What's in a 15% superannuation return?

The nation's super providers will soon produce their annual statements and customers are likely to be impressed.

Australian Super's default balanced fund, for instance, will produce a return of almost 15% for the year. But investors in such funds should pause before popping the champagne.

We've had some discussion among the Super Advisor investment committee about where a 'balanced' fund should sit in terms of risk profile. To us, the term 'balanced' conjures up a risk profile between 'Conservative' and 'Moderate' on the scale we use to guide our three model portfolios (Conservative, Moderate and Aggressive).

What does it make you think of? Are we just fuddy-duddies?

I'm a client of Australian Super, so have nothing against them. But let's take a look at the asset allocation in its balanced fund option. According to the organisation's website on the 9th of July, here's where things stood:

Australian shares (29%), International shares (23%), Direct property (12%), Infrastructure (14%) and Private equity (4%). Cash and fixed interest investments made up the remainder (18%).

To me, an 82% allocation to risky (or 'growth') assets doesn't sit well with the term 'balanced'. And considered in this light, the fund's 15% return for the year is brought into sharper focus. As is the 0.98% return for the preceding financial year.

Higher risk

There seem to be no rules around the use of the term 'balanced' in the finance industry and my concern is that the 70% of Australian workers who are in their employer's default fund option (typically a 'balanced' fund) are exposed to a higher degree of risk than they might imagine.
The danger is that in the inevitable bad years, the heat might get too much and they'll switch to a safer option at the worst possible time. As far as investing mistakes go, this is one of the most costly—selling out after a big market fall.

As the old saying goes: 'When it's sunny, I have no need to fix the hole in my roof; when it rains, I'm unable.'

If you have a friend or family member who's in a default option, do them a favour by encouraging them to pay close attention when they receive their super fund's report this year.

Tell them to look for pie charts and see where their money's invested. If the asset allocation seems too risky, it might be time for them to heed the immortal words of Kenny Rogers: 'Know when to walk away, and know when to run.'

Greg Hoffman