(03) 9020 2905PORTFOLIO POINT: Legislators need to step in to force fund managers into “truth in labelling” to help super members. Because the existing schmozzle really isn’t a hard fix.
That two funds calling themselves “balanced” super funds can have performance statistics that suggest they are not just from different performance cultures, but quite possibly from different solar systems, is a constant source of amazement to most.
But worse, it’s an ongoing source of confusion for the average superannuation member. Despite the warnings, some people do chase one year performance data when picking a new super fund, completely oblivious to the underlying reasons for its short-term outperformance in the first place.
“Why did my balanced fund do so much worse than the others in this table?”
The conventional wisdom – and what is reinforced by the mainstream press – is that it’s largely about management skill. The general perception is that one super fund did better than another similarly named super fund because one fund had superior stock picking skills.
Most super funds (particularly in the industry, corporate and government fund space) are actually not stock pickers. They outsource that function to investment houses. In essence, most managed fund super funds use “the MLC approach”. They “manage the managers”. They usually have several investment houses operating and managing their clients’ funds for them.
Those managers are then the stock pickers. And sometimes they’ll get it right and sometimes they’ll get it wrong.
How well one fund does in relation to another is – the degree depends on which source you read – far more heavily impacted by what asset allocation is choosen for the fund, which is something fund trustees usually maintain control of. That is, what percentage allocations are they going to allocate to cash, fixed interest, property and shares.
Asset allocation for each fund under a super trustee’s charge is a bigger determinant of performance. That is, in years when shares do brilliantly, it stands to reason that funds that have more of a weighting to shares will have done better than shares who are more heavily invested in cash. No matter whether they actually got the individual stocks right. And vice versa.
That is, up to 80% of returns are from the asset class allocation than actual stock picking.
Grab a bunch of funds that call themselves “balanced”. Check their performances and you will probably find that even though the “label” is the same, the performance figures could be as much as 5-8 percentage points apart for a one-year period. (It’s likely to be far less over a 3 or 5 year period.)
If you want to find out why, you need to look at what they are invested in. For the 12 months to June 30, 2010, you might find that one of them has as much as 75% of their money in “growth” assets of shares and property. And that might have beaten a competitor by the length of the Flemington straight, because the second super fund had only 50% of member money in shares and property. In the down years of 2007-08 and 2008-09, the performance was probably reversed. Even if the fund with 50% shares picked great shares in which to invest, it’s unlikely to beat the fund with 75% allocation to shares.
But they can both be called “balanced” funds.
This debate is known as “truth in labelling”. And this particular argument is firing up again in the backrooms of the nation’s fund managers. And about time.
Most Australians have heard of the term “balanced fund”. When used in the popular press, it gives the impression of a homogenous style of fund.
However, there is no industry standard definition as to what a balance fund is. (And there is no definition for any other style of fund either, including “growth”, “high growth”, “conservative”, etc.) A balanced fund can, technically, be used to describe something with a smattering of shares or something with almost everything in shares.
How will Joe Public know what sort of risk they’re taking when they buy into a balanced fund?
They won’t. They can’t. They don’t.
There is an urgent need to simplify labelling. Industry has tried, and is trying, but has failed miserably to reach agreement on definitions. But they’ve been failing to do so for years.
ASFA chief Pauline Vamos claims an agreement is close between industry parties. But the “working groups” are working on very limited areas. And they’ve discussed this before with no success.
It’s too late.
It’s time for government to step in to set the rules for what is a balanced fund. (Similarly to rules as to what is “made in Australia”, “produced in Australia”, “Australian-owned”, etc.)
It needs to be something simple, to help super fund members, such a number next to the letter G, which represents how much of the fund’s assets are in defined “growth” assets, such as G60, or G70, or G50. But it needs to be universal.
It would be so much easier for people to compare if a short explanation was provided by all funds before you started comparing the ABC Balanced (G70) to the LMN Balanced (G50). You’d have a very good idea about how aggressive the fund was invested immediately.
Sure, this doesn’t necessarily allow for super funds to make ongoing changes to their makeup. (Arguably, they shouldn’t be making major changes without the consent of their members. But that’s an argument for another day …)
*****
The problem is that industry can’t agree on anything. They’ve been fighting for aeons. Thousands of years. Okay, not thousands of years, but at least since the birth of Australian superannuation.
But while defining “balanced” and “growth”, etc, has been difficult, the real problem is apparently being caused by the definition or classification of assets and whether they go under the “growth” or “income” category. They can’t agree on how property – or specific types of property – will be classified. Where do you put the various types of hedge funds?
The argument is becoming ridiculous and far more complicated that necessary.
The government needs to make a stand. “Hey, new boy. Yeah you, Bill Shorten. There’s an easy win to chalk up here. Come in here and legislate. Or delegate to the ATO or ASIC. End this petty rubbish fighting, please.”
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.