Here's the picture: You work in a busy call centre.
The switchboard is going nuts. Nearly all the callers say something along these lines:
"I've set up my buckets, opened an ING account and now I need transfer my retirement savings to the Hostplus Indexed Balanced Fund".
That's happening right now -- hundreds, if not thousands of well-meaning but financially naive people are switching their super based on something they read in a book.
Spare a thought for the staff at Hostplus. Then, take a moment to worry about all the people being flogged a sub-standard product (probably including some of your friends), putting their retirement plans at risk.
People get screwed over by crap advice all the time. It still shits me though, so I'm hoping you can share this with everyone you know. You could change their way of thinking and save them a lot of money.
Here's my take at the outset: Stay away from the Hostplus Indexed Balanced Fund. It's a terrible option for most people.
I'm not the only one saying that either. More on that later, but first, let's go myth busting.
Myth #1 Hostplus Indexed Balanced is Balanced
Y'all know what a balanced fund is -- you were taught the concept in primary school. It's about not putting all your eggs in a single basket.
When it comes to your super, unless you're happy taking buckets of risk, you want a lot of eggs in many different baskets.
For most people (around 90% of the population never make an investment choice inside super) here's the standard omelette recipe:
A spread of shares (both Aussie and international), property (commercial, industrial and retail), bonds (both Aussie and international) and some cash. Most funds will spice it up a little with some infrastructure and alternative assets.
Here's what a properly diversified balanced fund might look like:
And now, (drum roll......) here's the Hostplus Indexed Balanced Fund:
Does it look very 'balanced' to you? Didn't think so.
That's because it's not a balanced fund at all. It's a high-risk share fund, with a bit of cash and fixed interest thrown in to make the pie chart look less scary.
Myth #2 Hostplus is Cheap
Going cheap isn't always a great idea. Don't believe me? Pop down to Aldi and buy a $7 toaster. Report back in six months.
Where were we? Oh yes, Hostplus.
Hostplus charges an investment fee of less than 0.02% for the Indexed Balanced Fund. That's less than twenty cents for every $1,000 invested.
Rather than look at what you get for your 20c (not much, really), let's look at what you don't get. Don't forget -- we're talking about the money you'll need to live on when you're retired.
- Currency management
- Tax management
- Developing markets
- Small companies
- Tactical asset management
There's a whole lot more I could list, but hey -- what do you expect for 20 cents?
Truth be told, Hostplus itself is far from cheap. It has around one million members, and those members cost a stack of cash to look after (the average balance is low compared to a lot of funds).
So every year, Hostplus charges members around $100 million in administration and investment costs.
And those costs aren't being shared equally. They're being loaded up on the members who don't make a choice (in the normal Balanced fund) to subsidise the members in Indexed Balanced.
Think that's going to continue?
Nah, neither do I. One day soon, Hostplus will have to start allocating costs more fairly. Either that, or the 900,000 members in the Balanced fund will riot and demand the CEO's head on a stick.
Myth #3 Hostplus Indexed Balanced is Safe
Go back a few lines. Check out that pie chart again.
75% of your money is in shares -- half Australian, half overseas. You're getting a big exposure to the US of A.
Now the Dow Jones has been on a roll lately, trading at its highest level ever. According to The Trumpster, that's because he's a genius. According to nearly everybody else, it's overvalued.
Look, I'm not one of those gloom and doom merchants that tells you to sell all your shares and hide under the mattress. But sooner or later, the US market (and everywhere else) is going to tank.
So if you're in a high risk option - like the Hostplus Indexed Balanced Fund (according to the PDS, they don't come much risker) prepare for the pain.
Myth #4 Index Funds Perform Better
Did you know that breakfast is the most important meal of the day? Most people do.
Nobody believed that until a bloke called Kellogg got churches to start preaching it.
You see Kellogg (a devout man) believed that mankind's biggest sin was masturbation. He must have been a blast at parties. According to Kellogg, only eating Corn Flakes could stop it.
Stay with me here...
Nowadays, everybody believes that breakfast is important, despite the lack of evidence. (There's never been a scientific study into the Corn Flakes and masturbation link as far as I'm aware).
It's a bit like index funds. The biggest promoters of index funds are the people who sell index funds. They've been throwing dollars at their cause for so long that people are starting to believe it.
Even one of Australia's biggest (note - not the best) fund managers, AMP, has given up managing money properly and is switching to indexing.
I'll explain elsewhere why the index argument can be shot down, but for now, rest assured there's no shame in paying a fund manager to give you decent returns. The good ones do, and the really good ones smash the market regularly.
The Naked Takeaway
I could keep going for a while yet and I haven't even touched on how moving to Hostplus could stuff up your insurance cover. I might look at that another time.
If you think I'm making sense, then please share this. It might stop your friends from doing something silly.
Still not convinced? That's fine, don't take my word for it.
Here's what Hostplus CEO (David Elia) and Chief Investment Office (Sam Sicilia) said a couple of weeks ago when they were asked about cheap index funds:
Both Mr Elia and Mr Sicilia also don't buy into trends around passive management, which tracks an index.
The Hostplus chief says active management plays an important strategic role for his fund in outperforming the equities market but also allows it to form strong defences should markets turn south.
"We believe in active investment management - that sets us apart from many of our peers who are much more invested in passive-style index products".
Happy (and safe!) investing.