Analysis: Short-term returns don’t come from a magic potion

A fund manager or superannuation fund’s return percentage is only a snapshot in time. Making decisions on a long-term investment — like your superannuation — should be made with long-term analysis.

The performance tables for the top performing super funds were published in the Australian Financial Review over the weekend. I looked straight at the top, as I’m sure most people did. Who’s the best? Hostplus Balanced – achieving 12.5% returns for the year. Sounds very good for a balanced fund.

Industry super funds have a good reputation for performance and keeping costs low, so maybe these numbers aren’t surprising. After all, they have enormous amounts of money and should be able to access investments out of reach to the rest of us. Maybe that explains the returns. Or do they have some form of ‘magic potion’?

Out of interest, I delved a little deeper. Hostplus Balanced has an allocation of 76% to growth assets including shares, property and private equity. Out of this there is apparently 47% in unlisted assets. The returns on these would be calculated in a very different way., but 76% in growth assets is hardly ‘balanced’. I thought balanced was 50/50.

Another good performer was Australian Super Balanced — it has a 1-year return of 11.1% — but 82% allocation to growth assets. And Sunsuper Balanced, another top performer, has 83% to growth assets and a 1-year return of 10.6%.

CFS FirstChoice Balanced came in much further down the list but its allocation is 50/50 (1-year return of 8.5%). Some of the other ‘balanced’ funds have a greater allocation to defensive assets — one with 70% defensive. There’s no magic potion — the leading performers have a higher allocation to growth assets. There’s a manager we use in some situations that delivered a 20% return for the same period with a net exposure to growth assets of only 54%. It sounds (and is) a very good return – but there’s a lot more to how it was achieved than meets the eye.

Performance is always a dangerous way to choose an investment manager or fund and mislabeling doesn’t help, even when it’s unintentional. Besides the asset allocation, there are so many variables that contribute to performance: the risk factor exposure, stock-picking success, and whether shorts or other methods are being used are just some of them. Even when the asset allocation is the same, judging a fund purely on performance is like judging a garden based purely on how it looked on a certain day. It reminds me of those show gardens that look wonderful on the day, but you just know they would look terrible in a month or so.

This is not criticism of the industry funds. They’re just doing their job as they each see fit. And they’ve done well to focus on commissions to attract members. After all, if advisers were charging fees and not delivering service, they deserved to lose their clients. But the new member shouldn’t expect to get any better advice from an industry fund unless they engage an adviser from the fund.

Frustrated investors will easily be distracted by performance surveys, poor labeling, and adverts focusing on commissions. Decisions made without a better understanding of the underlying differences in asset allocation, security risk and the services provided are likely to end badly.

It’s nobody’s fault — the industry funds don’t compile the survey, they just participated. The danger is that an investor already frustrated with what they’re getting from their existing provider, may see these surveys and conclude that an alternative is better without knowing the detail. For example, even in this survey, Sunsuper state it is expecting better opportunities in the future if prices fall and are remaining more liquid. In a year or two, they could be the top performer as a result.

When making decisions that have long-term impacts, it’s important to see short-term data as only one element of a much bigger puzzle.