Exposure to shares has an upside
Some people switched to their fund's cash or other low-risk investment options during the worst of the global financial crisis. But most remained with their fund's "balanced" option, which has about half the money invested in shares and the rest in fixed interest, property and cash.
Having such a high exposure to shares makes for volatile returns. That is not a problem for those with retirement some way off, who can ride out the ups and downs. But those close to retirement will have only just recovered the account balances they had at the start of the financial crisis.
The high exposure to shares works both ways. The rally in global sharemarkets that started in the middle of last year is responsible for the best superannuation performances for five years. SuperRatings data shows the typical balanced option returned 12.4 per cent for the year to February 28.
Balanced options are on track to record the strongest performance of a financial year since at least 2007, when the typical balanced option returned 15.7 per cent. Since July 1 last year to February 28 this year, the typical balanced option has returned 12.6 per cent, with another three months left before the end of the financial year. But March was a bad month for sharemarkets because of the problems in Cyprus. When the performance data is in for March, it will likely show the end to nine straight months of positive returns.
However, market watchers are expecting the rally on sharemarkets to continue. It seems investors are convinced the world's central banks will do whatever it takes to supply liquidity and keep the wheels of their economies turning. But the risk is that the rally is built on short to medium-term fixes, rather than a true restoration of the global economy's health.
While the Reserve Bank last week left interest rates at 3 per cent, it indicated it was in no hurry to raise the rates. Interest rates on term deposits are about 4.5 per cent. Dividend yields on Telstra and the big banks are about 7 per cent or 8 per cent, after franking credits. That means investors will likely continue to chase higher-yielding shares. As these are among the biggest companies by market capitalisation, they drive the overall market. For that reason, the Australian sharemarket is likely to go higher - albeit with setbacks along the way - to the benefit of superannuation account balances.
Frequently Asked Questions about this Article…
A balanced superannuation option is a medium-risk investment mix used by many super funds. According to the article, a typical balanced option has about half of its money invested in shares, with the remainder in fixed interest, property and cash.
Shares tend to move up and down more than fixed interest or cash, so having around 50% of a balanced option in shares produces bigger swings in returns. That volatility is usually manageable for members who have many years until retirement, but it can be a problem for people close to retirement who need stable account balances.
SuperRatings data cited in the article shows the typical balanced option returned 12.4% for the year to February 28, and 12.6% from July 1 to February 28. That made these options some of the best-performing super options in five years, although markets were hit in March because of the Cyprus crisis.
Yes — the article notes some people switched to cash or low-risk options during the worst of the global financial crisis and therefore missed the early part of the subsequent rally in shares. Most members who stayed in balanced options benefited from strong sharemarket gains.
Market watchers in the article expect central banks to keep supplying liquidity, which has helped the recent rally. However, there is a risk the rally is supported by short- to medium-term fixes rather than a full recovery of the global economy, and events like the Cyprus problems can cause short-term pullbacks.
The article points out that the Reserve Bank left interest rates at 3% and term deposit rates were about 4.5%. Dividend yields on companies such as Telstra and the big banks were around 7–8% after franking credits, so investors have been attracted to those higher-yielding shares.
According to the article, because high-yielding large companies are among the biggest by market capitalisation, they tend to drive the overall market. That suggests the Australian sharemarket is likely to move higher, but it will still experience setbacks along the way.
The article’s takeaway is that share exposure brings upside over time but also volatility. If retirement is some way off, you can usually ride out ups and downs. If you’re close to retirement, be aware account balances may still be recovering from past market falls and consider your risk tolerance and time horizon when choosing between balanced, conservative or cash options.
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