Battle of the index funds: Australasian property and Australian resources

Welcome to round 5 of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in Australasian property and Australian resource funds. We will be comparing the cost between the lowest cost fund providers that can be summarised in the tables below.

Current as at November 2018

Current as at November 2018

Current as at November 2018

Current as at November 2018

I have included these funds together because they both incur the same costs and the results will be the same for each fund. The only difference between the two funds is that the Australasian Property fund has one more provider (InvestNow) competing for the championship ring.

Sharesies, Superlife and Smartshares all offer a NZ Property fund. Superlife and Smartshares also have an Australian Property fund, Sharesies do not. InvestNow has an Australasian (Australia and New Zealand mix) property fund. The property funds invest in listed property securities in NZ and Australia. One consideration for the AMP fund is that it is hedged to the NZ dollar so you do not need to worry about short term volatile currency movements.

With the AMP fund the top 10 companies make up 73% of the fund, only 18% of which is Australian property. If you want a stronger Australian weighting you should go with the Australian property fund from one one of the other three providers. For more on property funds click here

The AMP fund also incurs buying and selling costs of 0.05% per transaction.

Also note that the NZ Property funds top ten companies make up 100% of the fund, due to our relatively small market. It is worth noting as 10 companies is not largely diversified. The Australian property funds top ten companies make up just 52% of that fund, so a bit more diversified thanks to a larger market. The Australian property funds for Superlife and Smartshares are not hedged.

The Australian resources fund invests in various companies involved in the Australian specific sectors of energy, metals, and mining.

With these funds you should be able to accept some market volatility. They should ideally make up a small percentage of someones portfolio. They are niche product offerings that are not very diversified on their own. However, it can add some diversification to a portfolio that is already well diversified locally and globally.

A broader stock and/or bond exposure is needed for a more balanced portfolio than these funds provide on their own.

Also note that there is the potential for overdiversification. BHP Bilton occupies over 30% of the Australasian Resources fund, and it also occupies 10% of the OZY top 20 fund discussed in round 2. If you hold both these funds you could have a larger weighting in one company than you thought.

The property funds tend not to sit too high in the NZ and Australia stock markets so not too much overlap there.

THE DATA

For the data I have assumed investor annual contributions of $600 to meet Smartshares and InvestNow minimum requirements for a level playing field.

For this fund I am assuming a 6% return after costs.

For the brokerage selling fees I have used ASB Securities rates and fees. Only Smartshare and InvestNow customers incur selling fees for this fund.

The numbers on the following tables is the price of the fund if it were to be sold at that period in time.

With that out the way, lets have a look at how the fees stack up for an investor who has an investment worth $100, $1,000, $10,000, or $100,000.



INVESTING $100

Smartshares and InvestNow are not an option for the $100 investor due to their minimum start up requirements of $500 and $250 respectively.

That leaves just Sharesies and Superlife as available fund providers.

Superlife comes out well ahead, after 30 years thanks to a lower annual administration fee of $12, compared to $18 for Sharesies. The Superlife management fees of 0.49% are also 0.05 percentage points cheaper than Sharesies 0.54% management fee. The difference for periods of less than 10 years is not significant because of the small amount invested.

At this level of investing we are looking at a $1,600 difference over 30 years.

The other key difference between these two companies is if your income is less than $48,000 you will need to do a tax return for your Sharesies fund. You do not need to do this for the Superlife fund.

Also note that both these companies use a flat administration fee as part of their charges. For a $100 investor, this can make up a huge chunk of your contributions. By year 7 you are still paying 1.11% in fees with Sharesies and 0.72% with Superlife. Pretty high rates for passive funds. If you sell in year 1 your fees will be more than 2%.

Superlife also has all three funds available. The Australian and New Zealand property, and Australian resources funds Sharesies only has the NZ property fund.

Winner Superlife

INVESTING $1,000

Smartshares and InvestNow are now able to enter the championship ring though.

Sharesies is again the highest cost provider across all time ranges. Over 30 years, there is a difference in costs of over $2,000 between Sharesies and InvestNow funds.

Sharesies fund, with their admin fees, takes 18 years to get to an annual cost of investing of below 0.7%. It’s a long time, and explains their poorer performance with smaller investing amounts.

Smarthsares comes in second in terms of fund costs, well ahead of Sharesies thanks to no admin fees. This is despite Smartshares brokerage selling costs. Smartshares actually starts out behind Sharesies because of the brokerage fees and initial $30 up front cost. By year 4, Smartshares overtakes Sharesies and doesn’t look back.

The AMP property fund is a clear winner thanks to a low management fee and no administration costs. These low fees more than offset the 0.05% buying and selling costs. Note that InvestNow do not have an Australian resources offering. If you are looking for a high weighting in Australian property then this fund is probably not for you. It is more heavily weighted to New Zealand property.

With the Smartshare and AMP funds incurring a selling cost each time you sell, it is important to buy and hold if you are to use these funds. If you want to frequently sell, then these funds will not be right for you. The cost setup encourages holding your investment for the long term and discourages frequent selling.

The other interesting realisation is that the InvestNow fund is at a lower cost than the Superlife fund during the first 25 years despite having a much higher percentage fee. 0.6% vs 0.49%. This is thanks to InvestNow’s $0 admin fee. With higher investment values, Superlife catches up because their $12 admin fee is spread out over higher values. Superlife’s low management fees of 0.4% are no competition over the long term for the 0.6% in the other three funds.

Winner InvestNow for property, Smartshares for Australian resources

INVESTING $10,000

Similar results to the $1,000 investor except with the higher starting amount Superlife has overtaken Smartshares and is closing the gap on InvestNow. This is thanks to higher investing amounts and low management fee offsetting the $12 admin fee. $2,500 ahead of last placed Sharesies. The other three funds are all within $1,000 of each other after 30 years.

Winner InvestNow for property, Superlife for Australian resources

INVESTING $100,000

Australasian property $100,000.png

A few changes with $100,000 invested. Superlife starts to race away and overtakes InvestNow comfortably. Over $4,000 ahead of InvestNow and $9,000 ahead of Smartshares and Sharesies.

Much like fee structures that have flat administration fees have big impacts on low investment amounts, fee structures with higher percentage management fees and percentage buy/sell fees have big impacts on higher investing amounts. That is why InvestNow fell off the pace, because of percentage buy and sell fees being greater than Superlife’s flat administration fee.

Interestingly though, Sharesies makes headway on Smartshares. The reason for Smartshares poor performance with higher investing values is the high brokerage (selling) fees of 0.3% having a big impact on higher values. I ran some more numbers and Sharesies would overtake Smartshares with a starting investment of $140,000. With 0.3% brokerage selling fees, Smartshare funds do not fare well in portfolios with higher balances.

This time around Smartshares takes 17 years to catch up to Sharesies thanks to high brokerage selling costs on the higher investment amounts.

Winner Superlife

FINAL THOUGHTS

Superlife is the clear winner for $1,000 and $100,000 ivesting amounts for the property and resources funds. Any amount less than $1,000 and greater than $25,000 (property) or $5,000 (resources) Superlife takes the win. In fact, as the investing amounts get bigger so too does the benefit of Superlife over the other funds.

Between those amounts it is pretty close between Superlife, Smartshares and InvestNow. Of course, InvestNow doesn’t have a Australian resources fund though. When the decision is not so clear cut it is important to consider all the costs and benefits of the company you are investing in.

For example, there is just $400 separating Superlife and InvestNow over 30 years at an investment of $1,000. Although InvestNow is cheaper, it is not by a lot. Now if investing in Australian property was important to you, or if you buy and sell frequently, then InvestNow would be a poor decision even though it is cheaper. The difference in cost is not worth the downside in this example.

Sharesies never really recovers from its relatively higher administration fee, although with higher investment amounts (the opposite of their target market) they close the gap on Smartshares.

When I say winner, I mean the fund with the lowest fees. Lowest fees does not always mean the best fund for you, so please carefully consider the other features of the different funds highlighted in the introductory article of this 12 part series and make sure that in addition to low fees, the fund also matches your portfolio strategy and is easy to understand.

Next up we will look at NZ mid cap funds.

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here