 2690 or via jamesc@lanternadvisory.com.au.

*The writer has post graduate qualifications in Investment Finance and is a long term contributor to the SMSF Association and Alan Kohler’s Eureka and Intelligent Investor reports that are well regarded.