If your fancy yourself as the Aussie Wolf of Wall Street, the chances are your super fund will give you the option of trying your hand at playing the stock market.
Super funds are increasingly offering members the option of managing their own superannuation investments with what are known as ‘member direct investment’ (MDI) options.
In a nutshell, MDIs let you pick which companies to invest your retirement savings, rather than the fund managing it for you.
Big funds already offering MDIs include QSuper, AustralianSuper, Telstra, Cbus and HOSTPLUS.
Master of your destiny
Paul Watson, HOSTPLUS’ executive manager, member and consumer choice, says his fund decided to offer an MDI because some wealthier members started leaving to the fund to set up their own SMSF.
“Our research told us people choose SMSFs because they want to invest directly in shares, and more generally because they want to be a master of their own destiny.”
Mr Watson calls an MDI option an ‘SMSF lite’. He says it is good for people who want more control, but don’t want to “go the whole hog” and set up a full SMSF.
Dangers of day trading
One of HOSTPLUS’s concerns when setting up the MDI was that members might start day trading, which Mr Watson calls “absolutely a bad idea.”
To avoid that, HOSTPLUS has a number of conditions. You can’t sell a stock on the same day as you buy it. You must also have at least $10,000 in your account to be eligible. You are only allowed to put 80 per cent of your overall balance into the option, and cannot have more than 20 per cent of your balance in one individual stock.
Another concern, says Mr Watson, is that members become emotionally attached to individual companies.
“Quite often if you look at mum and dad investors, they often fall a bit in love with the individual company or stock. It might be the supermarket where they shop or their favourite department store or their bank. So we point out that there is a lot of discipline required.”
A handful of MDI users, says Mr Watson, have treated it as a test to see whether they would like to start an SMSF. And a number, he says, have discovered that they don’t have the time or knowledge to do it effectively.
Can you beat your fund manager?
Beyond emotional factors such as desire for control, the big question is: can you do better than your super fund’s chief investment officer?
While the obvious answer would appear to be ‘no’, Alex Dunnin, head of research at superannuation research company Rainmaker, says it is not that simple.
“Research Rainmaker did into the 2013-14 super fund performance of member investment choice (MIC) options found that only one third of asset class MIC options beat their asset class index,” he says.
In other words, two thirds of the time index funds which track indexes such as the ASX 200 do just as well as professional fund managers who pick individual stocks.
“With results like this it’s hardly surprising that savvy super fund members are looking into MDI options and choosing their own stocks or using these same options to choose exchange traded funds,” says Mr Dunnin.
“The subtlety is that fund members choosing to run their super like this need to take it very seriously because the responsibility for choosing their investments will now be their problem. This is different to when they leave it to their super fund CIO.”
Another key risk with MDIs is lack of diversification. “If the member does pick shares the issue then is they reduce their diversification, which means that they are concentrating their investment risk very tightly. This returns us to what the super fund is doing for them as even if they don’t always beat their index in each asset class, what they are doing – or should be doing – is delivering diversification.”