Why MTAA's wheels fell off
August 14, 2009
PORTFOLIO POINT: The 25% fall by what had been a stellar performer fuels critics arguments against its 'alternative asset' model.
It's been the outstanding "balanced superannuation fund" in the Australian market for as long as most people can remember. The Motor Traders Association fund MTAA, run by Michael Delaney, had been the number-one super fund over one, five and 10 years. This year it won't even come close.
After a decade of stellar returns, MTAA has fallen from its perch. In the year to June it has reported a drop of 25% - worse than the average 13% fall for balanced funds in the same period, or even the 1.95% fall for the ASX 200, adjusted for the super fund tax rate.
The sharply lower results will provide ample ammunition for sceptics of the fund and its "alternative asset" model, which concentrated heavily on unlisted assets such as property and infrastructure while putting very little into the stockmarket. It will also sharpen the debate over whether the MTAA should any longer be classified as a "balanced fund" when its allocations are dramatically different than most of its peers.
Most balanced super funds have 25-40% of their assets in low-risk but reliable cash and fixed interest type investments. MTAA balanced super had less than 4% at June 30.
In March this year (see MTAA against the tide), we asked Delaney how his fund could show such good returns when rival funds were hurting. What's more, Eureka Report highlighted that the "alternative" nature of the MTAA Fund - specifically its exceptional dependence on unlisted assets -could mean that eventual revaluations of its key assets would hit returns. Back then Delaney was highlighting how his fund was performing well in the face of the financial crisis.
"There's no getting away from it and these are extraordinary times and an extraordinary market and extraordinary valuations," he said. "But I can really only say the reason unlisted asset values in our fund have not fallen by as much as listed securities and assets, is not because they are yet to be revalued, it's because many of them exhibit stable cash flows."
Now the tide has turned. So what happened?
Delaney told Eureka Report this week: "I'm not apologetic but I will say it's an uncomfortable place to be. The observation I would make is that we've faced a once-in-a-century event. Our model has been stressed, but the results are a snapshot of a moment in time."
"To all our investors, I would say that perhaps we may not make it to number one ranking this time - and I would add we are just working with preliminary figures - but to achieve the sort of outperformance we achieved historically, I cannot see any other way we could do it except with our model."
Acting to rebalance the fund after unlisted assets grew to an exceptionally large portion of the portfolio with the decline in the sharemarket, Delaney says: "We will, of course, now be making some adjustments."
But he continues to question the lower valuations imposed on his funds by auditors, suggesting that cash yields were often unchanged. "I believe some of this will be self-correcting," he says. "Also, we've seen some stronger revaluations in recent times, but we won't be waiting for it all to happen we will be making some changes . having said that, the model will not fundamentally change."
As MTAA investors digest the reality that their fund is no more impervious to the downturn than conventional funds, the debate rises again about the nature of MTAA and other funds that have run hard on the unlisted model. These include WestScheme, a WA fund that scored similarly spectacular results in recent years and has also significantly underperformed the average return with their "trustees selection" model posting a return of minus 20.74% over the past financial year.
Why has MTAA hit poor returns now?
Put simply, an average balanced super fund (generally made up of about 65% share/property type assets and 35% in cash/fixed interest assets) has provided a return of about minus 13%. Over the past 12 months, the previously "league leading" MTAA Balanced Super Fund has provided a return of minus 25%, providing the unusual (and I suspect for members surprising and disappointing) spectacle of a "balanced super fund" significantly underperforming the worst negative returns from growth investment markets for many years.
Most investors would expect a balanced fund would have a mix of growth (share/property) and defensive (cash/fixed interest) assets, so that when the stockmarket has a terrible year like this most recent financial year (minus 19.5% return), the defensive assets in the fund would provide a positive return and dampen the effect of the downturn.
The following two graphs show the asset allocation for the MTAA - both the "strategic" asset allocation and the "actual" asset allocation (as at June 30, 2009). The strategic allocation is the one referred to in its product disclosure statement and therefore (I assume) close to what fund members expect in the fund.
In understanding what is actually in the MTAA fund, it is important to understand what is in the "target returns portfolio", the part of the portfolio with a strategic allocation of 48% but, at the end of June this year, an actual allocation well above this at 67%. According to the MTAA website, the target returns portfolio consists of "high-yield debt, unlisted property, infrastructure, private equity and natural resources" with a high level of risk, including "liquidity risk".
|nMTAA Balanced Super Fund|
The current asset allocation problem
There seem to be two key problems with this current asset allocation, which sees 67% of the fund in generally less liquid "alternative" style assets. The first is that the significant underperformance of the fund has continued into the 2009-10 financial year as the fund continues to be heavily overweight alternative assets even when compared to its own top-heavy strategic allocation. As listed investment market returns have rebounded, the unlisted assets that make up the majority of the MTAA Balanced Super Fund have continued to trail funds more exposed to traditional investment markets.
The second is that the significant majority of the funds are invested in assets that MTAA itself describes as having liquidity risk: that they are assets that are difficult to turn into cash quickly.
As a benchmark of performance, I have compared the monthly cumulative returns from MTAA Balanced Super with a more traditional asset allocation, of 50% Australian shares, 15% international shares, 20% fixed interest and 15% cash.
I have called this the "MTAA Hypothetical Balanced Fund". As expected, the returns from this hypothetical fund of traditional investment classes shows a return of minus 12% for 2008-09, close to the return from the average balanced super fund. Over the first month and a bit of this financial year the hypothetical fund has returned 5%, again about what we would expect from a balanced super fund given the market returns.
The actual MTAA Balanced fund, with its much higher exposure to unlisted assets, provided a return of minus 24.6% for 2008-09 and plus 1.7% for the start of this current financial year, a combined underperformance over the past 13 and a half months of more than 16%.
The following graph compares the cumulative returns from July 1, 2008, of the actual MTAA Balanced Super Fund and the MTAA Hypothetical Balanced Fund that we have constructed - made up of the traditional investment components of Australian shares, international shares, fixed interest investments and cash follows:
|nMTAA Actual and Hypothetical returns, since July 1, 2008|
The trouble with chasing returns
The strong run of investment returns for the MTAA Balanced Super Fund, until the start of the most recent financial year, seemed to suggest that it had found a way for the fund to "decouple" the relationship between investment risk and return - providing investors with above average returns with little volatility.
However, the significant underperformance of the fund over the past year - likely to post the worst single-year balanced super fund return that I am aware of since the introduction of compulsory super in the 1990s - has shown that the old chestnut of risk and return really are related.
* NB: Returns figures for the MTAA Balanced Super Fund are based on returns published on the MTAA Super website (visited August 13, 2009) and returns for June, July and August 2009 are described as "interim". All other returns are described as final.
Scott Francis' articles in the Eureka Report