When is balanced, really balanced? Part II

A couple of weeks ago my blog focused on, when is a balanced investment fund, really balanced?!

One of the key aspects of the blog was the frustration I feel for investors who try and make an informed investment decision about where to invest their hard-earned cash. Furthermore, I have for a long-time been bewildered by the fact that there has been minimal noise about the discrepancies that exist in this space.

Well, I thought I would continue on this topic, as there has been a very positive announcement today by the Australian Prudential Regulatory Authority (APRA). APRA intend to release a discussion paper about this very topic later this year, which will try and simplify the decision-making process for investors. Do you think APRA read my earlier blog? Probably not, however I am happy about this announcement. 

Not surprisingly the key offenders in this space have already been vocal about the lack of importance this topic has, of course in their humble opinions! Truth is, what we should all demand is a framework which allows everyone to have appropriate information to make an informed decision, again, doesn’t sound like too much to ask for! 

So, what have APRA flagged for their white paper? 

The focus will be on the classification of infrastructure and unlisted assets and a conclusion where we can make easier decisions by simplifying the manner in which the information is presented. To explain, one of the major variance’s is whether infrastructure and unlisted assets such as property trusts, should be considered to be a growth asset or a defensive asset. Some circles classify these assets as growth assets whilst others defensive assets, which, not surprisingly adds complexity when making a decision. 

Those who believe they are growth assets suggest that given there is a chance the valuations of these assets can vary significantly over an economic cycle that they should be considered a growth asset whilst the other team believes that given they are large stable assets that they appropriately align to the defensive side of a portfolio.

So, why does this matter? In short, if fund A, classifies the asset as a growth asset they will therefore have lower exposure to other growth assets such as shares, whilst if Fund B classifies the asset as a defensive asset, they will have a higher exposure to assets such as shares. All the while both Fund A and Fund B may call themselves a Balanced Fund. I can see you rolling your eyes, as what should be straight forward is far from it and above all else to range of returns an investor could expect will vary significantly depending on which Fund they choose.

From my perspective, I believe that assets that have the chance of significant variance in return should be a growth asset, so I genuinely love the announcement that APRA have made and applaud their insight to try and simplify things for everyone. 

Furthermore, APRA have indicated that they intend to bring in a dashboard type system which ranks investments across four key categories, net returns, fees and costs, insurance and sustainability. This sounds a little bit too good to be true if we had a ranking system which in fact so simple, so I won’t hold my breath, however I will remain optimistic that there is light at the end of the tunnel.

Let’s continue to watch this space……

If you would like to read some more about this, please refer to the following article in the Australian Financial Review.
https://www.afr.com/wealth/superannuation/apra-s-game-changing-intervention-in-super-20190826-p52ks4