Balancing Risk and Return In Super

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Reports are trumpeting the nation’s “top” super funds having had stellar years on the investment front with 18 funds delivering returns above 10% according to a recent Super Ratings report. At the risk of channelling Donald Trump this really is fake news. The ASX All Ordinaries was up almost 8% for FY18 and the MSCI (global shares) up over 11% so any fund which had a high weighting to these two main growth asset classes would have returned close to double digit figures.

Rather than celebrating which fund has the highest return, it is far more important that super fund members realise where their retirement funds are being invested and are comfortable with this. Under the laws of investing, by definition you have to take on more risk to generate a higher return. Therefore by implication super funds with the highest returns in the Super Ratings report presumably took on the highest amounts of risk; not sure they would like it being reported that way! This by the way isn’t a bad thing, and in fact can be very appropriate for certain people again as long as they understand this.

What I find staggering, and can’t believe hasn’t received attention through the royal commission, is the use of the term “balanced” in relation to investment portfolio’s within the Superannuation industry. There is no standardisation across the industry and so what “balanced” means to one fund can and often does differ dramatically to other funds. The direct result of this is you can’t compare returns across funds because they are not the same on a risk adjusted basis, and more importantly they are confusing (even misleading) everyday people about how their hard earned retirement funds are being invested.

Take for instance top “balanced” fund performer Hostplus Balanced (MySuper) option with 12.5% return for the financial year. Great result, so what was it invested in? According to their website it recently changed to 25% in Australian shares, 28% International shares, 25% in direct property/infrastructure, 12% in private equity/alternatives and then 10% in credit/fixed interest and 0% cash. In other words 90% growth assets and 10% defensive.

As a financial adviser my understanding of balanced in relation to an investment portfolio is one that has a relatively even mix of growth and defensive assets (e.g. 50/50 or 60/40) and suits more conservative investors or people approaching or in retirement. These people are looking more for capital preservation and generating a return in a more risk conscious manner. You can see this could cause confusion, and you certainly can’t compare this result with a more conservative portfolio. So don’t forget when looking for a ‘top’ investment super fund you understand what risk is being taken on to generate that return and that you are comfortable with that and as always if you’re not sure ask questions and seek good advice!

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