Australian sharemarket a super disappointment

Sobering figures compiled by CommSec show that Australia has trailed many of its global peers since 2005, raising serious questions about the asset allocation of our retirement savings, which are heavily exposed to local equities.

In the past year super funds went backwards 2.5 per cent. Over five years, the average performance was lacklustre. If the billions of dollars that are pumped into funds each year are stripped out, some would have been negative.

In a comparison of 73 global exchanges, Australia ranked 34th after falling 14.3 per cent last year, which wiped billions of dollars from the value of shares and retirement savings. Australia was beaten by Spain, Ireland, the US, New Zealand and Britain.

Leading the global rankings was Venezuela, up almost 79 per cent, followed by the US with a gain of 5.5 per cent. But Australia did outperform the Nikkei, which ranked 43rd with a fall of 17.8 per cent, China's sharemarket, which ranked 54th with a loss of 21.7 per cent, and India, which was 59th with a loss of 24.6 per cent.

The worst performers were Cyprus, down 70.7 per cent, Greece, down 51.9 per cent, and Egypt, down 42.5 per cent.

The CommSec data reveals that Australia underperformed most markets regardless of the state of global economies. In 2005 it ranked 53rd, in 2006 39th, and at the height of the global financial crisis in 2008 was 33rd, which is staggering because Australia was one of few developed nations to escape a recession. Even when the Chinese mining boom powered ahead in 2010, our mining stocks were unable to pull the country's ranking into the top 10. Instead, the market ranked 55th after flatlining in 2010, edging up 0.1 per cent for the year.

The data raises questions about the country's $1.4 trillion retirement savings, almost a third of which is automatically invested in Australian equities as part of an asset allocation program. According to ChantWest, the average super fund allocates 29.5 per cent to Australian equities, 24.5 per cent to global equities and the rest to cash, fixed interest, listed property trusts, both locally and globally, and alternative assets such as hedge funds, private equity and infrastructure.

Despite two decades of compulsory superannuation and despite the huge pool of money accumulated, most Australians don't have anywhere near enough cover and the government's answer is to increase the compulsory superannuation guarantee from 9 per cent to 12 per cent over the next few years. While this is all well and good, the industry needs to start thinking about the best place to invest this money for Australians. In some countries, the average fund allocation to local equities is less than 20 per cent, with a greater weighting to global stocks. Indeed, some international funds pick stocks in terms of the best fundamentals regardless of where they are based.

Figures released by the Industry Super Network in September revealed that the super industry posted an average 5.01 per cent return from June 1996 to June last year. For retail funds, the performance was 3.66 per cent, which means the average return from retail funds over the 14 years would have been less than investing in cash, where average returns after tax were 4.23 per cent.

ChantWest estimates that for 2011 the growth funds, which are the typical default funds, lost 2.5 per cent. No doubt if asset allocators had invested in Venezuela, everyone would have been much happier and richer.

But it does raise questions about why Australia performs so much worse than countries that are doing poorly economically: European nations are battling with a debt crisis and the US economy has been struggling for the past few years. In sharp contrast, the Australian economy continues to expand. Annual economic growth is 2.5 per cent, which is down from the long-term average of 3.25 per cent, but is still better than most.

According to CommSec chief economist Craig James, one reason for the relative underperformance last year was the high Australian dollar. "If you look at the performance in US dollar terms, then Australia was similar to other markets. Foreigners are also more reluctant to buy Aussie shares when the currency is high. And some funds have to cut holdings as rising currency means they become overweight Aussie shares," he said. The Australian dollar hit a 29-year high of $US1.108 in late July but ended the year little changed against the US dollar.

Another reason is disappointing growth outlooks for companies listed on the ASX and the continual pattern of disappointment due to the ongoing downgrades of companies since 2008. To illustrate, in its latest report, Goldman Sachs estimates that the market's forecast for growth in earnings per share in 2012 was 20 per cent six months ago. Recent downgrades put it at 7.6 per cent.

Drilling down into the reason for the fall, of the 21 industry groups listed on the ASX, only three posted gains for the year. These were telecommunications, which rose 18.3 per cent, food, drink and tobacco, which was up 3.9 per cent, and utilities, up 3.1 per cent.

The biggest decline came from consumer durables and clothing stocks, down a massive 64.2 per cent, and led lower by Billabong. Next worst was retailing, which fell 40.8 per cent these include Myer, which is sitting on a near-record low of $1.96 after listing on the ASX in October 2010 at $4.10 a share.

Under the old system of direct-benefit funds, the fund managed the liabilities, but under the current system of defined contributions, the fund manages the assets, so the risk is taken by the members.

The Australian super business is now the fourth-largest in the world. Most people ignore the details of their accounts, or the asset allocation, until they are close to retirement when it is much more difficult to alter results. This makes it even more important for the default funds to perform well over time.

Perhaps it isn't such a bad idea for the government to think about letting members have the choice of using part of their super contributions to reduce their mortgage payments.

aferguson@fairfaxmedia.com.au