• Luke Jensen

Why Balanced funds may not be what they seem

Balanced super and investment funds…..millions of Australians are invested in them – but did you know that there is no consistent standard for what constitutes a “balanced” fund? If it’s been a while since you reviewed your superannuation fund or haven’t previously paid much attention to how your super is invested, you may be surprised to learn that your investments and risk exposure could be anything but “balanced”.



What exactly is a “balanced fund”?


“Balanced funds” are frequently referred to in the media, particularly as a benchmark for super performance averages. But what is a balanced fund? And what would you expect a balanced investment to provide to you?


For most people I speak to, they respond with some of the following:


  • I assume my funds are equally spread across all asset classes, as implied by “Balanced”

  • It means my eggs are not all in one basket

  • It means I have diversified investments.


In my opinion, a true balanced risk profile is one where you would typically hold around 50% of your money in defensive assets such as cash and fixed interest, and around 50% of your funds in growth assets such as shares and property. It would be reasonable for anyone with a default “Balanced” super fund to assume their funds are invested with a similar allocation of assets - but this is not always the case.


Buyer beware



A large number of balanced super fund providers have significantly deviated away from being a true balanced fund. For many years “Balanced” funds have been marketed as the “default” position, yet you may be surprised to learn that there is no legislated definition of how a balanced fund must be constructed. This means a “Balanced” fund with one super provider can have a completely different asset allocation when compared to another super provider. And different asset allocations mean different risk levels and different outcomes - which may not always be appropriate or desirable for the member.


As an example, a quick comparison of the “Balanced” option of 4 large Australian super funds shows a significant variation in the asset allocation*.


BALANCED SUPER FUND PROVIDER


A

B

C

D

Growth asset class

%

%

%

%

Australian Shares

22.1

26.5

9.6

58.0^

International Shares

32.4

27.0

30.7

^

Private Equity

5.5

6.5

6.8

^

Property

7.3

9.5

6.2

12.0

Infrastructure

15.8

8.5

14.5

17.0

82.1

78.0

67.8

87.0

Defensive asset class

Credit

4.3

-

-

-

Fixed Interest

8.2

12.5

22.5

6.0

Cash

4.0

4.0

6.5

2.0

Other

0.4

5.5

3.2

5.0

16.9

22.0

32.20

13.0

TOTAL

100

100

100

100



^Fund only stipulates Equities and does not provide a split between Australian and International or private Equity.

* Accurate as at 21.05.2022

From the above sample of providers, the average allocation to Growth assets is in excess of 78.5% of the portfolio, which is a significant increase to what is commonly assumed to be a 50% allocation in order to maintain a balanced portfolio.



Does this mean there is a problem with balanced funds?


No. This doesn’t mean there is a problem with balanced funds specifically - it just means investors need to closely look at their fund’s assets before selecting a balanced fund.


In the above examples where the underlying fund manager holds discretion towards the asset allocation of their funds, it appears they are operating well within the rules of their respective funds. However, it is common practice for people who typically do not take interest in their superannuation or their investments, or have little knowledge or understanding of investment-related matters, to select an investment option based on the term “Balanced”. They do this with the assumption that what they are investing into is, well…”balanced”. And the risk is that by the time they realise that it’s not what they thought, their choice has had an irreversible impact on their retirement goals.


Making informed super and investment decisions


If you are not working with a financial adviser, I encourage you to undertake some basic research into the existing fund and its holdings. And importantly, don't simply make an investment selection based on the name of the fund - because as you’ve seen, they are not all the same and the asset allocation can vary significantly.


Many people remember the impact of the Global Financial Crisis (GFC) in 2008, and the horror stories of retirees having to return to work due to the impacts of the stock market decline. We hear so many examples of people who were overexposed to the equity markets before the market downturn began i.e. their asset allocation was inappropriate for their circumstances and risk tolerance, and they simply had no idea until it was too late.


It is so important for any investor to consider the asset allocation of their funds and ensure that it reflects their individual risk profile, rather than just being dragged along by the fund manager and their default profile.


If you have any questions about your super or would like to make an appointment, please contact the Propel Financial Advice team.