'Incredible' dispersion in balanced fund returns

2022 has marked just the fifth financial year of negative returns since the Superannuation Guarantee (SG) became compulsory in 1992. This should not be a surprising result, as it fits broadly in line with the typical risk profile definition of a “balanced fund,” which states the expectation of one negative return in every five to six years.

A negative return is difficult to digest, even after such strong performance for several years, so there is no doubt a lot of challenging conversations being held in client review meetings. What has been most interesting, though, is the incredible and growing dispersion in returns of so-called balanced funds.

Readers are no doubt well aware of the dispersion in equity and bond market strategies, that being ‘value’ managers outperforming ‘growth’ and short-duration fixed-income outperforming long. However, few could have predicted or expected the significant difference that has come from an approach that seemingly should be the same in each portfolio.

The industry funds have clearly been the standout, thus far at least, with HostPlus reporting a 1.6 per cent gain for the financial year when nearly every other balanced fund posted a negative result. The soon-to-merge Christian Super was also able to gain 0.5 per cent (after failing the performance test in the prior year.)

While there are clearly questions to be asked about the valuation of unlisted assets, the use of discount rates and venture capital, for the purposes of this article we will take the performance as it is stated. AustralianSuper was at the perceived lower end of the spectrum, falling 2.7 per cent, but still outperformed the Super Ratings SR50 index, which fell 3.1 per cent. 

At the other end of the spectrum is research house Morningstar’s Target Allocation benchmarks, which track the peer group performance of an actively managed portfolio of funds. The Balanced Target benchmark fell 8.3 per cent for the year, likely due to a combination of factors.

The broader FE fundinfo Balanced benchmark fared slightly better, dropping 6 per cent but with the underlying universe delivering returns of anywhere from positive 2.5 per cent to negative 10 per cent for the financial year.

This level of dispersion seems to be unprecedented in the context of balanced portfolios and shows the very wide definitions and approaches being used across the industry. From a high level, there appear to be four simple explanations behind that the growing dispersion:

1. Duration positioning: Those investors who stuck to the tried and true ‘long-duration’ government bond approach were hit with a reversal of long-held correlation assumptions, with fixed-income allocations falling as much as equities.
2. Growth and momentum factor exposure: This may well be the biggest driver of the difference, with those still holding the winners of 2020 into 2022 being met with an abrupt surprise, as bond yields sent high-growth stocks into a real meltdown.
3. Indexing or passive cores: index-focused strategies tended to underperform during the period of heightened volatility, primarily due to the fact that by their very nature, these portfolios were heavily weighted to growth stocks and government bonds.  
4. Unlisted and alternative assets: For better or worse, those funds that embraced alternative assets, whether direct property, private equity or infrastructure fared best. Whether the assets are held at cost, or will be gradually marked-down, only time will tell.

Drew Meredith

Drew is editor of The Inside Network's publications and a principal adviser at Wattle Partners.