Despite what managers say, super can lack an essential component, writes Mark Bouris.
WHAT'S going on with your superannuation fund? During the week we saw the curious discrepancy between the views of the chief executive of Australian Super and the outlook for a forklift driver.
The 62-year-old forklift driver from Melbourne had put $80,000 of his savings with Australian Super in its default "balanced" option. He couldn't work out why the ads on television were showing industry super funds on the fast escalator when his fund wasn't.
During the past three years the Aussie Super "default" option has returned savers just 1.7 per cent a year, or 3.1 per cent for the past five years.
A good place to start is to understand that Aussie Super's balanced fund is not really balanced. It has half its portfolio allocated to local and global shares, which carry very high risk. It puts another 29 per cent of the portfolio into risky unlisted "private equity" and "direct property".
And it has just 2 per cent invested in cash and 9 per cent in bonds.
It is not hard to work out why the forklift driver is confused and disappointed: if you're over the age of 50, having half your retirement savings in shares puts you in a risk profile that does not suit your needs or life stage.
In defending the fund's performance, the AusSuper CEO said: "The reason that most funds, including ours, have most of their assets in equities is that over the past 100 years equities have proven to be the best-performing asset class."
I have a few problems with this thinking.
For a start, the Australian Securities Exchange was formed in only 1987 and unbiased data on Australian stocks before the 1970s is hard to come by, largely because of a problem known as "survivorship bias". Long-term sharemarket data tend to include only the winners because businesses that go bust and delist from the securities exchange get removed from the index.
Researchers have found that long-run sharemarket returns are biased upwards, so Australian academics usually look at performance during the past 30 years.
Second, to use performance of an asset over a century seems almost useless when your fund has been performing so badly for people nearing retirement. They don't have 100 years for the peaks and troughs of a volatile share market to flatten out.
In recent weeks I have been writing about the worrying lack of good bond investment options for retirement savers. Government and corporate bonds are much less risky than equities yet they perform just as well. And balanced funds shun them.
Compare the total returns delivered by 10-year Australian government bonds to the returns provided by Australian shares (plus dividends). The returns are little different during the past 30 years with one important exception: bonds had significantly less risk of loss. Bond investors don't have to endure the wild swings of the sharemarket, allowing them to plan for the future.
I'm not saying you should have 100 per cent in cash and bonds. Shares have a very important role to play in most investment portfolios and I am optimistic about the outlook for the Australian sharemarket and for the economy in general.
But getting the right mix of assets is crucial.
If you are over 50 and you're in the default option in your super fund, it's highly likely that no more than 11 per cent of your money is in cash and bonds. Yet the optimal bond allocation for you is certainly far higher. It's as if some super funds have created default options for a 22-year-old - a person who has many years to weather the ups and downs of the market.
There are many Australians who are just like the forklift driver from Melbourne. They are confused and losing faith in the system. So, what can you do?
You could look at a low-cost self-managed super fund, which allows you to tailor investments to your needs. Or you could take control by telling your fund how you want your money invested.
Either way, use this ready reckoner: if you're 20, no more than 20 per cent in bonds and cash if you're 50, no more than 50 per cent in bonds and cash, and so on.
Always get expert advice, if you're able. But you can also start by ensuring your risk profile is matched to your age.