Written by Hudson Adviser Michal Park
We’ve all been subjected to the ads. “Compare the pair” referring to industry superannuation funds versus almost everything else. On the surface they make for a very compelling argument in favour of industry superannuation funds and their unbelievable returns. But dig deeper, and all is not what it seems. It seems industry super funds take liberty when using the term “compare”.
What if I told you that industry funds are not necessarily comparing apples with apples? I have always taken offence to these ads as they only ever compare pre-determined investment options – and evidently this comparison of pre-determined investment options is not even a fair comparison!
A very interesting article came across my desk this week on this very subject and compelled me to write my Hudson Report. The article dared to scratch the surface of these industry fund pre-determined investment options to uncover exactly how they invest and why they manage to produce great returns when “compared” to other similar investment options.
The answer is simple. These funds essentially expose a greater amount of funds to growth assets (ie higher risk assets) which is at absolute odds with how the consumer actually believes they are investing. The best example of this is HostPlus.
In a nutshell, HostPlus’ Balanced option exposes 25% of their holdings to Defensive assets and 75% of their holdings to Growth assets. Now, in anyone’s book, Defensive assets are made up of cash and fixed interest type products and Growth assets are made up of shares and property/infrastructure. But not in the case of HostPlus. In HostPlus’ Balanced option the 25% of holdings exposed to Defensive assets actually includes property and infrastructure! In fact, a whole 15% of the 25% is exposed to property and infrastructure. This means that only 10% of funds are actually invested defensively for an option that calls itself “Balanced”.
I can hear what you are saying. “The markets are doing well, so it’s paid off having 90% of funds exposed to growth assets”. And you are right. But the risk is the potential downside. Individuals who invest in a ‘Balanced’ fund expect that their funds will be invested in a ‘Balanced’ way so that the defensive exposure provides a hedge against the volatility of the growth exposure – especially in a market downturn.
In addition, the property and infrastructure holdings are held within unlisted trusts which are characteristically illiquid and generally only valued around every six months. Again, not a problem in rising markets, but when a cycle ends, chaos can erupt. In 2008, the Real Estate Investment Trust sector saw assets so highly leveraged against unsustainable property values that when the GFC came and property values declined, this sector fell 75% globally. Another darling industry superannuation fund at the time, MTAA, lost $1.6billion due to poor management of unlisted assets and subsequently went from being one of the best performers in 2008, to the second worst according to Super Ratings.
So the moral of the story would be to not simply accept industry fund returns at face value. Sometimes it pays to delve a little deeper and see just how much of your money is at risk to generate said returns.
Source: Compare The Pair: Why Some Super Funds ‘Outperform’. Adrian Pelligra