I have followed with great interest the debate that has been taking place in your magazine over recent weeks about the classification of “growth” and “defensive” assets for superannuation funds. This is an important topic, and the current discussion and debate is timely.
The primary purpose of superannuation is to provide retirement income. By its very nature, superannuation is a long term investment – so in an ideal world super funds would be compared on the basis of the long term retirement outcomes they deliver to their members, rather than on the basis of investment performance league tables.
As investment professionals, we all know that a single year’s performance cannot be used to draw statistically significant inferences about the future, and in particular it tells us almost nothing about the capacity of a fund to deliver upon its primary mission of providing adequate retirement income. Even investment performance over much longer periods does little to inform us about the extent to which the primary mission is achieved.
Nonetheless, we do not live in an ideal world. Super funds are, and probably always will be, compared on the basis of their annual performance. Given the competitive way in which the Australian industry has evolved and given the environment under which they are regulated, I think leagues tables are here to stay.
My experience is that the publishers of superannuation league tables generally have a good understanding of the limitations of performance tables and go to considerable lengths to emphasise the importance of focussing on longer term returns and considering a range of factors other than investment performance when assessing funds. Furthermore, providers are well aware of the need to compare like with like, and for this reason, investment option performance is sensibly segregated into a range of risk-based cohorts. The shorthand that is used for the purpose of this segregation is “growth” and “defensive” assets, and it is on this point that the debate has raged in recent times.
I was recently quoted in Investment Magazine as saying that institutional investors should be thinking about their assets in a more sophisticated way than using simple labels such as “growth” or “defensive”. There is a complex array of factors that influence the risk and return profile of any given asset. Within any given asset class and in any given set of circumstances, individual assets can display defensive or growth characteristics, or more often, a combination of the two. Simply labeling an asset as “growth” or “defensive” masks this complexity and ambiguity. In my experience, all institutional investors recognise that successful investing requires multi-dimensional thinking, and all have moved away from the one dimensional thinking implied by a binary distinction between “growth” and “defensive”. (A classic example of this ambiguity is ungeared core real estate – it is hard to argue that an illiquid asset that is impacted by economic cycles and supply/demand dynamics is defensive, but on the other hand, it certainly has different characteristics to listed equities – the “classic” growth asset).
It would be difficult to use a more sophisticated system to capture all of the subtle nuances of risk, so I can understand why the “growth” and “defensive” shorthand is used in performance tables. The key issue seems to be that there is no universally accepted definition of what constitutes a “growth” or “defensive” asset – the recent debate in your magazine clearly illustrates this point! In the absence of a clear definition, individual funds themselves have been left to make their own classifications. The danger of course is that different funds may well use different definitions and/or adopt different conventions for dealing with assets that don’t obviously fit in either box. In practice, I suspect there is likely to be a bias for funds to seek to broaden the range of assets that are labelled as “defensive”. Given this bias, I am inclined to support a conservative and narrow definition of what constitutes “defensive” and for all “non-defensive” assets to be labelled as “growth”.
The obvious solution seems to be for the industry, the performance table providers, and/or the regulators to agree on a common framework for classifying assets. In that way, where comparisons are made, these will be made on a more consistent basis. Developing a common framework is unlikely to be an easy task – the recent debate and unsuccessful attempts at standardisation in the past clearly illustrate this – but it is probably better to have the difficult debate than to put it in the too-hard basket and encourage inconsistency. The outcome of the debate may well be a different or broader group of classifications to that which currently applies – in my view the actual outcome is less important than actually having standardisation. If the definitional issues cannot be resolved through agreement in the industry, it may need to be solved through regulation. I note that some commentators have already made this point.
I don’t have any easy answers, and as I said at the start, I’d much prefer to see an industry that focuses significantly more on retirement adequacy than absolute investment performance. But if league tables are here to stay, then I think consistency in definitions would be most welcome.
I hope this is a helpful contribution to this debate.
Graeme Miller, director, investment services, Australia, Towers Watson
