Tell the truth, the whole truth
Investment labels such as ‘balanced’ don’t always mean what they suggest
Super fund members rely on labels such as growth, balanced, conservative and cash to help them choose an investment option. They match their risk profile and goals with the most suitable product. But how true to label are the options?
Each has a different exposure to growth and defensive assets. The growth option aims for higher returns and invests in more volatile assets such as equities and property. The cash option is least risky, but also less rewarding.
But since the introduction of super, options have taken on a life of their own as funds compete for members and a bigger slice of the industry’s $3.3 billion pie.
What are members to make of labels like alternative growth, conservative balanced, sustainable balanced, balanced growth and capital stable, to name just a few? It’s challenging enough for researchers, let alone the layperson .
Yet members are regularly urged to compare their product with others on the market and ditch it if it’s underperforming. Confronted by so many confusing labels, what are their chances of comparing apples with apples?
Consumers generally expect the product to be true to label and assume there is a standard definition somewhere that determines its asset allocation. But they couldn’t be more wrong. The default balanced, or MySuper, option, where most members have their money invested, isn’t spared any of the confusion.
“Traditionally the balanced option was 50% growth and 50% defensive, while growth was 70% growth 30% defensive, and capital stable 30% growth and 70% defensive,” says Mark Berry, a director of Berry Actuarial Planning.
“But over the years the growth portion grew as it delivered higher returns as expected and funds did not rebalance back to the original benchmark.”
In other words, the balanced option is no longer that “balanced”, with exposure to
growth assets and risk creeping up much higher over the past 20 years or so.
Asked how widely growth asset allocations vary from super fund to super fund, Berry says benchmark balanced allocations can vary from 50% growth up to 85%.
To add to this complexity, there is no definition for what a defensive or growth asset is. “Some funds will argue that property and infrastructure type assets, which have long-term leases in place, are defensive whilst others would see these as growth pointing to the level of gearing,” he says.
So, what can fund members do? Xavier O’Halloran, director of Super Consumers Australia, says as things stand consumers need to look beyond the labels. “Disclosure around risk is one of the trickiest things for consumers to engage with. The research shows people have a limited understanding of what risk means.”
He says the super industry hasn’t helped by using labels that don’t make much sense to non-experts.
“For example, people might expect a balanced option to have a roughly even mix of growth and defensive assets. The reality is most balanced options tend to have a greater proportion of growth assets.
“This might be an appropriate investment strategy for most members in the fund, but the language used is very confusing for those looking to compare options.”
O’Halloran says at some point the federal government will have to deal with this.
“They are going to have to find some way of communicating better around what is actually inside these products so consumers are comparing apples with apples.
“Truth in advertising is one of the most important consumer protections. People need to be able to trust that businesses are telling the truth; if they can’t it threatens the fair and efficient operation of the market.”
Aside from asset allocations, O’Halloran says super funds also need to be more transparent about their underlying portfolio holdings. “At the moment, Australia is pretty far behind the rest of the world when it comes to disclosing what is in a super product. Only a handful of funds fully disclose what they are invested in.”
He says an independent review in 2010 called for greater disclosure about what super funds are invested in. “More than a decade later we still don’t have regulations in place to make this happen. But it’s not all bad news, in August the government consulted on some new regulations which would require funds to disclose their investments, which is welcome progress.” He also welcomes news that the
regulator ASIC is reviewing the claims made by investment managers about the environmental, social and corporate governance (ESG) credibility of their products. This investment option has become increasingly popular, particularly among millennials. However, there is the potential for funds to over-represent the extent to which their practices are environmentally friendly, sustainable or ethical, referred to in the market as “greenwashing”.
“Our research has found fund managers take different approaches to ethical investing. Some divest from problematic companies altogether, while others will stay invested but try to change the direction of a company from within.
“For people who are interested in taking a more ethical approach to investing, it is important to ask your super fund what approach they are taking and ask them how this approach is leading to the change they want.
“An engagement strategy may work for some companies, but in others may not be effective. Likewise, the impact of divesting may be minimised if other investors are happy to step in and take up stock in less ethical options,” says O’Halloran.