DO AUSTRALIAN super funds invest too heavily in shares? It's a question more and more are asking after the dismal performance of most funds in recent years.
Instead of shares, several business and economic luminaries say we should look more closely at bonds, which were once seen as stodgy but have produced much better returns in recent years.
Australian super funds tend to be higher-risk than pension funds overseas, typically holding about 50 per cent of their assets in local and international shares.
Because shares can deliver capital gains and dividend growth in the good times, it means Australian super balances do very nicely when markets are rising.
But it is also risky. When financial markets go haywire, as they have in recent years, retirement savings suffer.
In contrast to our preference for shares, Australian funds put a much smaller proportion of their assets in bonds which are effectively "IOUs" issued by governments and big companies.
Among countries in the Organisation for Economic Co-operation and Development, the average pension scheme has 55 per cent of its assets in bonds, compared with just 11 per cent in Australia.
Unlike shares, bonds do not deliver capital growth. However, they do pay investors a fixed return, or yield, and are much lower risk than shares.
So what's behind our preference for shares?
According to finance theory, shares provide better returns than bonds over several decades the time frame that matters for super investors.
However, experts including former Treasury secretary Ken Henry and previous Future Fund chairman David Murray have recently slammed this argument. They say looking at long-term "average" performance of shares is too simplistic.
Because sharemarkets are volatile, they argue fund performance can be strongly affected by when someone enters the workforce and when they retire.
Due to the heavy weighting of shares, they say, many people approaching retirement suffered bigger losses than they should have in the global financial crisis.
So far, these calls have fallen on deaf ears, with most fund managers remaining loyal to shares. But at the very least, the debate should encourage members to examine whether their fund suits their specific circumstances (see also page six).