IF THERE was any doubt that the country's $1.3 trillion retirement savings are too dependent on the vagaries of the stockmarket, take a look at the impact of the recent equities bloodbath on the performance of our super funds, which have lost a fortune in the past six weeks.
The latest figures from ChantWest and SuperRatings show that super funds have started the new financial year in the red.
The sharp fall in equities, down more than 11 per cent since June 30, has slashed the performance of all types of funds by a significant amount.
According to SuperRatings, weak equity markets saw the median balanced fund fall 1.4 per cent in July and as much as 5 per cent since June 30.
The big losses put the spotlight firmly on the country's super industry and its heavy exposure to equities, particularly after the havoc wreaked on retirement savings during the global financial crisis, when it suffered its worst performance in 20 years and well over $150 billion in value was lost from the funds.
Back then, stories abounded of Australians being forced to postpone their retirement plans due to the poor returns of their super funds. It prompted an unprecedented number of people to shift their assets into self-managed super funds to see if they could do a better job the jury is out on that because there is no proper data available.
Whatever the case, funds have been clawing their way back since the dark days of the GFC, but with the debt issues plaguing the US and Europe, and the stronger markets such as Germany getting caught up in the contagion, it looks like the bull market has gone into hibernation and the bears are out in full force.
Paul Keating, who was treasurer when compulsory super was introduced, came out last week and said as much. In an interview published as the industry celebrated 20 years of the super guarantee, Keating said: "One of the problems super has is that there is not enough members' money invested in debt instruments. Funds are too heavily weighted in equities [and] not enough in fixed interest."
Most people think a balanced fund is 50 per cent growth (shares, property, alternatives, private equity, infrastructure) and 50 per cent defensive (cash, fixed interest, bonds).
Some funds masquerade as balanced but they are 85 per cent growth and 15 per cent defensive, according to financial adviser Matthew Ross from Roskow Independent Advisory.
Ross cites a few super funds that he believes are not offering balanced options, but say they are. "This is an issue that really gets under my skin . . . AustralianSuper's balanced fund is 85 per cent growth, 15 per cent defensive. This is not balanced. Hostplus balanced fund is 76 per cent growth. REST's core strategy is 75 per cent growth and Catholic Super is 68 per cent growth," he says. "They're high-growth funds, calling themselves balanced. Higher risk equals higher reward. So, the more risk they take in the balanced fund the more return they can boast about but they're taking risks consumers aren't aware of."
ChantWest does its own reclassification of funds. In the case of MTAA's balanced fund, which has been one of the worst performers in recent years, ChantWest puts it in the
high-growth class due to the high-risk nature of some of it assets.
But even the defensive category might not be as conservative as some funds would have us believe. For instance, when it comes to cash, some funds that invest in cash-plus and cash-enhanced funds, are investing in things other than cash. Such funds offer better returns than straight cash by investing in shares and property as well as bank bills and fixed-interest securities, but they are much higher risk and some investors don't realise this.
Fixed interest can also be deceptive. While some fixed-interest products might be AAA-rated Australian government bonds, others are junk bonds, including insurance-linked securities, which are a euphemism for catastrophe bonds.
The reality is funds need to provide clearer definitions for what they are investing in and there needs to be a greater focus on how to get super funds to invest in low-risk, steady regulated returns of certain infrastructure classes.
With an infrastructure backlog of $32 billion last year, and more than $700 billion that needs to be spent in the next 10 years to return the quality that will sustain national prosperity, infrastructure bonds should be considered.
While they are not the panacea for the country's worsening congestion, bottlenecks and electricity outages, they would help super funds realign their balanced portfolios.
The government also needs to look at finding other ways to tap the country's super funds.
In the case of super funds, the average Australian fund allocates 29 per cent of its portfolio in Australian shares and 11 per cent in Australian fixed-interest products but only 5 or 6 per cent to infrastructure.
If funds lifted their infrastructure allocations to 15 per cent, a further $240 billion could be made available to the sector over the coming 13 years, or $18 billion a year. But a deterrent is the lack of certainty about the long-term pipeline of investment opportunities.
There is something else that could be considered: allow individuals to use their accumulated super fund balance towards the purchase of owner-occupied housing. It might not be a balanced fund, but it is something worth considering.
aferguson@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Why did Australian super funds lose value recently and how big were the falls?
Super funds were hit by a sharp fall in equity markets — equities were down more than 11% since June 30 — which knocked the performance of many funds. SuperRatings reported the median balanced fund fell about 1.4% in July and as much as 5% since June 30. ChantWest and other industry trackers flagged the new financial year starting in the red due to the equities bloodbath.
What does 'balanced fund' really mean and why should investors check the asset mix?
Many people assume a balanced fund is roughly 50% growth (shares, property, alternatives) and 50% defensive (cash, fixed interest, bonds), but some so‑called balanced options are heavily weighted to growth. Financial adviser Matthew Ross highlighted examples such as AustralianSuper’s balanced option being about 85% growth, Hostplus about 76% growth, REST core 75% growth and Catholic Super 68% growth. That higher growth weighting means more risk — investors should check the actual asset mix, not just the label.
Are super funds too exposed to equities and not enough to fixed interest?
That is a key concern raised in the article. Former treasurer Paul Keating said funds have too much money in equities and not enough in debt instruments, while industry averages cited show about 29% of portfolios in Australian shares and only around 11% in Australian fixed‑interest products. This concentration in equities leaves retirement savings vulnerable when share markets fall.
Can 'cash' and 'fixed interest' options in super be risky?
Yes. Some funds label products as cash‑plus or cash‑enhanced that invest not only in bank bills and fixed‑interest securities but also in shares and property, which raises risk compared with plain cash. Fixed‑interest investments can also vary in quality — from AAA government bonds to lower‑quality 'junk' bonds or insurance‑linked (catastrophe) securities — so defensive labels aren't always equivalent to low risk.
Would investing more super in infrastructure bonds reduce risk for retirees?
The article suggests infrastructure bonds could offer lower‑risk, steady regulated returns and help rebalance portfolios away from equities. With an infrastructure backlog and a large pipeline of projects, boosting infrastructure allocations could free significant capital: raising allocations from about 5–6% to 15% might make roughly $240 billion available to the sector over 13 years (about $18 billion a year). However, a lack of certainty about the long‑term project pipeline is a deterrent.
How can super funds improve transparency so members understand investment risk?
Funds need to provide clearer definitions of what their options actually invest in — spell out percentages in shares, property, fixed interest, infrastructure and the types of fixed‑income instruments used. The article argues for greater clarity and a stronger focus on directing some money into low‑risk, steady regulated-return infrastructure classes so members can make informed choices about retirement risk.
Could rules change to let people use their super savings to buy a home?
The article mentions that one idea worth considering is allowing individuals to use accumulated super balances toward the purchase of owner‑occupied housing. It flags this as a policy option to explore, though it doesn't present a decision or detail on implementation.
What role do industry researchers like ChantWest and SuperRatings play for everyday investors?
ChantWest and SuperRatings track fund performance and reclassify options based on actual asset mixes and risk. For example, ChantWest reclassified an MTAA balanced option into a high‑growth class because of its risk profile, while SuperRatings reported recent median balanced fund falls. Their analysis helps investors compare performance and risk, but classifications and definitions can differ between providers, so it's useful to check multiple sources and a fund’s own disclosures.
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