How Much Risk Are You Taking?

The answer is...probably a lot more than you think.

Most people fall into the category of a Balanced investor; one who is willing to assume a modest level of risk, in search of modest long term gains. A Growth investor is one who has less regard for risk - and seeks to be rewarded with greater returns over the long term. Whatever your definition, any reasonable party would likely agree that a Balanced investor is willing to take measurably less risk than a Growth investor. 

Unfortunately, many large superannuation funds seem to have other ideas. 

Currently, the ‘Balanced’ investment option offered by many large superannuation funds in Australia comprises an exposure to risk assets (such as shares and real estate) of around 80%, leaving them virtually indistinguishable from the Growth and High Growth investment options they also offer. That is to say, those who believe they are taking a modest approach to risk by investing in a Balanced portfolio, are in fact assuming roughly the same risk as a Growth, or High Growth investor. This may result in periods of greater returns, but it could reasonably be expected that greater losses may also be realised.

To put that figure of 80% in perspective, the Morningstar Balanced Portfolio has a long term expected allocation of only 50% risk assets. That's quite a difference.

Taking a look at one of Australia’s largest superannuation funds, AustralianSuper, you'd be hard placed to find any material difference between the ‘Balanced' and 'High Growth' options they offer. If you had invested $10,000 in either option 14 years ago, you would have roughly $30,000 today; with a difference of only a few hundred dollars between them (see chart* below). Notably, both fell by around 20-25% during the Global Financial Crisis - and both took around 5 years to recover their pre-crisis levels. A similar pattern can be observed in the offerings of SunSuper and Mercer to name but two.

This apparent misrepresentation of risk is beginning to attract the attention of some Australian research houses. It wouldn’t be a surprise to learn that regulators are also beginning to take a closer look, given that the entire Australian finance industry is currently under the microscope of a Royal Commission - and many Australians are now hurtling towards retirement with their superannuation exposed to a greater percentage of risk assets than they have ever been before.

The chart* below highlights the similarities between the Balanced and Growth options offered by AustralianSuper, SunSuper and Mercer. Mercer emerges as the clear loser overall, with AustralianSuper taking the lead - and SunSuper somewhere in the middle. In all three cases, there are only very slight differences observable over time between the Balanced and Growth offerings (respectively, Balanced and High Growth in the case of AustralianSuper, Growth and High Growth in the case of Mercer). Relevant data was unavailable from several other major funds for the purposes of this analysis, however, similar relationships between investment options would likely be observable.

The upshot of all of this is that the comfortable middle ground of risk and return sought by most investors can be difficult to come by in the world of large superannuation funds. Worse yet, those of the belief that their retirement savings are invested in accordance with their wishes as a Balanced investor may have some nasty surprises in store. A high allocation to risk assets can mean great returns in years of strongly performing markets, however, when returns fade and volatility rises (as would seem to be the case at the moment) this can result in periods of significant losses. Younger investors are likely to have time to recover from such a scenario, however, those who are in retirement, or who are approaching retirement, may have no such luxury.

Whatever your age, it's important that you understand how your superannuation is invested - and that the investments you hold are the right ones for you. Getting your superannuation on the right track is probably a lot easier than you think. If you feel that you may be inappropriately exposed to risk, or if you would like your assets to work harder for you, please contact me today on 0404 730 453, or email me at richard@blackswanevent.com.au.

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*All source data, quoted figures and the attached charts were drawn directly from Lonsec iRate as at 26/03/2018.