The Risk behind Balanced Industry Super Funds
Super funds in 2017 saw fantastic returns as a result of buoyant and fairly stable market conditions. A survey conducted by Chant West found that Growth Funds that year received a median return of 10.8%. However, they were greatly outperformed by the leading 5 Industry Super Funds, with an average return of 13.2%.
Through analysis and comparison of the top 5 Industry Funds and their respective retail funds benchmarked against Morningstar’s Balanced Index, we find the industry funds generating far superior returns across all risk profiles.
But why? You might ask… What sets these Industry Funds apart from your regular retail fund?
Well, Despite Industry Funds claiming that their low fees and not-for-profit structure account for these higher returns, they still post significantly greater returns when benchmarked against other not-for-profit retail funds like Future Fund; who generated a 12 month return of 8.1%.
This is a direct result of Industry Funds severely disproportionate allocation of client capital to Growth and illiquid Growth Assets. Comparatively, retail funds like Future Fund had their Growth allocation in direct property & infrastructure (14%) and private equity investments (12%). HarbourSide Capitals portfolios hold no illiquid or direct assets.
When evaluating the Growth allocation of the top 5 Industry Fund’s Balanced portfolio’s against Morningstar’s Balanced & Growth Index, we discover that the industry funds Growth allocation was 53% higher than the Balanced Index; and 13% greater that the Morningstar Growth Index, with total average Growth allocation of these Industry Fund’s equating to 78%.
Whilst having a greater exposure to Growth assets (Risky) in rising markets may show superior returns, when the market does correct or crash; having a greater exposure to growth assets could potentially lead to greater than market losses.
However, there is a better way to achieving potentially better than market returns whilst managing downside risk…
At HarbourSide we run multi-factor based investment strategies that typically holds 20-30 shares of equal weighting. Holding a more concentrated portfolio allows us to invest in “the best of the best”, and sometimes there may not be enough stocks that meet our rules; so we turn to cash. Combining factors such as momentum value and growth allows us to steer clear of overpriced shares during market corrections, helping us manage your portfolio risk; and on a risk adjusted basis potentially out-perform in rising markets.
Risk Adjusted Returns
To broadly equalise the risk of each fund and Morningstar Indexes, to that of the Top-5 Industry Super Funds and HarbourSides Balanced Model portfolio, we applied a simple risk-adjusting measure. This was done by calculating a simple “growth ratio” to adjust their respective returns, as shown in the table below:
|
Fund/Benchmark |
Growth Assets (%) |
Illiquid Growth Assets (%) |
12 month “risk adjusted” Return (%) |
|
Top-5 - Industry Super Funds |
78 |
18 |
13.2 |
|
Morningstar MS Balanced Index |
51 |
3 |
7.7% x (78/51) = 11.8 |
|
Morningstar MS Growth Index |
60 |
4 |
9.2% x (78/69) = 10.4 |
|
Morningstar MS Aggressive Index |
88 |
3 |
11.2% x (78/88) = 9.9 |
|
Future Fund |
56 |
26 |
8.1% x (78/56) = 11.3 |
|
DFSPS Balanced Portfolio |
55 |
0 |
9.1% x (78/55) = 12.9 |
|
HarbourSide Balanced Model Portfolio (multi asset portfolio strategy) |
50 |
0 |
11.74% x (78/50) = 18.31 |
Source: Morningstar; Chant West; Industry Super websites; Future Fund; Based on calendar year 2017 returns.
Document Source: dfs Portfolio Solutions. White Paper “Not All Balanced Super Funds Are Equal”
Disclaimer: Harbourside Capital Pty Ltd (ACN: 166 765 537) is a Corporate Authorised Representative (CAR No. 448907) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian Financial Services Licence (AFSL no. 435746). Any information or advice contained in this article is general in nature and has been prepared without taking into account your objectives, financial situation or needs. A Financial Services Guide is available on our wesite and should be considered before deciding to deal with Harbourside Capital Pty Ltd. Before acting on any information on this website, you should consider the appropriateness of it (and any relevant product) having regard to your circumstances and you should carefully read and review the PDS of the relevant financial product as provided before acquiring the product.
All securities and financial products or instruments transactions involve risks. Trading derivatives carries a high level of risk to your capital and you should only trade with money you can afford to lose. Trading derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved, and seek independent advice if necessary.
Latest Blog
Leave a Comment
Your email address will not be published