The Subjective definition of RISK in Superannuation
By Nick Bruining
There’s a debate going on in the world of superannuation at the moment and it’s all to do with the murky and some might argue, subjective definition of risk. At stake is the ability to properly compare apples with apples. it’s worth understanding how this argument about risk, could affect your super in a downturn.
A return to basics is in order.
Returns on our investments, always comes with an element of risk. At one end of the spectrum, is a speculative share in some 2 cent per share lithium explorer that could triple in value overnight or disappear into the abyss of failed exploration companies the next. A Wesfarmers share on the other hand is still regarded as risky, but you have the tangible assets of Bunnings, Coles and Target backing up the value of Wesfarmers shares.
Shares are generally regarded as “growth” assets and so, sit in the red corner under the risky banner.
In the blue corner sit our assets classified as defensive. This might include bank accounts, term deposits and in the world of finance, government bonds and bonds issued by corporations. A bond is a form of wholesale loan from the general public, used by governments and corporations to build real assets like hospitals and schools or to fund expansion. The security of thee asset is ultimately, the security of the issuing organisation.
Here’s the relevance to you. A high growth fund, will typically see about 90 percent of your money invested in growth assets. That produces cracking returns when share markets are surging but collapsing in value when we cop an ’87 style share market crash or a Global Financial Crisis. A Balanced fund, typically has about 60 percent in growth and 40 percent in defensive assets and a Conservative super or pension fund, about 30 percent in growth and 70 percent in defensives.
And here’s the problem.
The classification of what constitutes a defensive asset is somewhat subjective. Some might regard real estate, such as a suburban shopping centre or office tower as a defensive asset and worthy of being parked in that camp. However, a downturn in the economy can have a serious impact on retail sales and business. That means empty shops and offices. No rental income means the valuations of the centre can tumble as can that office tower in the city. For that reason, many super fund managers will have real estate, firmly in the growth and therefore, risky camp.
The problem is, there’s no rules about what’s what.
Under these classification differences, what one fund manager could call a “Conservative super fund” might in fact, be closer in make-up, to a growth fund. That means risk. And lots of it.
And the world is even murkier when we start to bring in other assets like infrastructure including power stations and toll roads. Infrastructure assets are popular within industry super funds and growing in retail funds, endeavouring to catch up. Almost all of these assets are not traded in any open market and as such, some argue the values which contribute to the fund returns, are difficult to verify.
You don’t often see a wind-farm appearing in the for sale section of the classifieds.
Supposedly they’re all safe-as-houses but try telling that to the members of the MTAA super fund who saw a sizeable investment in the Lane Cove Tunnel Toll road in Sydney, go belly up a little over ten years ago. Decidedly risky as it turns out.
And even the present doyen of the super world, the Host Plus balanced fund, claims to have a 75 percent allocation to growth assets. With 15 percent of the defensive assets made up of infrastructure and property. Using the conservative definition of risky assets, that potentially puts the fund at a 90 percent exposure to growth assets. Great returns no argument. But when the next Global Financial Crisis type event hits, we’ll see how really defensive some of these investments turn out to be.
The message here is to simply gain an understanding about how the returns are being generated. I for one, am happy investing in highly liquid and transparent funds. Good bad or indifferent, when funds are invested only in readily tradeable assets such as shares, listed trusts and fixed interest securities, the values accurately reflect the value of the assets on any given day.