In This Issue
Just how risky is a ‘Balanced’ Fund?
By definition, to be invested in a balanced portfolio is to be invested in a mix of growth and defensive assets – shares and listed securities for capital growth and dividend income, and defensive assets such as bonds to pay a stable, fixed rate of return. In principle, it’s a great mix.
Traditionally, balanced funds have an allocation of around 65% – 70% to growth assets, with a corresponding allocation of 30% – 35% to defensive assets, consistent with the objective of providing a mixture of growth and income. This mix is designed to have the defensive portion helping to offset the risks associated with the growth portion – all pointing to the ‘balanced’ nature of the portfolio.
To the ordinary person, therefore, the term ‘balanced’, might suggest a secure and thoughtful place to invest – but as with many things, we need to look beyond the label.
Many superannuation funds (particularly industry super funds in their default pre-mixed balanced options) may actually have an exposure to growth assets of 80% to 90% – with allocations of as much as 30% to 40% in direct and unlisted property being presented as defensive or ‘alternative’ assets.
Property is not a ‘low risk’ asset class; it is a growth asset which can carry significant investment risk, and should not be mis-categorised.
So, what makes this distinction so important?
Funds with a higher exposure to growth assets will obviously perform better in good times than one which has, for example, a 65% exposure to growth assets. But when the market corrects, as it always does, the fund with the highest exposure will be subject to the highest falls – leaving the investors to wonder why their ‘balanced’ portfolio has been so adversely affected.
In other words, one alleged balanced fund with a very high growth assets exposure (and associated risk) can shoot the lights out when compared with a more conservative (and true to label) option. Putting both in the same category is misleading.
Comparing performance between balanced funds is not as simple as ranking percentage returns for a given period.
Experience also tells me that many industry super funds (whose 10-year returns in their ‘balanced’ options have dominated the performance charts on the basis of the inflated valuations applied to their direct and unlisted assets) are very likely to have a performance reversal in the next financial year. As a result, the returns of exposed ‘balanced’ fund members (who are often unwittingly in high growth asset allocations) will be adversely affected. We are already beginning to see these results being played out in returns on unlisted property trust holdings.
By way of adding to the confusion, we now have the “Superannuation Performance Test” regulations, designed to protect super fund members by calling out failed performance and alerting them to consider moving to an alternative, supposedly better performing fund. But the returns-based testing methodology applied by the regulator is fundamentally flawed.
Rather than getting carried away with pointless measurements to create an APRA ‘My Super’ comparison table, and the frustrating practice of hiding behind percentage returns within selective timelines, the government needs to mandate the definitions and asset allocations for the labels ‘Defensive’, ‘Moderate’, ‘Balanced’, ‘Growth’ and ‘High Growth’ super fund investment options.
This would be a far more sensible and useful way to assist with “comparing any pair”!
We do not use ‘pre-mixed’ investment options
The point of the discussion around balanced investment options and other asset allocation labels is that generally, these funds are single or pre-mixed investment options, managed by a superannuation fund trustee, or a fund manager specialising in managing ‘multi-sector’ investment options. This means that the investment manager determines the asset allocations and how wide of the mark those allocations can range at any given time.
At Marinis, we do not recommend the use of ‘pre-mixed’ investment options in portfolio construction.
In keeping with our investment philosophy* we use individual sector funds (managed funds which meet our research criteria, and which represent the broad market sectors ie, domestic and international shares, listed property and fixed interest, both domestic and international). The weightings in each sector and resultant allocation to growth and defensive assets reflect the identified risk profiles of our clients.
Our approach avoids reliance on a single investment manager to determine the asset allocation ranges for each asset class, or the valuation basis for the assets in your portfolio.
For example, if your risk profile corresponds with a ‘balanced’ profile, your portfolio will reflect a 65/35 ratio of growth versus defensive assets. The portfolio will have the flexibility to be easily rebalanced so that it always remains true to label, appropriately diversified, and consistent with your risk expectations.
We believe in spreading risk by selecting good quality assets from a broad range of classes and investment management styles. It is only by understanding the goals and expectations of our clients, and your tolerance for investment risk, that we are able to recommend an optimum investment strategy to achieve these goals.
And One More Thing:
I will be writing to the Federal Minister for Superannuation The Hon. Stephen Jones MP to highlight the issues above. I will provide a link to that letter and any response in future editions of eGrow.
Don’t Forget: https://www.cyber.gov.au/protect-yourself
*If you would like to revisit, or know more about the Marinis investment philosophy please click here
As always, if I or any of the staff can be of assistance, please don’t hesitate to contact us on (08) 8130 5130 or via firstname.lastname@example.org
Theo Marinis CFP®, B.A., B.Ec., CPA., MCIFAA