Sam Sicilia, chief investment officer of HOSTPLUS, has called for a revamp in the way balanced funds classify defensive and growth assets, after the fund’s definitions were called into question in a PwC report.

Sicilia said the definitions should be updated to account for the contemporary asset allocations where many funds allocate to unlisted assets.

“The definition of defensive asset classes (cash and bonds) and growth asset classes (anything not cash or bonds) is simply historical, from a time when unlisted assets were not prevalent in strategic asset allocations,” Sicilia said.

He urged for unlisted property and unlisted infrastructure to be accounted for by the degree to which they are correlated with equites, bonds and cash, under varying capital market scenarios.

“Since it is a relatively simple exercise to disaggregate the return from any real asset (property or infrastructure) into its capital (growth) and income (defensive) components, that methodology is available to all funds to adopt,” he said. “It is particularly disappointing that PwC did not take the opportunity to lead the debate by challenging the traditional definition of growth/defensive split.”

In the report Comparing super funds: Apples vs apples or fruit salad? Stephen Jackman, principal at PwC, said superannuation funds are classifying growth and defensive assets in different ways and this could be disadvantaging some funds in the SuperRatings SR50 Balanced (60-76) survey.

Jackman pointed out that while some funds use a strict description of defensive assets meaning cash or bonds, others are also describing around 50 per cent of their property, infrastructure and other alternative assets as “defensive”.

Under such a strict description of defensive assets some funds would no longer qualify for the SuperRatings survey, as they would have more than 76 per cent in “growth” assets.

Sicilia took exception to the report and its assumptions, not least as he recognised an anonymised case study used by PwC to make its case, as that of the asset allocation of the HOSTPLUS MySuper fund.

In the case study, a “typical” fund was identified as allocating 7 per cent fixed income, 9 per cent property, 3 per cent infrastructure and 5 per cent alternative assets to its defensive assets (24 per cent in total), thereby meeting the requirement for the SuperRatings balanced survey.

The same fund has a further 3 per cent of alternatives, 9 per cent property and 3 per cent infrastructure allocated to its growth assets.

In reply, PwC said it does not endorse the strict approach of defining defensive assets as merely cash and bonds, and see some merit in classifying some infrastructure and property as a defensive asset.

Jackman added the main point was the consistency of approach, with some funds adopting the same method as HOSTPLUS while others did not, which “leads to the question of whether some funds are being disadvantaged”.

“We welcome further discussion on this issue, and our views on the correct approach are actually similar to Sam Sicilia’s,” Jackman said.

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