Abysmal returns are a super shame

PORTFOLIO POINT: The superannuation industry lost more than $18 billion of clients’ funds last financial year. Part of this is explained by the high average allocation to equities.

What a dismal tale of woe is the Australian retirement savings industry.

Figures released by APRA on Friday show that, in total, the industry lost $18.5 billion of their clients’ money in the financial year to June, which was only partly made up by $6.5 billion in incomes (interest and dividends).

It’s true that contributions were strong, but only because of mandatory salary deductions, and only if you include self-managed funds, which, amusingly, the Financial Services Council did in its press release on the figures on Friday.

Voluntary contributions, in fact, declined, money poured into self-managed funds and the industry suffered net outward rollovers of $6.2 billion.

But that’s just one year – a better way to look at it is over the long term.

The average rate of return from the superannuation industry between 1997 and June 2012 was 4.9% a year, and the volatility was 8.4%.

For most of that time the 10-year Government bond yield fluctuated between 5% and 6.5% and, more importantly, the average return from the All Ordinaries accumulation index for the past 15 years has been 7.03% per annum.

For the year just ended, net investment earnings for the whole industry were $6.3 billion and expenses totalled $4.7 billion. But for retail funds, net investment earnings were MINUS $1 billion – yet expenses were another $2.7 billion.

Little wonder that member contributions fell and self-managed funds are the only sector that’s growing: in the past 12 months, the number of corporate, industry and retail funds fell by 34, or 10%, while the number of self-managed fund increased by 35,300 to 478,263.

The key problem for Australia’s pension savings industry is that more than half the funds, 53% to be precise, are invested in equities – at June 2011 (the average asset allocation for 2012 is not yet available).

At the same time, according to Towers Perrin, the average allocation to equities in the seven largest global markets is 37.7%. To bonds it’s 40.1%. The Australian super industry’s allocation to bonds is just 16%.

To be clear: whereas most other pension funds around the world have more money invested in bonds than equities, Australian funds have three times the allocation to equities as to bonds.

Asset allocation that’s heavily weighted to equities explains the volatility, but not the fact that the industry total performance has underperformed the total sharemarket return by more than 2 percentage points per year.

You can’t go too far with averages, but here is an indication of what that means.

The average total sitting in big super funds over the past 15 years is $800 billion ($321 billion in June 1997 rising to $1.45 trillion today).

That suggests the average underperformance has been worth $16 billion a year, or $240 billion over 15 years.

At the end of July, the Financial Services Council, which represents the industry, proclaimed that average super fees had fallen from 1.27 to 1.2% in the year to 2011, according to Rice-Warner research. Five years ago the average fee was 1.37%.

What the FSC press release didn’t say is that the total funds in industry and retail funds in the year to June 2011 increased from $565.6 billion to $620.4 billion, which means fees actually paid on those funds increased from $7.18 billion to $7.44 billion.

More to the point, super funds in general lost most of their income through capital losses in the latest year (2012), according to Friday’s APRA report.

The figures show that total investment income was $25.08 billion and that capital losses totalled $16.89 billion. Investment managers, asset consultants and custodians then took $1.88 billion, and operating expenses were $4.67 billion.

Total costs were $6.5 billion, and net earnings were $2 billion, or 0.2% of average assets for the period – absolutely abysmal.

For that performance they’re charging 1.2%, but at least the fees fell by 7 basis points – a decline more than made up by mandatory contributions.