Author: Greg Alder - .au
How super products produce a false sense of security
We have noticed one recurring concern from fund members over the past few years (other than the obvious one about where their money has gone). Many who lost money have been baffled that they could lose so much money when their super had been invested in a product called Moderate Defensive, for example. How could something with a name that suggests security lose 30% in a year?
The questions have prompted us to examine the names given to super products and how they can deceive us into false expectations of either safety or performance. So here is our take on whatʼs wrong with the naming of super products. Whatever proprietary name a product might be given, it will generally fall into one of these five groups - Aggressive, Growth, Balanced, Moderate or Conservative. These represent a broad mix of investment strategies and product mixes -
Aggressive (80% growth assets, 20% income assets)
In this group you can find products called High Growth, Total Growth, Managed Growth, Enhanced Growth and High Growth Plus (which sounds to us like a fertiliser). Some products might indicate the percentage of money invested in growth assets - Growth 90. You get the picture? Growth is big. However this causes problems, as the next category demonstrates. Other products with an aggressive investment strategy might be identified by their performance objective - Inflation Plus 7%, for example. We will come back to this last name in a moment.
Growth (61-80% growth assets, 20-39% income assets)
You noticed that products in the Aggressive category often had the word Growth in their names? Well, so do products in the Growth segment - as you would expect. Products have names like Protected Growth, Managed Growth (and yes, the same name appeared in the Aggressive list - more on this in a moment),
Capital Growth, Diversified Growth and Balanced Growth. You will also find products called High Growth and Active Growth, which sound more like aggressive investment strategies. And you will find products with the word Balanced in their names, even though they fall outside the accepted definition of a balanced investment strategy. Confused? Read on.
Balanced (41-60% growth assets, 40-59% income assets)
Products in this popular group often have words like Moderate or Diversified prefixing the word Balanced. But they can also have the word Growth in their names. Or Defensive. And each of these names suggests a more aggressive or a more cautious investment mix than is typical of this half-and-half investment mix. Others might be called Monthly Income (which ought to put them into the Conservative group below) or they have nonsense names like Active Moderate Defensive. Why not Defensive Aggressive or Rampant Prudence?
Moderate (21-40% growth assets, 60-79% income assets)
Does Moderate sound similar to Balanced to you? It does to us. The word Income appears in many of these products, emphasising the dominance of income-generating assets - Managed Income, Income Plus, Asset Income, Defensive Income, Diversified Income. You will also find products suggesting stability - Capital Stable, for example. And there are products with this moderate investment mix that have names that include the word Conservative, like Conservative Growth or Enhanced Conservative … which brings us to the final group.
Conservative (0-20% growth assets, 80-100% income assets)
Products with this investment mix have names like Capital Stable (again), Capital Secure, Defensive, Conservative Income or Monthly Income. And Active Defensive (to differentiate it from Active Moderate Defensive products).
Do you see the problem here? There are products with deceptive names that might give an investor a false sense of security or false hopes of aggressive returns. There are products with strategies that place them in the Growth segment but which have a name that suggests a less risky investment. If you are going to select a super product with confidence, it is necessary to look beyond its name and to really understand the investment mix. Better still, select products based on their performance objectives.
Every fund will publish its objectives. This is usually indicated as expected performance relative to inflation. So the Inflation Plus 7% product listed in the Aggressive category above indicates that the fund expects this product to deliver returns 7% better than the rate of inflation - that is, 9.8% at the current rate.
Other well-named products indicate the percentage of money invested in a particular asset, such as a Growth 90 product.
Even within the accepted definition of a segment, there is enough room for variation in investments to product dramatically different results. A product with 60% in growth assets will earn its investors a lot more in buoyant times than one with just 40% in growth assets. A product whose growth assets are mostly unlisted (that is, not on any stock exchange) will not benefit from a bull share market.
Our advice? Look at the investment mix of any product you are invested in. Look closely.
Forget about what the product is called.
Disclaimer: SuperRatings Pty Limited holds Australian Financial Services Licence No. 311880. Any advice provided here is of a general nature and does not take into account your individual financial situation, objectives or needs. It is not guaranteed to be accurate or complete. Information has been prepared without taking into account your individual financial objectives, situation or needs. You should, before acting on the information, consider its appropriateness having regard to your own financial objectives, situation and needs and consider obtaining personal financial advice from a financial adviser. Before you make a decision regarding any of the products mentioned, you should obtain and consider a copy of the relevant Product Disclosure Statement from the product issuer.