Should you move your super away from the balanced option?
Many Aussies are invested in the balanced default option in their superannuation fund. It’s a strategy that has served super fund members well in the past few years as super funds have delivered very strong returns, but will this strategy serve investors over the next five years?
Global and domestic markets are facing a myriad of economic and geopolitical concerns. There’s the finalising of the Brexit deal, a looming US election, lingering trade wars, a spate of natural disasters, and the detrimental immediate and long-term impact of the deadly coronavirus.
So, with a backdrop so grim, where does this leave yield-hungry investors seeking healthy returns while avoiding heightened levels of risk?
In order to achieve their required level of income, investors – particularly retirees – may need to revisit their traditional balanced investment strategies, as the late stage in the market cycle turns and overall returns reduce.
Revisiting balanced options
The balanced default asset allocation option is the way many people are invested in superannuation. Typically, this is an asset allocation of 70% to investments perceived as riskier, such as shares that experience large swings in market value, with the remaining 30% then allocated to more secure or less risky investments, such as fixed income.
Generally, these balanced portfolios are typically divided between stocks and bonds, and seek both preservation of capital and growth. They tend to be used by investors with a more moderate risk appetite, while more conservative investors generally opt for a higher ratio of capital preservation strategy, and more aggressive investors typically choose a riskier growth strategy.
For medium- to long-term investors who want exposure to investment classes that will potentially give higher returns, a balanced option may be still appropriate as long as they understand that negative returns are likely over the short term.
Strong returns drawing to a close
All good things must come to an end and, with the market’s 20% returns of the past 12 months no longer realistic, balanced investors are unlikely to continue receiving such strong investment returns as interest rates hit the bottom of the cycle.
Furthermore, with interest rates over the next five years unlikely to rise by more than 1% or 2%, we can probably expect one-year term deposit rates to remain under 3% and other secure fixed interest investments to provide similar rates of return.
This means the balanced investor with a 30% allocation to fixed interest investments may only receive a return of 3% for this part of the portfolio for the next five years. In contrast, medium-term returns of 7%-8% – comprised of dividend yield and earnings growth – over the next five years would be a reasonable expectation for share investments.
With a 70% allocation to shares, the balanced investor is likely looking at a total return of between 5.5% and 6.5% for the next five years; significantly less than previous years.
This turn in the cycle comes at a time when many “baby boomers” will be looking to access their superannuation balances as they enter retirement. Unfortunately, for investors who are drawing down more heavily from their superannuation, such a return may be too low.
One possible solution to improve investment returns is to increase the allocation to the risky part of the portfolio. An extra 10% allocation is likely to produce a 0.5% higher return.
But investors will need to be aware that sharemarkets – both here and overseas – will continue to operate in the same volatile manner, which can be a daunting prospect for those not used to the fluctuations that come with the current level of market uncertainty.
However, while a 15% short-term market correction on a higher proportion of an investor’s portfolio may be a difficult pill to swallow, for the benefit of higher expected long-term returns, it may be necessary to achieve a longer lasting superannuation balance – something those approaching or at retirement age need to very carefully consider.
Compare Superannuation with Canstar
The table below displays some of the superannuation funds currently available on Canstar’s database for Australians aged 30 to 39 with a super balance of up to $55,000. The results shown are sorted by Star Rating (highest to lowest) and then by 5 year return (highest to lowest). Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the applicable administration fees based on an account balance of $50,000. To learn more about performance information, click here. Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD. Use Canstar’s superannuation comparison selector to view a wider range of super funds. Canstar may earn a fee for referrals.
- Performance, fee and other information displayed in the table has been updated from time to time since the rating date and may not reflect the products as rated.
- The performance and fee information shown in the table is for the investment option used by Canstar in rating of the superannuation product.
- Performance information shown is for the historical periods up to 31/01/2024 and investment options noted in the table information.
- Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the applicable administration fees based on an account balance of $50,000. To learn more about performance information, click here.
- Performance data may not be available for some products. This is indicated in the tables by a note referring the user to the product provider, or by no performance information being shown.
- Please note that all information about performance returns is historical. Past performance should not be relied upon as an indicator of future performance; unit prices and the value of your investment may fall as well as rise.
- Any advice on this page is general and has not taken into account your objectives, financial situation or needs. Consider whether this general financial advice is right for your personal circumstances. You may need financial advice from a qualified adviser. Canstar is not providing a recommendation for your individual circumstances. See our Detailed Disclosure.
- Not all superannuation funds in the market are listed, and the list above may not include all features relevant to you. Canstar is not providing a recommendation for your individual circumstances.
- Canstar may earn a fee for referrals from its website tables, and from Sponsorship or Promotion of certain products. Fees payable by product providers for referrals and Sponsorship or Promotion may vary between providers, website position, and revenue model. Sponsorship or Promotion fees may be higher than referral fees. Sponsored or Promotion products are clearly disclosed as such on website pages. They may appear in a number of areas of the website such as in comparison tables, on hub pages and in articles. Sponsored or Promotion products may be displayed in a fixed position in a table, regardless of the product’s rating, price or other attributes. The table position of a Sponsored or Promoted product does not indicate any ranking or rating by Canstar. For more information please see How We Get Paid.
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Performance and Investment Allocation Differences
- Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology.
- Some providers use different age groups for their investment profiles which may result in you being offered or being eligible for a different product to what is displayed in the table. See here for more details.
- Australian Retirement Trust Super Savings’ allocation of funds for investors aged 55-99 differ from Canstar’s methodology – see details here.
- The Australian Retirement Trust Super Savings (formerly Sunsuper for Life) product may appear in the table multiple times. While you will not be offered any single investment option, this is to take into account the different combinations of investment options Australian Retirement Trust may apply to your account based on your age. For more detail in relation to the Australian Retirement Trust (formerly SunSuper for Life) product please refer to the PDS issued by Australian Retirement Trust for this product.
- Investment profiles applied initially may change over time in line with an investor’s age. See the provider’s Product Disclosure Statement and TMD and in particular applicable age groups for more information about how providers determine their investment profiles.
About Jonathan Philpot
Jonathan Philpot is wealth management partner at HLB Mann Judd Sydney, a firm of accountants and business and financial advisers.
Cover image source: William Potter/Shutterstock.com
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