AUSTRALIA - Investors looking to switch superannuation funds under the new Choice regime should consider a fund's underlying asset allocation, not just performance, warns Mercer Human Resource (HR) Consulting.
Weighing into the debate on fund return rankings, Russell Mason, head of Mercer’s industry funds business, pointed to hype surrounding fund performance.
“Currently, too much attention is being paid to which super funds are delivering the ‘best’ performance under the generic title of balanced investment options,” he said. “However, we believe fund members need to understand the underlying reasons why a fund out-performs another and not assume the name of the option properly describes the underlying asset allocation profile.”
According to Mercer research, the level of exposure to growth assets as opposed to manager selection is more predictive of long term investment performance.
The consultancy analysed returns of three hypothetical ‘like with like’ funds with 85%, 75% and 65% exposure to growth assets, typically shares and property, on a year-on-year basis, and annualised over a seven year period using the actual indexed returns achieved in those years for each asset class.
The results showed that depending on the market cycle, returns of balanced funds can vary significantly, primarily due to the performance of Australian and overseas equities, Mercer said.
“Just because an investment option is called balanced or diversified doesn’t mean you can fairly compare it with other options of the same name,” Mason said. “Fund members need to dig deeper into the reasons why one fund performed better than another (and also compare over a reasonable timeframe) before using performance as the primary determinant for changing funds.”
He added: “Over the past seven years those funds with a higher exposure to growth assets, especially Australian shares, generated the average highest return but under-performed in three of those seven years. In selecting an appropriate asset mix, we advise members to determine the level of volatility they’re prepared to accept, without assuming that the option name reflects that volatility, and then take a long term view.”
Partner Insight: In recent years, pensions administrators have seen scheme member engagement increase significantly. The advent of Pensions Freedoms in 2015 and the increased choices faced by members have led to a sea-change in the levels and types of...
Purna Bhudia looks at how the PPF's investment strategy has evolved, especially in the area of credit
Two consultancies have reported decreases in defined benefit (DB) transfer quotation requests in Q3, and said guaranteed minimum pension (GMP) equalisation could impact transfer activity.
The Association of Consulting Actuaries (ACA) and Royal London have proposed a "pensions pound" to "radically simplify" defined benefit (DB) pensions rights.