Understanding the new super environment

BTFinancial Group will use this year’s Conference of Major Superannuation Funds (CMSF) to reinforce the message that, for all their faults, managed funds represent a better and more predictable bet for most investors.

Utilising data released earlier this year, BT Financial Group senior economist Tracey McNaughton will tell CMSF delegates that in the new environment created by choice of superannuation fund, managed fund investors are likely to act more rationally than their direct equity counterparts when choosing to sell investments.

The research to be used by McNaughton was undertaken by BT Financial Group and the University of Western Australia (UWA) and is unique in the sense that it spans 30 years and covers more than 850,000 retail investors and close to 7 million daily transactions.

The research says that the advent of choice of superannuation fund has focused attention on how that choice will be exercised by investors and makes the point that it is well recognised that individuals are prone to systematic biases in evaluating the relevant factors.

“However, the scope of the biases remains poorly understood,” it said. “Particularly in the market for managed funds.”

Looking at the impact of choice of superannuation fund on the decisions being imposed on people, the study said: “The difficulties people experience in exercising superannuation choice effectively is not a sufficient argument against choice because well-structured interventions may largely ameliorate, if not eliminate, the problem.

“Understanding how investors’ characteristics affect their trades in managed funds is a crucial step in designing appropriate interventions,” it said.

The research concludes that gender, wealth and age influence the kind of funds investors select and their subsequent trading behaviour.

The research also looks at the so-called disposition effect — the tendency for individuals to sell their ‘winning’ investments and hold on to their ‘losing investments’.

However it says that, contrary to previous research into the trading behaviour of direct equity investors, the results show:

* that there is now evidence of the disposition effect among managed fund investors at the aggregate level;

* that older women in aggregate hold riskier portfolios than men; and

* that wealthier investors are relatively more prone to suffer from the disposition bias than other investors.

“Managed fund investors in aggregate tend to sell their winning investments less than they will their losing investments,” it said. “Indeed, the ratio of winning sales to losing sales is just 0.6 per cent.”

It said that the key issue in the advent of superannuation choice has been how it will be exercised in circumstances where it has been argued that people are best placed to make decisions affecting their own welfare.

However, it suggests that important considerations indicate superannuation choice is not an unqualified benefit in circumstances where people still believe the Government will provide a safety net and that they are often overwhelmed by the decision to make a choice.