There are no prizes for getting the answers half right and this is especially true for financial advisers. The extensive array of products and funds available mean advisers relying on a "know the client" strategy, are only doing half the job.
There are no prizes for getting the answers half right and this is especially true for financial advisers. The extensive array of products and funds available mean advisers relying on a "know the client" strategy, are only doing half the job.
According to Stuart Fechner, Navigator's research manager, the greatest challenge for financial advisers is understanding the immense and ever increasing number of different investment products, and then grasping a large range of funds.
A particular area viewed as both concerning and challenging is within diversified funds. The two main issues are, firstly how funds are categorised, and secondly how they are named.
In relation to fund categorisation there is no formal or regulated framework providing a level of consistency as to how diversified funds are classified. This is important in providing an accurate reflection of not only a funds underlying asset allocation structure, but more specifically of a funds possible return characteristics and volatility. If such characteristics are sought by simply viewing the fund name, an inaccurate and misleading result can occur.
While no formal categorisation exists, the standard classifications for diversified funds are as follows:
| Categorisation description | Allocation to growth assets* |
| Defensive | 0 - 20% |
| Moderate | 21 - 40% |
| Balanced | 41 - 60% |
| Growth | 61 - 80% |
| Aggressive | 81 -100% |
* Growth assets defined as Australian shares, international shares & property
This classification is utilised by several key research houses and asset consultants including, Lonsec, Assirt, Morningstar, Mercers and Navigator Research.
The pre-select range of funds offered within the Navigator fund list have been structured to fit within these standard and commonly used classifications. The Norwich Union branded range of diversified funds is also consistent.
A core example is the Navigator Pre-Select Balanced Fund, with an asset allocation structure included in the standard balanced classification.
"This degree of consistency cannot be said for many competitor funds. And, as the above relatively broad classifications are only intended as a guide, advisers would be wise to view them as just that," Stuart points out.
Significant differences can exist between the asset allocations of funds classified within the same diversified category. This can be as severe as one fund having an almost zero allocation to a particular asset class versus another fund that has a significant allocation.
Two simple examples exist within the Diversified Growth categorisation. At the end of June 2004 the Macquarie Master Balanced Fund had exposure of 26.5% and 11.8% to Australian fixed interest and Australian property respectively. While the ING Tax Effective Income Trust had an allocation of 13.0% and 26.2% respectively, to the same asset classes.
"This illustrates the importance of know the product so it can best deliver the investment goals and objectives determined for the client once the know the client is understood," said Stuart.
Another concern is also highlighted: the labelling or naming of diversified funds, where the investor has no relationship with a financial adviser, and therefore no guidance regarding the selection of funds and/or the construction of a portfolio.
"It can be seen within the example that one is titled as a balanced fund, yet classified within the diversified growth categorisation. This mismatch of a fund name and its related investment classification is common place within the broad sector of diversified funds," comments Stuart.
When a classification or comparison of diversified funds is made, it should be done so on the basis of an income/growth assets split or allocation as opposed to simply on the basis of fund name.
Highlighting this is the fact that of the 17 funds offered via Navigator within the Diversified Growth investment category, seven funds have the word balanced within the name and equally so seven funds have the word growth within the fund name.
"It is common practice for a financial adviser when undertaking such assessment and comparison to do so on an asset allocation rather than fund name basis, yet not such a straight forward proposition for an investor without a financial adviser relationship," said Stuart.
One segment of the investment industry where the lack of such a relationship is arguably more prevalent is corporate superannuation. Within the majority of corporate superannuation plans it is broadly accepted that the majority of funds flow (investors SGC contributions) is directed to the non-discretionary, multi manager funds (such as a Pre Select style fund). As a result it is reasonable to expect many investors simply select their fund of choice by the name which resonates with them the most - such as Balanced, as opposed to reasons attached to the asset allocation structure of the fund.
Within the non-discretionary range of funds primarily offered within corporate superannuation plans, predominantly balanced named funds have much closer to an income/growth allocation of 30/70 - which is certainly not balanced. It would be naive to think all such balanced investors would be seeking to invest in a fund that holds three-quarters of its assets within growth asset classes.
"Over recent years, the naming of funds has become more of a marketing and positioning exercise as opposed to one solely focused on reflecting the underlying funds structure itself," said Stuart.
"While the value of marketing and fund positioning is undeniable, there has been a type of diversified fund bracket creep whereby the majority of balanced named funds are really growth funds, especially in an asset allocation sense," he said.
"The impact of this highlights the importance of an adviser relationship for investors, particularly within the corporate superannuation segment of the industry," said Stuart.
-ends-
Stuart Fechner is available for interview on 0407 839 080.
Notes to editors:
- Aviva Australia is a group of two specialist financial services companies: Navigator and Norwich Union Life Australia Ltd. Portfolio Partners, the Australian funds management arm of Aviva plc, is a sister company. Through these companies we provide products and services in the areas of wealth creation, wealth management and wealth protection for more than 300,000 customers throughout Australia
- Globally, Aviva Australia is part of Aviva plc, the world's fifth largest insurance group, the largest insurer in the UK and one of the top five life companies in Europe. Aviva was formed in May 2000 through the global merger of CGU plc and Norwich Union plc
- Aviva is a leading provider of life and pensions products to Europe and has substantial businesses elsewhere around the world. Its main activities are long-term savings, fund management and general insurance. It has premium income and investment sales from continuing operations of A$78 billion, and more than A$624 billion of assets under management (as at 1 July 2004). The group has more than 56,000 employees and 30 million customers worldwide. Aviva is a leading provider of life and pensions products to Europe and has substantial businesses elsewhere around the world. Its main activities are long-term savings, fund management and general insurance. It has premium income and investment sales from continuing operations of A$78 billion, and more than A$624 billion of assets under management (as at 1 July 2004). The group has more than 56,000 employees and 30 million customers worldwide
- The information in this document reflects Norwich Union Life Australia Limited's (NULAL) and NULIS Nominees (Australia) Limited's ('NULIS') understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information given in this document is of a general nature and has not taken into account the investment objectives, financial situation or particular needs of any particular person and it is not a substitute for professional advice. Applications to invest in a financial product issued by Aviva, or any of its related entities, must be made by completing the application form attached to the applicable Product Disclosure Statement ("PDS"). A PDS is available from Aviva or your financial adviser. Before making an investment decision on the basis of the information above, a prospective investor needs to consider, with or without the assistance of a professional adviser whether the information is appropriate in the light of their particular investment needs, objectives and financial circumstances.