Balanced funds failing to deliver
The traditional superannuation balanced fund, with its 70/30 allocation to growth and defensive assets, is limiting investors and failing to deliver appropriate investment outcomes for members in their retirement, according to State Street Global Advisors (SSgA).
Despite returning an average of 14.7 percent (before fees) during the financial year 2012/13, the typical balanced growth fund had returned only 3.8 percent per annum on average over five years, Dan Farley, head of SSgA's Investor Solutions Group, has pointed out.
Farley said that the good returns achieved last financial year also masked a number of risks that these balanced funds exposed investors to during the year.
For example, a marked rise in bond yields and a resultant loss in fixed income coincided with a fall in equity markets during the year - highlighting that relying solely on the diversification of traditional assets as a way to protect a portfolio's value was not enough.
"As an industry we have failed to effectively manage the key investment risks associated with retirement such as accumulation, longevity, volatility and inflation," Farley said.
"Furthermore, these considerations have not evolved through the investors' lifecycle - working years, nearing retirement, active retirement, and the later years.
"We need to focus instead on one end game over an enduring period of time, accounting for changing market conditions; the suitability of investments through different stages of life; equity risk and asset protection during specific market regimes; and the allocation of portfolio expenses," he continued.
"It's time to build better retirement portfolios for all ages and lifestyles."
Using the global financial crisis as an example, Farley said that in 2007 most funds had adopted a static asset allocation to traditional growth and defensive assets based on long-term assumptions.
"The underlying investments were not fit for the purpose and the right assets were not allocated to for the right market environment," he said.
"This is particularly apparent for those in or approaching retirement.
"There was no change in construction based on the investors' stage of life, no explicit risk or return targets, no account of retirement lifestyle needs or investor behaviour and no explicit management of equity risk," Farley continued.
"These fundamental limitations in portfolio construction still persist today.
"Equities still dominate the average retirement fund, in asset allocation, risk and return."
Originally published by SMSF Essentials.
AUTHOR
Staff Writer
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