It is that time of year again when the best annual returning super fund is crowned. It is easy to take the reported returns at face value, however - a quick look into the details shows some super funds are carrying greater levels of risk to generate these high returns than you may be led to believe.
To start with, I will state that it is fundamentally flawed to compare 1 year returns for an investment that is designed to give a return over a 5 to 7-year period. If ‘investment A’ performed better than ‘investment B’ over 1 year but was not as well managed leading to a lag in return over 7 years, would you still prefer ‘investment A’? What compels investors to think this way is cognitive bias, which we have touched on in another article in this edition and will expand on in the future – stay tuned!
ASIC (the Australian Securities and Investments Commission) defines a defensive asset as cash or a fixed interest – investments that are low risk and can hold their value when markets fall. Growth assets are defined as shares, property and infrastructure – those investments which give growth over time but can change significantly in value over short periods of time.
The proportion of growth and defensive investments will define an investment’s return. A conservative investment is lower risk and should provide lower returns over time. On the other hand, a growth-orientated investment is higher risk and should provide higher returns over time.
More and more, super funds have become creative with their definitions of defensive assets which has given a return rating boost. For the purposes of this article, we have reviewed this year’s top performing balanced fund – the Hostplus Balanced Fund. The balanced category requires a super fund to have approximately 70% invested in growth and 30% in defensive assets. Hostplus’ self-defined defensive allocation is below:
The self-defined defensive allocation includes assets traditionally classed as growth (infrastructure, property and alternatives), which has enabled Hostplus to claim the top spot in the ‘balanced’ category despite having 92% in growth and only 8% in defensive investments.
To be clear, we are not criticising Hostplus. We are simply making the point that when comparing super fund or investment returns, make sure you compare apples with apples. That is, super funds or investments with similar growth and defensive allocations.
There is ‘no one size fits all’ approach when it comes to choosing a super fund or investment. Key factors that should influence your decision should be your capacity for loss, risk required to meet your objectives, and personal willingness to take risk. For example, the super fund analysed above may be suitable for a younger person starting their career but the same could not be certain for someone approaching retirement.
If you would like to review whether your super fund or other investments are appropriate for you, please contact us.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings, etc., as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances.
The financial product advice or information in this document is of general nature only and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision on the basis of the advice above, a prospective investor needs to consider, with or without the assistance of a professional adviser, whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances.