Q. I am age 64 and plan to retire later this year. Can you give me a general idea of what exposure to growth investments I should be looking to have for my Superannuation and Allocated Pension investments for the long term in retirement?
A. It is generally accepted that growth assets will outperform defensive assets such as cash and fixed interest in the long term. As such it is important that your overall portfolio has exposure to growth assets to protect against the long-term impact of inflation.
There is no definitive answer as to how much you should invest in growth assets in retirement. How much you choose to invest in growth assets should be determined by your appetite for risk, your life expectancy, your income needs and your ability to weather a market downturn and allow for recovery.
Diversify your portfolio amongst a range of investments, both growth; such as Shares, Property and infrastructure as well as defensive; such as cash and Fixed Interest. These asset classes should be diversified by type and a mix of Australian and International.
Retirees typically feel comfortable with exposure between 50% and 60% of their assets to growth investments. There is logic to this asset allocation; assuming you draw income from your Allocated Pension at 5% per annum and you withdrew the money from the defensive assets within your portfolio, on a 50% growth exposure, you have 10 years “breathing space” before being forced to sell growth assets in the event of a share market crash. If your portfolio was structured as 80% Growth then obviously you would only have 4 years. You need to determine how comfortable you would feel in this scenario and how big an income buffer you would require.
Q. Can you please explain to me why there is so much difference in the performance of Superannuation funds when I look at ranking tables?
A. Whilst the fees charged by Superannuation funds are an important consideration, the primary driver of investment performance is asset allocation and investment selection.
Asset allocation refers to how the funds are invested. Typically Superannuation fund managers will invest in a range of assets such as shares, property, infrastructure, fixed interest and cash. Quality Investment selection is reflected in the skill of the manager to buy assets that grow in value and generate a rate of return in excess of the market.
Trying to compare funds on a like for like basis is not as easy as it should be. You need to ensure that you are comparing funds with a similar asset allocation. This is not made easy by performance tables that bundle funds together as “diversified” or “balanced” funds when there is a marked difference in their asset allocation.
If one Balanced fund has 60% exposure to growth assets and another one has an 85% exposure to growth assets, it should be fairly obvious which one will outperform if share markets are performing strongly. But if the opposite occurs then an inevitable outcome will ensue.
My concern for Super fund investors is that they know where their funds are invested and what risks they are taking to generate a rate of return. Past investment performance is important but so is the amount of volatility you experience and also the capital risks you take on board to generate a return.
Make sure you check a funds exposure to growth assets and compare between funds with a similar exposure. Do not rely on the fund name or its ranking to give you the answer.
Reading through the websites of some particularly high profile Superannuation funds worries me incredibly. I hope those investors investing in some Balanced funds know that in some instances that they may be exposed to 85% exposure to growth assets and they accept that level of risk. There is nothing wrong with this asset allocation provided you understand the risks you face in the pursuit of return.
Once you are comparing on a like for like basis, then compare the relative performance, considering fees, the volatility and the capital risks taken to generate the returns. Do not rely on the Super fund or performance tables to do this for you.