Exposure to shares has an upside

Those superannuation fund members who are in lower-risk investment options have missed the early part of what could be a longer rally in shares.

Those superannuation fund members who are in lower-risk investment options have missed the early part of what could be a longer rally in shares.

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.

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