Is your super fund using performance-enhancing drugs?

These days whenever I watch sport, I can’t help wondering whether the competitors that win are using performance-enhancing drugs. I think ever since the Lance Armstrong saga a number of years ago, many people are now sceptical of sport, particularly when there are large amounts of money on the table.

My suspicions were again aroused recently when I read an article in The Wall Street Journal. The journalists reported that Nike may have been directly involved in performance-enhancing programs or doping of their track and field athletes (see article).

There’s no doubt that drugs in sport gives players an unfair advantage over their competition. It’s certainly not a level playing field when the majority are not taking drugs and then somebody comes along and cleans up the trophies and the money because of artificial enhancement of their performance.

The problem can then progress over time to a situation where such a large proportion of the field is taking performance-enhancing drugs, anybody who is clean does not stand a chance of getting on the podium. The Lance Armstrong scenario is a case in point.

But what does all this have to do with superannuation? Well, recently APRA finally commenced its enquiry into the classification of superannuation investment options, such as which assets should be classified as defensive and which should be classified as growth.

So why is this such an issue?

Well, think of it like the performance-enhancing drug situation. You have a group of competitors (super fund asset managers) that are all abiding by the rules with 50% growth-based exposure and 50% defensive-based exposure portfolios. They all refer to them as ‘balanced’ and are competing on equal terms.

Whichever fund ‘wins’ the title of top-earning super fund receives the fame, the glory, and more importantly the cash influx of new investors joining the fund.

Then a new super fund asset manager comes on the scene that might say something like this: ‘Definition of growth exposure and defensive exposure is nonsense …” As a result, this fund manager believes it can break the rules and use what I will term ‘performance enhancing stimulants’ to boost its fund’s returns.

So while on the surface the fund manager might be calling the fund ‘balanced’, in reality, it puts very little exposure into defensive assets; in fact it reduces it down to, say, 10 or even 0%.

As you can imagine, the returns are higher, the fame and glory follows, and around $2 billion or so of new investor money rolls in the door. All these new investors think this is great; they are in a balanced fund and look how great the returns are. Yet these investors are unaware of what the fund might be doing with their lifetime savings and all the extra risk that comes with this investment option.

Now other fund managers might think this is unfair, and with the stakes so high, they also look to inject performance-enhancing stimulants into their portfolios too. Before long, we have moved onto phase two as I outlined above in the example of Lance Armstrong: whereas before just one fund tried it; it becomes prevalent to the detriment of investors.

In fact, this issue is happening right now, with a large number of industry superannuation funds having exposure to growth-based assets.

Will this end in tears? When it comes to investing, if it sounds too good to be true, then usually it is – but only time will tell.

I believe when a person chooses an investment option, it should be reflective of what they are expecting and should also be protected by regulator guidelines around what mix of assets can provide long-term conservative, balanced growth.

Unfortunately, it might be some time before this becomes a reality, so until then we are left to navigate this maze of performance-enhanced fund managers, and try to figure out which investment to choose that best matches your goals.

If you are trying to decide what investment options you need for your superannuation, I recommend you seek professional guidance from a suitably qualified and practising financial planner and of course, I recommend AJ Financial Planning.