Careless fund labelling an issue: Morningstar

Lack of consistency in fund name conventions remains a significant issue, with labels such as ‘balanced’ and ‘growth’ often meaning very different things from one product to the next, according to Morningstar’s Multi-Sector Funds Sector Wrap-up.

The research house published its qualitative assessments of 51 multi-sector strategies offered by 12 fund managers, which found the plethora of labels within multi-sector strategies can “confuse investors trying to understand portfolio risk and return characteristics”.

Morningstar’s co-head of fund research Tim Murphy said this could make it difficult to undertake like-for-like comparisons.

“This is a major industry issue, particularly given the magnitude of superannuation contributions flowing into so-called ‘balanced’ and ‘growth’ funds,” Murphy added.

According to the report, almost 55 per cent of Australian superannuation assets are invested in multi-sector growth vehicles, many containing the term ‘balanced’ in the name.

Morningstar said it was especially mindful of fund managers offering so-called ‘balanced’ vehicles that tilted clearly towards growth assets — typically 70-80 per cent of a total portfolio.

“This reflects a commonly-accepted view that this 70:30 allocation is a ‘balanced’ asset mix, and is generally the most popular. The problem arises with unsuspecting investors potentially assuming greater risks than they were bargaining for,” the report stated.

In other findings, Morningstar highlighted there had been a rebirth in popularity for multi-sector funds since the global financial crisis, which saw total multi-sector fund assets reach $154 billion at 30 June, 2010.

The expected long-term risk/return relationship has not panned out for Australian investors over the last decade, with the conservative category beating aggressive multi-sector funds, the report noted.

Murphy said this could be attributed to two major bear markets in equities, falling interest rates helping bond prices and an appreciating value of the Australian dollar adversely affecting returns from international shares, among other things.

“We don’t think the next decade is likely to see a repeat of the last decade, particularly given where interest rates and the [Australian dollar] are now, but this does highlight that the ‘long term’ can sometimes mean a very long time indeed,” he said.