Don’t get wiped out by numbers

IT’S that time of year again when the annual performance comparisons of super funds are displayed in various media publications.

Assessing the performance of super funds can be a difficult exercise for many investors. Recent articles have listed the top-performing “balanced” funds for the financial year.

I’m sure many would have read these articles and compared the performance of the supposedly best funds with their own.

Unfortunately, the layperson simply sees the term “balanced” and thinks they are all invested in a similar way. You do, however, need to look a bit deeper than just the declared return.

Super funds generally have an exposure to defensive assets and growth assets. It is how the funds display their allocations that can confuse.

A balanced fund generally can have an exposure anywhere between 60 per cent and 80 per cent in growth assets, so in good years the funds with higher growth assets should perform better than those with lower allocations.

If your fund has a 60 per cent exposure to growth, it is not an apples-with-apples comparison,with one at 80 per cent, so be mindful of that.

Some funds even have allocations to property and infrastructure assets, but display them in their defensive allocations, which makes it even more misleading.

So while they promote that they have a 75 per cent growth allocation, in reality it could be closer to 90 per cent.

At best they should be categorised with other high- growth funds. In the past 12 months Australian shares have performed relatively well and international shares even better. The top-ranked funds now are possibly going to be the ones that fall further in a market correction than the more defensive funds.

Other issues to be mindful of are how the growth assets are comprised. For example, in the past 12 months a fund that has a higher allocation to international shares than Australian shares should perform better than if the allocation was reversed. But in another year, the Australian sharemarket might outperform.

Even further, it depends on how much a fund allocates to listed assets versus unlisted assets, which are often only revalued every 12-18 months.

I recall a high-profile fund some years ago which was top rated one year and the following year had a massive writedown of its high exposure to unlisted assets and was left languishing as the near-worst fund.

Those who transferred into that fund based on the previous year’s performance made the worst possible move, as they would have experienced a significant negative return when all others were positive.

Ensuring that you understand your own fund’s asset allocation and your tolerance to market risk is a very important part of financial planning for your future.

And don’t jump ship from your own fund to the top of the pops based just on one year’s return.

It’s important for you to look at the five-year numbers of your fund and ensure you understand what they are invested in.