What do a cat, the moon and quantum physics have in common?

Tick, tick, tick, tick. Time’s up. The answer is nothing.

Another question: What do a hundred Balanced options have in common?

Tick, tick, tick, tick. Time’s up. The answer is nothing.

Given that Balanced options are the country’s most popular (or should that be most numerous?) investment option types, you’d hope that it would be easy to define what they are. The truth is, however, that all the so-called Balanced options share just one thing in common. Their name. They might sound alike. They might even superficially look alike. But they are not alike in investment mix nor in performance.

So, what exactly are Balanced options? Let’s start with the word ‘balanced’. Many Australians imagine that Balanced refers to a middle ground, somewhere between risky, but potentially very rewarding products at one end and safe but lacklustre investments at the other.

That’s not a bad interpretation. If you look at the historical performance of so-called Balanced options, they generally fall in the middle ground, neither leading with blisteringly high returns nor plodding along barely above inflation.

However, the truth is that Balanced options define an investment balance between listed assets (shares) and unlisted assets (property, for example). Now this is where things get messy.

You’d think that if a whole bunch of funds offer their members options called Balanced, then these products would be fairly close in terms of the balanced between listed and unlisted investments. How wrong you’d be! The Balanced products offered by some funds have 80% of their money invested in shares. In others, that’s as low as 20%.

Now let’s presume that a hundred funds offer Balanced options and let’s presume that they all set identical performance objectives - say CPI plus 3% over 5 years.

If all of these 100 products are called Balanced and their objectives are the same, then surely members could expect them all to perform fairly similarly. That’s reasonable. But it’s wrong.

Look at what’s happened post financial crisis. The Australian share market has rebounded gloriously and is well on its way to recovering its position before the GFC. If your money’s in a Balanced product with 80% invested in shares, your super has also rebounded spectacularly in the past year.

However, if your Balanced option has just 20% invested in shares, your super might still be languishing in the doldrums - or continuing to go backwards. Whilst the share market has rebounded, property hasn’t. Sure, some super products investing in property have done well (the best has averaged 6.6% return in the past five years). The worst, however, has lost 10% in that same period. Obviously, the property (and the less in Australian shares), the greater the likelihood that you’re lagging behind the recent recovery.

As we keep saying, it’s important to not only find the option type that’s right for you (taking into account your appetite for or aversion to risk, age and savings goals), but to take the time to find the best performers in your selected investment option. A quick look at Balanced options (in the 60-76% growth bracket) shows a chasm between the best and worst performers over 5 years.

Our parent company, SuperRatings, have long been advocates for a change in the definition of so-called Balanced option products. Now, on behalf of fund members, we’re also taking up the cause. We say, forget looking for a ‘Balanced’ option. Look instead for the words that give a clue to the fund’s investment philosophy. Phrases like ‘aggressive’, ‘moderate’ or ‘defensive’ are better indicators than catch-all ‘Balanced’ of where a fund has positioned its product. Look also for performance objectives. Most reputable funds aren’t afraid to publish the returns they’re aiming to achieve (we’ll have more to say on this in the very near future). Sure, check out the funds whose products have delivered the best returns over the long term, but then check these against their objectives and check out the balance of listed and unlisted investments. Finally, read the Fundamentals reports. Only then can you make sense of the hundreds of products that share little in common except their ‘Balanced’ nomenclature.

As a starting point - in case you missed it - here are the Top 10 performers in the Balanced investment options category since 2005:

• Balanced Fund Options with between 60% and 76% of assets in growth style investments. All results are not of fees and tax

^Interim Rate Returns

Disclaimer: SuperRatings Pty Limited holds Australian Financial Services Licence No. 311880. This release has been prepared for the purpose of providing general advice only and has not considered the recipients objectives, financial situation or needs. The recipient should consider obtaining independent advice before making any decision about a financial product referred to in this report and should obtain and consider a copy of the relevant Product Disclosure Statement from the product issuer.