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. But what does this really mean; and aren’t these funds all the same?

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

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?

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% 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, I also noticed that growth-based exposure was sitting at around 74%, if you included the ‘defensive alternatives’. If these alternatives are removed, it pushes the exposure up to 81%, as it is unclear exactly what these might entail.

Australian Super’s ‘balanced’ option appears to be in similar territory. When I looked at the mix of assets, if credit, fixed interest and cash are included as defensive assets, then growth-based exposure sits at 73%.

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?

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%.

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.’

Active Managed Funds…Do they really work?

These days a lot of people seem pretty interested in Managed Funds, with their flashy marketing and slick offices…. but do they really offer real value for money?

A lot of the managed funds promote that they are “actively managing your capital”…. but are you getting a true to label experience. To find out, let’s look at the below analysis:

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The is an extract from 3 large fund managers which operate in the Australian market place.  Each of the fund managers hold well over a $billion in management and are household names.  The exact above looks at their top 10 holdings.  

When I look at this the following questions come to mind:
1. Are they significantly different?
2. If you hold for example 9% in WBC or 5% in WBC is this really going to make a material difference to the portfolio return as you still hold the position?

In most cases, managed funds hold well over 100 positions, but another question I ask is do they really need to hold this number of positions to be considered diversified?  Portfolio theory states with around 19 positions you are 95% diversified. Therefore when reviewing many of the managed fund portfolios, is it a case of diversifying your risk away and also diversifying away your return?

Below is a list of the top 20 companies by market cap in the Australian share market.  The interesting thing is when you look at the market weighting compared to the list above you are not really seeing a great deal of difference. They did however leave out CSL which only went up 58% in the past 2 years…I guess this was an “active” choice…. but outside this they look pretty similar!

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So if you are thinking about a managed fund, make sure if you are selecting an “active” one that you are actually getting a true active fund – rather than simply an overpriced index fund!

Alternatively, we find with many of our clients that it may be more appropriate to build your own direct equity exposure if you are looking at this sector.  This, in some cases, can be far cheaper and you can also ensure that your assets are in fact more actively placed in line with your values set too.

Like most things in life, not all managed funds are the same and it is important that you seek professional guidance from a suitably qualified Financial Planner before jumping into this sector – and we would recommend our friendly expert team at AJ Financial Planning.