This recent article in the Australian Financial Review provided an insight into how some retail and industry super funds are marketing their products as “Balanced” when in reality the profile of the funds looks more like a “Growth” product.
This is misleading in the extreme and something worthy of exploring given a “growth” portfolio carries more risk but will, all things being equal, outperform a “balanced” alternative over the investment horizon more often than not, yet “growth” is marketed as “balanced”. This has escaped media attention…until now.
The article further supports a fact one of our advisors established earlier this year when a client questioned the performance of the balanced portfolio we constructed and managed with the returns of a “balanced” super fund, which were superior. Some investigative work revealed the “balanced” super fund was indeed “growth” oriented and more appropriate for the risk tolerant investor. It was hardly comparing “apples with apples”.
In the low interest rate environment that seems like has been around forever, the returns investors are able to generate from the defensive asset class have been front & centre as a topic for discussion. The income investors have been able to generate from this asset class has been belted, which has seen an increase of flows into “passive” or index-based investments as investors chase better returns. However, this “passive” index-based investing artificially inflates the share price of a company whose fundamentals otherwise might suggest they are not performing quite so well. When global interest rates normalise as has started to happen, all things being equal, companies with poor fundamentals will get sold off, and quickly. To quote one of the greatest investors in history, “only when the tide goes out do you discover who’s been swimming naked”.
Back on the article…it lists the top 60 performing super funds with an asset allocation of 61-80% into growth assets i.e.; Australian & international equities, commercial property and infrastructure assets. Some of the funds listed are designed to “hug” the index to keep administration costs down. Fees are an emotional issue and under the spotlight given the revelations provided at the ongoing Royal Commission.
The problem with index hugging is it involves no active stock picking but rather, capital is deployed into each company comprising the index in line with their weighting thereof. As indicated above, this can artificially inflate the share price of a poor company you might otherwise not invest in.
The returns shown in the article are net of investment fees & tax but before administration fees and are provided over 1, 5 & 10 years. The median return of those top 60 “growth” super funds over 10 years is 6.6%, before admin fees.
I thought that was an interesting number as the portfolios I’ve seen since I started with The Investment Collective stacked up very well against that 6.6% median return for “growth”.
Digging into PAS, our portfolio management system, the first growth profile I randomly selected has achieved a return net of fees since inception of 11.26%, the second 7.68%, the third 13.58%, the fourth 7.89%, the fifth 7.54%, the sixth 8.31%, and the seventh 13.96%.
I then wanted to “compare the pair” with how some of our truly balanced portfolios have performed since inception. The first portfolio has returned 6.18% net of fees, the second 7.35%, the third 7.27%, the fourth 7.25%, the fifth 6.47%, the sixth 6.82%, and the seventh 6.55%.
Whilst the social agenda these days in this instantaneous world concentrates on the “here & now”, with investing, long-term returns are what matter most. The effect of compounding returns on wealth accumulation over time warrants the need to take a long-term view.
We actively manage client portfolios as many of you already know. Whilst we don’t get it right 100% of the time, I’ll let you make your mind up on “comparing the pair”…especially so given we provide full transparency around what we do and how we do it.
Please note that this article provides general advice. It has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today.