It’s that time of year again, where super funds are strutting their stuff, and the best performers are crowing about their place in the league tables of fund returns.
But, there is a dirty little secret to this exercise – it only tells half the story. The funds boast about their performance, but mention nothing of the risks they took to get that performance.
Mostly, they focus on the performance of their “balanced” option, which is usually understood to be a middle of the road mix of defensive and growth investments.
However, here is the catch – and it is a very important catch:
“there is no universally accepted definition of what constitutes a balanced fund”.
As a Financial Planner, I usually interpret a balanced fund as 40% defensive assets (low volatility, lower returns), and 60% growth assets (higher volatility, higher expected returns), with a tolerance of plus or minus 10%.
In order to research the difference, I looked into the PDS’s of two Allocated Pensions, namely, Australian Super, and AMP (yes, the very same AMP that has copped a hiding in the press lately). I chose these two for the simple reason of, Size. They are both very big.
I then compared the balanced option in each fund, as outlined in the PDS.
Firstly, Australian Super.
According to their PDS, Australian shares can range from 10% to 45% of the portfolio, International shares from 10% to 45%, Direct property from 0% to 30%. These are all growth assets, and a quick calculation will show that it is possible the entire portfolio could be in growth assets, and thus fall well outside the definition of “balanced”, which are outlined above. (For the record, other asset classes are Infrastructure (which could be growth or defensive), 0% to 30%, private equity, 0% to 10%, credit, 0% to 20%, fixed interest 0% to 25%, cash 0% to 15%, other 0% to 5%.)
AMP, on the other hand, has a tighter definition of their balanced option. Australian shares can range from 12% to 32%, Global shares from 15% to 48%, listed property from 0% to 10%.
Interestingly, AMP has no room for exposure to direct property (which is 0% to 30% in the case of Australian Super).
So, 2 different asset allocations, with 2 different risk profiles and 2 different returns.
In both cases, the manager has wide discretion as to where the money is invested. It is well on the cards that from time to time, the investment mix will go well outside the confines of “balanced” that I outlined above.
Well regarded research has shown that differences in fund performance come down mainly to differences in asset allocation. So long as managers get their asset allocation right, they will perform well. But, if they get it wrong, they will perform badly (possibly showing negative returns). Changing asset allocations changes risk – and this is the unseen dirty secret.
