The announcement by Host Plus

Hostplus is a $44 billion superannuation fund representing the hospitality industry. Last Friday it updated its product disclosure statement to highlight its “absolute discretion” to “suspend or restrict” applications for cash withdrawals.

What does this mean?

Whilst it is the members’ retirement money, it is controlled by Hostplus, as the trustee. Hostplus make all the investment decisions, and now, this includes the discretion to dictate what investment option you can choose, therefore restricting your ability to roll out your superannuation in favour of another super fund; or potentially restricting you from accessing up to $20,000 of your superannuation under the Government’s early access provision due to the COVID-19 pandemic.

Why did they do this?

Hostplus has been exposed as having a very high proportion of their members’ money invested in unlisted assets including airports, toll roads and property (commercial, retail and hospitality).

In December 2019, it held zero cash in their famous ‘balanced’ option, which by the way includes 80% growth assets.

Whenever there is a run on a managed fund or trust, the manager, in this case, Hostplus), needs to have enough cash to payout the withdrawal requests. If they don’t, they must sell assets to fund the requests. This is extremely dangerous in a market when assets have fallen as they must sell assets at depressed prices. The losers from this are those who remain invested as they will never recoup what has been sold. More on this later.

The truth behind industry super funds –

While industry super funds market themselves to only profit members under a low-cost fee structure, the reality is that the management of our retirement savings is BIG business!

Competition is fierce to gain market share of our retirement savings, and what better way to attract new money than to have exceptional investment performance!

What you wouldn’t know is that many large super fund managers ‘cook the books’ to inflate the value of their unlisted assets. Some have been found to pick and choose when to re-value their unlisted assets to represent better annual performance figures.

When are you not in control?

There are a number of factors –

• If your money is managed by a third-party making investment decisions with your money, without specific knowledge or consideration given to your goals and objectives, they are in control, not you.
• If your money is invested in managed fund structures, pooled with other people’s money.
• If you are not made aware when the manager or your adviser makes changes to your investment portfolio(s).
• If the manager has the ability to refuse your requests to withdraw your money, or freeze fixed income expected from your investment, you are not in control.   

What can happen when you are not in control?

• Quite simply, investment decisions are made without any consideration given to your goals and objectives, or the financial impact on you personally, such as tax implications or changes to your income.
• You can be at the mercy of others’ irrational and poorly motivated investment decisions. During market declines, investors often sell to cash after a market decline. Managers will first payout whatever cash is available, erasing any income/dividends normally expected. Once the cash dries up, the manager has to begin selling the assets of the fund and they will generally sell the quality assets first because that is where the value is, leaving remaining investors with the crap.
• Quite often market volatility creates buying and selling opportunities. When markets decline as experienced currently, buying opportunities often exist. Potentially not being able to capitalise on these opportunities can greatly impact your long-term returns.
• You have a reduced ability to change the course of your investment strategy to suit a change in your circumstances.

How do you take back control?

• Where possible, we advocate investing directly into assets, such as Australian shares. By owning assets directly, you effectively own a small piece of the asset itself.
• By constructing a portfolio of assets that you physically own, you can make investment decisions that will address your own goals and objectives, no one else’s.
• Whilst you cannot control what happens to investment values in the short term, you have a much better chance of controlling the cash flow. Long term, we have a good idea what dividends a company will pay, what rent a property will provide, or what income a fixed interest asset will pay, such as a bond, a term deposit, or 1st secured mortgage.
• Consider avoiding a relationship with an adviser or investment manager that allows them to make investment decisions without your consent.
• Seek out independent advice. By doing so the adviser’s recommendations will be free from all conflicts of interest leaving you in the driver’s seat.
• For many, a large industry or retail fund is a necessity. My advice here is to fully understand what you are investing in. This information is published on the fund website. Regarding superannuation, a self-managed superannuation fund can be a fantastic alternative to an industry or retail fund. As the trustee of your own super fund, you are in control of what you invest in to achieve your goals and objectives.

ASIC has a continual focus on SMSFs, particularly around fees and performance. This plays perfectly into the hands of industry funds who spruik low fees, with adviser relationships sold separately, and often inflated performance.

While I agree that a minimum account balance is essential, perhaps having complete control and flexibility over your retirement is just as important as fees and performance.

At Hewison Private Wealth ensuring our clients have control over their own investment destiny is our number one objective. For this very reason, we predominantly recommend direct ownership across all investment structures. We actively manage over 700 SMSFs on behalf of our clients, as we ultimately believe it is possible to manage your own affairs to maximise control, cost and performance.