Australian investors need to be more informed by their super fund in relation to the risk their nest egg may be exposed to.
New research has unearthed the challenges for superannuation funds in reporting the riskiness of the investment options they have on offer.
The research, undertaken by Monash Business School’s Dr Banita Bissoondoyal-Bheenick and Professor Robert Brooks with Dr Hung Xuan Do from Massey University, also shows that what is considered a ‘balanced’ option, can vary significantly amongst super funds.
And it means that super fund members are struggling to accurately compare superannuation products.
“Australian super funds tend to use their own judgement when it comes to classifying their investments as ‘growth’ meaning risky, or ‘defensive’ meaning more stable,” says Dr Bissoondoyal-Bheenick.
For example, super funds in Australia heavily invest in infrastructure and property yet these assets are classified in very different ways by different funds.
“While some super fund managers seem to provide very good results in terms of returns, they may possibly be underplaying the risk to members,” she says.
Growth V defensive assets
Traditionally, growth assets refer to assets with a higher return and risk and refer to investments in property and shares. On the other hand, defensive assets refer to lower-risk assets with an income stream like cash through bank deposits or term deposits and fixed interest such as government bonds.
However, good returns from unlisted property and infrastructure mean that super funds are increasingly investing more in these assets. Which increases the risk of these balanced fund options.
“Though traditional finance dictates these are growth assets, the super funds are not necessarily reporting them as such,” says Dr Bissoondoyal-Bheenick.
Added to the problem is that there is no clear definition within the industry of what a ‘balanced option’ within a super fund offering is.
For example, superannuation ratings agency SuperRatings categorises a balanced option as having a 60 per cent to 76 per cent allocation to growth assets, while its competitor Chant West deems a ‘balanced’ fund to have 41 per cent to 60 per cent allocation to growth assets.
“It is suggested that a growth fund should have a 55 per cent to 80 per cent allocation to growth assets, yet we do have a number of funds with the same percentage allocation and yet the label is a balanced fund,” says Dr Bissoondoyal-Bheenick.
Which is confusing – so what does your average investor think a ‘balanced’ fund means?
“Your average investor thinks a balanced fund means a fund that has a 50 per cent split between growth and defensive assets,” says Dr Bissoondoyal-Bheenick.
“Yet this is now rarely the case.”
Consistency for balanced funds
However, with the introduction of MySuper last year, it is now even more important for super funds to be consistent with what a ‘balanced’ fund is.
“With the introduction of MySuper, most funds converted their existing balanced option into the default option,” says Dr Bissoondoyal-Bheenick.
“And research shows that most people default into the balanced option”
Dr Bissoondoyal-Bheenick’s previous research has also highlighted how the definition of ‘return’ also diverges wildly between super funds. “Many investors have no ideas on the basis or time frame on which the return is calculated,” says Dr Bissoondoyal-Bheenick.
This study also looks at whether for a balanced fund the growth to defensive asset split really makes a difference in the long term in terms of risk.
With funding from a grant from the Australian Centre of Financial Studies, the study uses a sample of monthly asset classes of 1213 investment options from January 1990 to December 2016 sourced from the Morningstar Direct database.
By redefining the investment options over this period and using a new measure of risk and return, the study looks at the difference between an investment option with a 41 per cent to 60 per cent split towards growth assets and an option with a 31 per cent to 70 per cent allocation to growth assets.
They found that over the longer term, or across the 26 year period, there was no significant difference between the balance funds.
However, Dr Bissoondoyal-Bheenick advocates caution and suggests that in the short term, there may be a big difference in terms of the risk exposure investors are subjecting themselves to.
This research was produced under the ACFS Academic Research Grant program, which has the dual objective of generating scholarly articles in good academic journals and producing knowledge which is of interest and relevance to industry practitioners and government – and making that knowledge accessible to those groups. Further details about the program and other ACFS grants, are available here.