Bleak future for funds
The banking doyen says the high investment returns achieved in the last financial year by median growth super funds had not been matched by the growth in corporate earnings and that given the global economic environment, future returns will struggle to break past double-digit growth over the next three to five years.
"That's the more likely outcome because that's the nature of the world we are in," says Murray, who chaired the now $90-billion Future Fund from its 2006 inception to 2012.
Figures from super research firm Chant West show in the last financial year median growth super funds - which have between 60 per cent and 80 per cent of their portfolio weighted towards equities and are where most people have their super - achieved the highest investment returns in 16 years.
Returns soared 15.6 per cent, mostly driven by resurgent equity markets.
In a bleak assessment of the investment outlook, the former Commonwealth Bank chief executive says "the investment returns in the period from 1985 to 2007 were unusually high and very high in respect of bonds ... For the foreseeable future, returns will be very different and lower, particularly in relation to cash and bonds."
Murray says the low return rate for cash, bonds and equities could go on for an extended time until governments in the US and Europe deal with fundamental reforms.
"We are only five or six years into the post-crisis period, which isn't very long," he says. "So it could be quite some time still before these things come back."
Earlier this year the London Business School conducted an extensive report into the global investment outlook, which included Australia. The authors of the report - Elroy Dimson, Paul Marsh and Mike Staunton - concluded we are entering a 20-year period of low investment returns and make a point of saying that when real interest rates are low, real equity returns also tend to be low.
Australia's official cash interest rate is now at a historic low of 2.5 per cent, with further rate cuts predicted by economists over the next 12 months.
The academics predicted an investor with a 20- to 30-year horizon faced close to zero real returns on inflation-protected government bonds, while the annualised real return on a rolling investment in cash is likely to be negative by as much 0.5 per cent over 20 years. They forecast real equity returns in the region of 3 per cent to 3.5 per cent over 20 to 30 years. Weighing also on Murray's mind are the findings released this week in the World Economic Forum's global-competitiveness report for 2013-14.
The report showed Australia falling further behind in international competitiveness, with its ranking down one place to 21, three places behind New Zealand. "The main message is relying on the sort of returns we had prior to the crisis might not be the smartest thing to do," Murray says.
Frequently Asked Questions about this Article…
Former Future Fund chair David Murray warns that double-digit returns for Australian super funds are unlikely for the next few years. He says last year’s unusually high returns were not matched by corporate earnings and, given the global economic environment, future returns are likely to be lower—especially for cash and bonds.
Chant West data show median growth super funds—which typically have 60–80% of their portfolios in equities—returned 15.6% last year largely because equity markets rebounded. That result was the highest in 16 years and was mostly driven by resurgent share markets.
Murray suggests low returns for cash, bonds and equities could persist for an extended period—potentially until policymakers in the US and Europe implement fundamental reforms. The London Business School report cited in the article also warns we may be entering a roughly 20-year period of generally low investment returns.
The London Business School authors concluded that with low real interest rates, real equity returns tend to be low. Their forecasts included close-to-zero real returns on inflation-protected government bonds over 20–30 years, a negative annualised real return of about 0.5% for rolling cash over 20 years, and real equity returns around 3%–3.5% annually over 20–30 years.
Australia’s official cash rate was at a historic low of 2.5% at the time of the article, with economists predicting further cuts. Low cash rates tend to push down returns on cash and bonds and can also reduce expected long-term returns on equities, making it harder for super funds to achieve high yields.
Yes. Murray chaired the now $90 billion Future Fund from its 2006 inception to 2012 and is a former Commonwealth Bank chief executive. His experience in managing large institutional funds and banking informs his view that the unusually high returns seen before the crisis may not be a reliable guide for the future.
The article’s main message—echoed by Murray—is that relying on pre-crisis levels of return may not be wise. Everyday investors should temper return expectations for superannuation and be aware that long-term returns may be lower than they were in the unusually high-return period before the financial crisis.
Yes. The World Economic Forum’s 2013–14 competitiveness report showed Australia slipping to 21st place, one down from the prior year and three behind New Zealand. Murray cites such competitiveness concerns as part of the broader picture weighing on the investment outlook and potential future returns.
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