Thanks to the strong rise in the popularity of self-managed super funds (SMSF), a number of industry funds are attempting to lure members back with member direct investment options (MDIO), but it could be a mistake.
The returns from industry fund Hostplus' MDIO option – Choiceplus – over the past two years are negative 5%, compared to around 19% cumulatively for Hostplus' balanced option according to Hostplus chief information officer Sam Sicilia. By comparison, the ASX has returned roughly 12% cumulatively over the same period.
MDIO allows members of super funds to select their own stocks, rather than leaving it up to the fund manager.
That suggests that Hostplus members attempting to beat the market through picking their own stocks – and it isn't working – although it isn't clear why.
UBS head of product and proposition, platform solutions group, Jennifer McDermott has told Financial Standard Australia, "When a member has to make an investment switch, they have to move money out of their investment options, come across and start paying fees before they even start seeing value in the MDIO".
"What we can see from member behaviour is they come in and transfer the minimum amount of cash, have a look around for a month, and transfer that money back."
"That's disrupting their investment process. It's a really inconvenient way for members to experience the value."
Like plenty of research has shown, retail investors generally have the worst timing when it comes to buying and selling stocks – usually selling stocks at the bottom and buying in near the top – and it could be a big reason why HostPlus's MDIO is underperforming.
Another reason is that switching all of a members' funds into the direct investment option means they are no longer as well diversified as a balanced fund. A balanced fund not only invests in ASX-listed companies, but also many other asset classes including international shares, domestic and offshore fixed income (bonds and fixed interest securities), infrastructure and cash.
That provides protection when equity markets are falling – such as today's 2% plus crash in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
A lack of investing experience, bad advice, higher fees and an unprofessional approach such as over-trading are also likely to blame for member direct investment options underperforming.
Foolish takeaway
As we wrote last week, generally, the larger the SMSF, the better it performs, usually because the trustees have experience in making tough decisions and transfer that skill to the running of their SMSF.
The lesson is that if you want to try member direct investment options (MDIO), make sure you have the right advice, the right investing strategy and the right temperament to make those investing decisions. If you don't feel confident, leaving your funds in the balanced fund is likely to be a better option.
