For the sixth year in a row the Australian sharemarket chronically underperformed many of its global equity market peers, despite being at the centre of a mining boom and being part of an economy that managed to notch up its 20th consecutive year of growth.
Sobering figures compiled by Commonwealth Securities show that Australia has been a chronic underperformer against many of its global peers since 2005. It raises 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 by 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 34 after suffering a negative return of 14.3 per cent for 2011, which wiped billions of dollars from the value of shares and retirement savings. Australia was beaten by Spain, Ireland, the United States, 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.
However, Australia did outperform Japan's Nikkei, which was 43 with a fall of 17.8 per cent China's market, which ranked 54 with a return of negative 21.7 per cent and India, which ranked 59 with a return of negative 24.6 per cent. The worst performers were Cyprus, down 70.7 per cent for 2011, Greece, down 51.9 per cent, and Egypt, down 42.5 per cent.
The CommSec data reveals that Australia underperformed most global markets regardless of the state of the global economies. In 2005 it ranked 53, in 2006 it ranked 39, and at the height of the global financial crisis in 2008 it ranked 33, which is staggering, given Australia was one of the 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 rankings into the top 10. Instead, it ranked 55 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, 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.
This is all well and good, but the industry needs to start thinking about the best place to invest this money. 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 fund, 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 beg a few questions as to why Australia performs so much worse than countries that are doing poorly economically. European nations are battling with a debt crisis, the US economy has been struggling for the past few years and - in sharp contrast - the Australian economy continues to expand. Annual economic growth stands at 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 the chief economist at CommSec, Craig James, one reason for the relative underperformance in 2011 was the high Aussie 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 in Aussie shares," he said.
The Aussie dollar hit a 29-year high of $US110.8? in late July but ended the year little changed against the US dollar.
Another reason is disappointing growth outlooks for the companies listed on the ASX and the continual pattern of disappointment due to the ongoing downgrades of companies since 2008. To illustrate, the latest report by Goldman Sachs estimates that the market's forecast for 2012 earnings per share growth forecast was 20 per cent six months ago. Recent downgrades put it at 7.6 per cent.
Drilling down into the reasons for the fall, of the 21 industry groups listed on the ASX, only three posted positive gains for the year. These were telecommunications stocks, which rose 18.3 per cent for the year food, drink and tobacco, which were 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 this includes 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 to use part of the super contributions to bring down their mortgage payments.