Obfuscation is not the only barrier to making things accessible and easy to understand for the everyday consumer. Alongside the use of confusing terminology, there exists axioms, or accepted truths, that we hold to be self evident, à la Thomas Jefferson and the Declaration of Independence. There are a lot of them in superannuation, things that you’re just expected to know.
At the end of the financial year I used to get a statement from my Super provider. In this statement there would be information regarding the balance of my super, and then it would show me how many units I had and what I had bought them at, what their current value was and what their sell price was. This meant absolutely nothing to me, it was a waste of ink. All I cared about was the bottom line — how much do I have in my super?
Now, alongside not understanding what a unit was or its significance, my personal ignorance extended further, I didn’t know what kind of fund I was in, what I was investing in, or what kind of returns I was expecting and needed to fund my retirement. I was the living breathing example of what can be wrong with the disengagement that occurs in the superannuation sector. Part of the problem was no one really took the time to explain, or help me understand what was going on, everyone just kind of assumes that everyone knows what super is and what these concepts mean and what you should be doing and how it should be done and it perpetuates a vicious cycle of ignorance….
As we have discussed earlier, you do not invest in a superannuation fund, the fund is a vehicle that holds investment assets. So the concept of a unit, and a unitised fund is a very important in the path to helping people understand what is going on with their super. It is one of the axioms that needs addressing.
The basic principle of unitised funds is that the underlying assets of the fund (the investment portfolio) are notionally apportioned into units so that the total number of units equals the fund’s net asset value. This equality between unit values and assets is maintained via the creation/cancellation of units at the current unit price when unit holders (members of a super fund) apply/withdraw funds, and by movements in the unit price when the market values of the underlying assets (investment portfolio) change.
If we began a new fund and the fund had $1,000,000 in assets, the $1,000,000 of assets would be divided up into units (1,000,000 units) and distributed among the members of the fund based on their contribution. So, if you contributed $10,000 you would have 10,000 units in the fund. However, some of you may be wondering what the point is, if we are essentially creating a middle man (the unit) between our investment (money) and the assets of the fund, particularly when the value of the unit and your investment are exactly the same.
The value of a unit trust is when the underlying assets change in value (preferably increasing) over time (after all this is the point of super) and when you have more people entering the fund over time. For example, if we think back to our initial fund. Your unit price was $1 and you have 10,000 units. However, in the year to date the value of the fund has increased from $1,000,000 to $1,051,000. Your unit price is the fund net asset value (NAV) divided by the number of units (1,000,000). So your unit price is 1,051,000/1,000,000 = 1.051. If you have 10,000 units this means they are now worth $10,510 dollars. You have seen a return of 5.1%.
If someone new joins the fund, their buy price would be equivalent to the current unit price of 1.051. As an earlier entrant into the fund you got more value for money, you bought low and can sell higher. The newer entrant will have to see the fund continue to perform well to see a similar return on their investment.
With superannuation and the SG contributions that are made by our employer, the unit price and how the fund is performing is not always front of mind as the units are bought when the contribution is made, without consideration of how the fund is performing, or what the unit price is. In addition, the way returns are displayed they are usually annualised, or over a longer time horizon (e.g. 10 years). This gives performance on the fund as a whole but it does not provide you with context on how your individual super has been performing. Keeping an eye on the unit price can help you maximise the returns you see from your super provider. If you have noticed a slight dip in the unit price, it might just be a good time to make a salary sacrifice or voluntary contribution as a little bit now, can end up being a lot in 30–40 years time. In the same way that you try to buy low and sell high with shares, it is the same principle with your super. You can put money into your super when the unit price is low, knowing that as it is a long term investment, you have plenty of time to see a return on your investment.
