Among the many issues facing Australia’s $4.5 trillion superannuation system, the concept of what constitutes a “balanced" fund is one of the most pressing.
For most super consumers, a “balanced” fund sounds like a great idea and it is usually what many people default to, either voluntarily or through a lack of involvement.
The really big problem with this is that the very concept of what constitutes a “balanced” fund has been changing over the years and it is far from being a “like for like” label when it comes to comparing different super managers.
No Definition of a ‘Balanced’ Fund
There is no legal or industry-standard definition of what a balanced fund is, which means it has limited usefulness when it comes to understanding what investments or even volatility or risk profile your superannuation fund has.
When you look inside the “balanced” box, you might find anything from an old-school 60/40 shares bonds mix all the way through to a fund with 80% growth assets.
There may or may not be any property, the amount of cash could vary widely, as could the amount of foreign and domestic shares and the presence of unlisted assets.
Balance Can Be Costly
With Australians often disengaged with their super until they hit fifty when they belatedly start to concentrate on how they will live after retirement, that level of variation within what constitutes a “balanced” fund can be a really dangerous cocktail that can leave some people with a needlessly small balance.
In the past year growth funds earned around 10% and capital stable funds with a high amount of cash and bonds were closer to 6%, so even over one year the difference between different fund labels can be considerable.
However, there is a lot of variation within the same label, with balanced funds varying so widely in their asset allocations.
It is by no means impossible to see a scenario in which two balanced fund investors who put in the same amount into super could end up with hundreds of thousands of dollars of difference with their final balance.
Marketing Pushing for Higher Returns – and Risk
With the big funds all competing with each other by spouting their latest balanced fund returns, there has also been an inevitable rise in the risk assets within the balanced label as the pressure not to underperform in any given year increases.
Many of the funds that are now labelled “balanced” would have worn the “growth” label five years ago.
This can be dangerous in another direction as well—a pre-retirement member who thinks they are in a low-risk fund could get a nasty surprise when it records a negative return due to having a high proportion of growth assets at a time when it is difficult for that member to make up lost ground.
By juicing up returns – usually by upping the overall percentage of shares and/or increasing the level of international shares – these “balanced’’ funds might be increasing returns but they are also increasing risk.
Running Funds to Suit Everybody
All of which is one of the great problems of superannuation—running funds that need to meet the needs of people of various ages, needs, and stages of life.
Ideally, super fund members would be so engaged with their super fund that they could change asset allocations and risk levels to suit their individual needs but in the absence of that we end up relying on that “balanced” approach.
However, when frequently used asset allocation terms like conservative, balanced, growth or high growth are used with no true comparability between the use of these labels between different super funds, then consumers can rightly claim that they are confused.
Time for More Rigorous Classifications?
There are some signs of hope with analysis by groups like Morningstar applying a more rigorous classification system which interestingly puts most large funds balanced options in its “growth” category.
With most super funds still advertising their wares through past performance – ironically along with the warning that past performance does not indicate future returns – the trickle up effect for balanced funds will continue.
To make comparison easier and to avoid confusion, it is long past time for the super industry to regulate itself and introduce industry wide classifications that add some specific meaning to terms such as conservative, balanced, growth and high growth so that super members have a more specific idea of where one of their biggest assets is invested.
Until then, the best remedy is to do some personal detective work into the specific fund you are a member of and ensure not only that it has a good long-term performance and low fees but also get an understanding of its asset allocation and risk profile and whether that suits your particular needs.
