Alex Jamieson: Are industry super funds headed for an asset allocation disaster?

Superannuation funds within the retail and industry super fund market usually offer 'balanced' or 'growth'-based investment options. Alex Jamieson, leading financial advisor and founder of highly respected financial advisory, AJ Financial Planning, explains what this means and whether these funds are actually all the same.

Funds should be categorised by assets

On 31 May 2017, Vanguard's Balanced Index Fund reported an allocation to growth-based assets of 49.9 percent.

"Over the years, my interpretation of a balanced profile for an investor has been fairly similar to Vanguard's 50/50 position; that is, one's holdings are fairly equally split between growth-based assets and defensive assets. The question is, are industry super funds applying the same principle or, more importantly, are they headed towards an asset allocation disaster," Jamieson said.

Fund categorisation isn't always straight forward

"Recently I reviewed Catholic Super's asset allocation and I discovered something interesting. Delving into the target's asset allocation for a 'balanced' fund I noticed a 70 percent growth-based assets allocation. This is a massive divergence from Vanguard's recommendation, not to mention any number of portfolio theory textbooks. It made me wonder, has Catholic Super's marketing department 'mislabeled' this investment option?"

When reviewing Catholic Super's strategic asset allocation, Jamieson also noticed that growth-based exposure was sitting at around 74 percent, if you included the 'defensive alternatives'.

"If these alternatives are removed, it pushes the exposure up to 81 percent, as it is unclear exactly what these might entail," Jamieson added.

Australian Super's 'balanced' option appears to be in similar territory. When Jamieson looked at the mix of assets, if credit, fixed interest and cash are included as defensive assets. This means the growth-based exposure sits at 73 percent.

Neither Catholic Super nor Australian Super provide a date reference for these asset allocations on their respective website, so these percentages may have changed since they were originally published. It's reasonable to assume, however, that both Australian Super and Catholic Super are taking a tactical asset allocation position but have they reasonably exceeded these boundaries?

Under the hood of performance

For years now, industry super funds have been reporting strong returns above those of their peers. The question must be raised, therefore, have these funds' marketing divisions been pushing up returns by 'mislabeling' investment categories in order to attract new investors? Of greater concern, though, is whether these funds are potentially exposing investors to far more risk than the labels may imply?

"So, let's go back to the Vanguard Growth Index Fund reported on 31 May 2017. The index presently sits with a maximum range of exposure for growth-based assets at 72 percent," Jamieson said.

"You might ask, does having a larger exposure to growth-based assets matter? Doesn't it mean higher returns for the members of the super fund and everybody is happy?

"The short answer is: volatility and market downside. These factors make it very difficult for an investor whose risk profile is balanced to ensure they are matched carefully with the right exposure for their risk tolerance."

So, who has got it right? Vanguard, or the industry super funds? Which asset allocation really is 'balanced'?

"As Warren Buffett famously said, 'Only when the tide goes out do you discover who's been swimming naked," Jamieson commented.

The bottom line

"Super is personal," Jamieson said.
 

"The right fund for you is the one that matches your risk tolerance, values and time horizon. Always look beneath the headline returns to understand what sits inside a fund. The decisions you make today will shape your financial security for decades, which is why it's always best to seek professional advice before making changes."
 

About Alex Jamieson

Alex Jamieson is the founder of Melbourne-based advisory firm, AJ Financial Planning. With a firm belief in responsible investing, Alex crafts investment portfolios for clients that not only meet their financial objectives but are also sustainable and match their ethical values.

A highly respected financial advisor, Alex is considered one of the country's leading experts on all matters financial planning, investing and retirement.

http://www.ajfp.com.au/