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No matter what it is you buy, consumers are urged to read the label. But when it comes to the labelling of super fund investment options, the labels themselves are confusing.
There is a lack of consistency in the naming of investment options by super funds and the risk categories they are slotted into by research groups who rate them and track their performance. There is also a lack of clarity about what is a growth asset and what is a defensive asset.
Most funds, but not all, use the terms Balanced, Growth or Defensive in their labels as clues to the investments they hold and the level of risk and potential rewards. But with no clear definition of what these terms mean, funds and their marketing departments have gone rogue.
Ignore the label, look at the ingredients
SuperGuide reviewed the labels used by funds in Chant West’s survey of 226 super investment options. This is the raw material Chant West works with to categorise investment options for its regular super performance league tables.
Here’s a table of the most popular labels for the 226 options, the amount they hold in growth assets (mostly shares), the number of investment options with this label and the percentage of the total 226 options reviewed.
|% of total
Source: Chant West, SuperGuide
As you can see, Balanced options (where most Australians have their super) have anywhere from 49% to 80% of members’ money allocated to growth assets, traditionally shares. The remainder is in defensive assets, traditionally cash and bonds.
Given that the average person might reasonably expect balanced to mean a 50:50 split between growth and defensive, it may come as a surprise that up to 80% of their savings may be in high-risk growth assets.
Even someone in a Conservative Balanced option may baulk at finding they hold up to 60% growth assets.
Many names, little meaning
The names of the options can also be confusing. What is the difference between Growth and Aggressive? Stable and Capital Stable? Some are oxymorons like Conservative Growth and Moderately Aggressive. Others are completely meaningless such as Core, Horizon and Diversified. Surely all investment options are diversified to some extent, even if they are single asset options.
“The labels mean nothing, there are no rules or guidelines,” says Chant West head of research Ian Fryer.
At the fund level, there may be some logic to labels relative to other options they offer. For example, options labelled Conservative, Balanced and High Growth may alert members to different levels of risk and return. But this won’t help you compare between funds.
To compile their performance tables, Chant West and SuperRatings muster this wild bunch and corral them into risk categories so people can compare like with like. But even here, the two groups label similar categories of risk differently.
Comparing apples with apples
Chant West uses five risk categories – All Growth (96–100% Growth assets), High Growth (81–95% Growth), Growth (61–80% Growth), Balanced (41–60% Growth) and Conservative (21–40% Growth).
SuperRatings uses similar labels but with different underlying asset mixes. For example, its Balanced category has 60–76% growth assets, which aligns closest to Chant West’s Growth category.
Confused? You are not alone.
Ian Fryer says when Chant West originally worked out its categories, the industry norm was that Balanced meant roughly 60% growth; any higher put a fund in the Growth category. Since then, funds with up to 80% growth call themselves Balanced and Fryer admits he’s lost the argument.
“We are willing to work with SuperRatings to have the same funds in the same baskets.
“The funds are another issue. For them to change investment names could be confusing for members,” says Fryer. However, he thinks that moves to standardise the definition of growth and defensive will give funds some ability to work on their labelling.
Are we focusing on the wrong issue?
Hostplus chief investment officer Sam Sicilia questions the focus on labels in the first place. He says the labels Growth, Defensive and Balanced are nonsensical because the world has moved on from traditional definitions of growth and defensive. He argues that what matters is the portfolio as a whole.
In a way, that’s what already happens with the MySuper default accounts that all funds must offer for members who don’t choose their investment option. Funds all use the generic MySuper label for these accounts, with no reference to Balanced, Growth or Defensive.
Although funds generally use their Balanced product as their MySuper default, they could include 90% growth assets if they chose to and still be compared to all the other MySuper offerings.
“What is it we are trying to achieve from super? Surely what really matters is the retirement balance that members have in their account,” he says.
“To use a restaurant analogy, isn’t what matters the meal at the end, not the flour, water or eggs that were thrown in to make the meal? People want the meal, the returns, at the end and not the behaviour of the ingredients because that is an artifact of a flawed system.”
An historical perspective
In the old days, back when Australia’s compulsory super began in the early 1990s, funds invested in shares, listed property, bonds and cash. The first two were growth, the latter two were defensive.
Funds added up the proportion of investments in each and it was generally accepted that somewhere around a 60:40 mix of growth to defensive assets was Balanced. Investment options with significantly more than 60% growth were labelled Growth and any less than 50% growth was Defensive.
But then things got messy.
As the super system matured and funds had more member contributions to invest, they started diversifying into other assets such as unlisted property, unlisted infrastructure, private equity, hedge funds, high yield credit and other forms of debt.
Initially, research houses used the traditional approach and treated all the new arrivals as growth. But over time, it became clear that treating some of them as partly defensive made sense.
As Fryer explains, during the GFC peak-to-trough losses for unlisted property and infrastructure were much lower (10–25%) than losses for equity markets (about 50%). Listed property losses were worse at around 70%.
At present, it is up to funds themselves to classify these investments as either growth or defensive or a bit of both. This gives rise to criticism that funds can game the system.
Are funds gaming the system?
The discretionary labelling of growth assets, and the wide range of growth assets used in performance tables, have led to criticism that funds can game the system to attract new members and keep existing ones.
According to this argument, Fund A might have 75% growth assets that would put it in SuperRatings’ Balanced category alongside Fund B with only 60% growth assets. This would improve Fund A’s chances of outperforming Fund B, but the comparison may not be fair. Fund B may have assets chosen to provide members with less volatile returns along the way. If Fund A increased its exposure to growth assets by just 2% to 77%, it would be compared with funds in the higher risk category and its returns may not rank so highly.
Funds dispute this of course but, until there is more consistency in the labelling of investment options and assets, it is difficult for fund members to know.
Putting the risk back into returns
By their very nature, performance tables draw attention to returns which can be misleading if viewed in isolation, without understanding the nature of the underlying investments and the level of risk they entail.
While the level of growth assets is used as a proxy for risk, that’s not the whole story.
For example, AustralianSuper’s Balanced option returned 8.8% over the seven years to 30 June 2020, putting it at the top of the performance table. But when returns are adjusted for risk, AustralianSuper ranked 9th while QSuper came out on top despite having a lower average annual return of 8%.
The difference was in the composition and diversification of their investment portfolios.
Apart from labels, funds also try to indicate the level of risk in their investment options by disclosing the number of negative years members can expect in a 20-year period.
For example, a typical Balanced fund might indicate a risk of less than four negative years out of every 20. Any more would be an unacceptable level of risk and an indication that the fund was not performing as intended.
However, this is unlikely to satisfy members of a fund that is habitually at the bottom of the performance tables, even if it hasn’t had one negative year in 20.
Diversification, not labels
Sam Sicilia argues that risk-adjusted performance is all about diversification, whereas we are currently asking for growth/defensive labelling to account for risk-adjusted performance. “It can’t and it never has,” he says.
As a simple example, he says a portfolio made up of 60% NAB shares and 40% NAB debt would be regarded as a Balanced 60:40 portfolio, but it’s not diversified and obviously extremely high risk.
Yet the issue of developing a labelling system that accurately reflects the underlying portfolio is no mean feat.
“We should be talking about asset class attributes, is it listed or unlisted, the contractual arrangements in place, the diversity of the rental returns, of the geography, the sectors, asset managers and the active/passive split,” says Sicilia.
He gives another example of an unlisted commercial property investment. Traditionally property comes under the growth label. But what if the building is in a major city’s CBD and leased to the ATO? “I would say that building is 100% defensive; but if it was leased to venture capitalist companies that could go bust tomorrow, I wouldn’t give it any defensive rating.”
While he agrees that funds need to take a more consistent and accurate approach to labelling to help consumers make informed investment decisions (because marketing works so it is relevant), the only thing he’s sure of is that Growth, Balanced and Defensive are not the solution.
“If you want simplicity, I’m out of ideas,” says Sicilia.