Super funds overbalance again as exposure to equities reaps sharemarket whirlwind

The latest figures from Chant West and SuperRatings show that super funds have started the new financial year in the red.

The sharp fall in equities, more than 11 per cent since June 30, has hit all types of funds hard.

According to SuperRatings, weak equity markets saw the median balanced fund fall 1.4 per cent in July and up to 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 as well over $150 billion in value was lost from the funds.

Stories abounded of people being forced to postpone their retirement due to the poor returns of their super funds. It prompted an unprecedented number of people to shift their assets into self-managed funds to see if they could do a better job themselves - 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 global financial crisis, 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 force.

Paul Keating, who was treasurer when compulsory super was introduced, came out last week and said as much. In an interview 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 ... Australian Super's balanced fund is 85 per cent growth, 15 per cent defensive. This is not balanced. Host Plus balanced fund is 76 per cent growth. REST 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 consumer aren't aware of."

Chant West does its own reclassification of funds. In the case of MTAA Super's balanced fund, which was one of the worst performers in the past one, three, five and seven years, Chant West puts it in the high growth option due to the high risk nature of some of it assets.

But even the defensive category might not be as conservative as some funds claim. 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 to be spent in the next 10 years to return the quality of infrastructure to a point 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.

But there is another option: 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.