If you take half an interest in superannuation, you’re probably familiar with the term ‘balanced fund’, which refers to splitting your fund allocation between shares and bonds.
In theory, it provides you with protection against loss, but the weird financial beast unleashed by the factors at play in 2022 means it is not a foolproof strategy.
In October the Australian Financial Review reported that traditional diversification strategies had failed this year, as worsening inflation ramped up the pressure on interest rates worldwide.
The result was an average loss of nearly five per cent for the average balanced super fund, with one falling by as much as 11 per cent.
What is a balanced fund?
The Australian government’s MoneySmart website defines a balanced fund as “a fund that invests across a mix of classes like cash, property and shares, to achieve medium- to long-term and a reasonable level of income”.
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Across the superannuation industry, that generally translates to an asset allocation that is 60 per cent shares and 40 per cent bonds. The strategy is predicated on the idea that when equities fall in value, bond prices will rally via the safety of fixed income returns.
But some investment experts believe such an approach to be naïve, and 2022 – a year in which both equities and bonds took a hammering – bore out that out to a degree. And, according to Atrium chief investment officer Tony Edwards, it was not the first time that bonds and shares were similarly punished.
Mr Edwards said: “What we’ve seen this year with 60-40 portfolios and really conservative portfolios having deep negative losses, is the interest rate risk – which is the primary risk that’s played out in markets this year – hasn’t been confined to fixed income portfolios.”
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While Mr Edwards is correct that 2022 is not the first time we have seen concurrent equity and bonds losses, such losses for a full calendar year are still relatively rare.
Globally speaking, the only two other such years over the past 96 years were 1931 and 1969.
There have, of course, been dual losses across multiple quarters during that period of almost a century, but prolonged periods are quite uncommon.
Other industry experts are advising ordinary Aussie investors not to panic. Canstar’s Effie Zahos is one such person.
“In some cases, no action is the right action,” she says.
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“People that ripped out their super funds from a balanced fund to conservative during COVID are around about $45,000 to $55,000 worse off,” she said.
The key, say most industry experts – such as Dr Martin Fahey, chief executive of the Association of Superannuation Funds of Australia – is to take a long-term approach.
“It’s not about tomorrow, it’s not about next week,” he said. “It’s about the next two and a half decades for most people”.
If you are concerned about your super allocation or level of diversity, speak to a registered financial adviser.
Do you have a balanced fund super account? Are you concerned about the market volatility that’s been on display in 2022? Why not share your thoughts in the comments section below?
Why do we pay for super funds to manage our funds and they lose money?? This is the part that really annoys me with these industry funds I have not been able to work for past 5 years so the super just sits there yet I lost just on 20k last year with not a word from Australian super
Correct Fishy, same with me. However I keep hearing that Super is a long term investment.
Not if your 75 !! The super gains over the past ten years have not been that great and right now they are negative, yet the funds managers keep getting pay rises.