Market woes chip at superannuation nest eggs

THE average Australian superannuation fund lost money in 2011 due to the sharemarket's poor performance, with analysts expecting a 2 per cent decrease in median "balanced" funds.

By InvestSMART · 19 Jan 2012

By InvestSMART ·
19 Jan 2012

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THE average Australian superannuation fund lost money in 2011 due to the sharemarket's poor performance, with analysts expecting a 2 per cent decrease in median "balanced" funds.

Conservative funds and cash funds which allocate money to defensive assets such as fixed interest and bonds, where returns are normally lower outperformed high-growth funds.

Paul Saliba, chief investment officer at wealth management firm Lachlan Partners, expects the outlook for 2012 to be similar to last year, with low-risk assets outperforming the sharemarket because of the risks facing the global economy.

"There is a clear risk for equity returns in a world of weak economic growth, deleveraging of both consumers and governments worldwide," he said.

The debt crisis in Europe was a "dire risk", he said, and "unless something changes and on all reports it's hard to see how it can change with any speed then investors are going to be gun shy".

While government bonds were the biggest gainers last year, Mr Saliba said corporate bonds should do well this year as people realised that "companies are not going to fail en masse".

According to superannuation research and consultancy firm Chant West, the negative super returns of 2011 compared with positive returns of 4.7 per cent in 2010 and 15 per cent in 2009, but were far better than losses of 21.5 per cent during the late-2008 global financial crisis.

"We can say overall the median growth [category] has only lost 2 per cent and that is because growth funds are well diversified across a number of growth and defensive asset classes," research manager Mano Mohankumar said.

"Our [average] conservative fund would have actually had a positive return for the year of 3 per cent. The main reason for that is that they have a higher weighting to bonds, which were the strongest-performing asset class of the year."

Conservative funds had only about 20 per cent of assets exposed to shares, which were considered high-risk assets, he said.

Salvador Saiz, investment research manager at SuperRatings, expects the sharemarket tide to turn this year.

"Markets in December finally directed their attention towards the continued stream of positive economic data from the US," he said. "To date, much of the better than expected news on US corporate earnings and GDP growth had been overshadowed by events in Europe.

"While we don't expect markets to shoot the lights out in 2012 and members should moderate their expectations on returns improving sentiment could be a positive catalyst in 2012."

Most Australians have their super invested in the default "balanced" funds because they have not selected an alternative. These funds usually have 61 to 80 per cent of assets exposed to high-growth assets such as shares.

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Frequently Asked Questions about this Article…

Why did the average Australian superannuation fund lose money in 2011?

The article says poor sharemarket performance was the main driver of negative superannuation returns in 2011. Analysts expected about a 2% fall in the median 'balanced' fund as global economic risks — including weak growth, deleveraging and the European debt crisis — dented investor confidence and equity returns.

How did conservative super funds and cash funds perform compared with high‑growth funds in 2011?

Conservative and cash funds outperformed high‑growth funds in 2011. According to Chant West, the average conservative fund actually posted a positive return of about 3% for the year because it had a higher weighting to bonds, which were the strongest-performing asset class in 2011.

What made bonds such strong performers for superannuation in 2011?

The article explains that government bonds were the biggest gainers in 2011 and conservative funds benefited from higher bond allocations. Bonds tend to do well when investors seek defensive assets amid equity market weakness, so bond exposure helped conservative super funds deliver positive returns.

What is a 'balanced' super fund and how much do they usually invest in high‑growth assets?

The article describes default 'balanced' super funds — where most Australians are invested if they don't choose an alternative — as typically having 61% to 80% of assets in high‑growth assets such as shares. Balanced funds aim to be diversified across growth and defensive asset classes.

How did 2011 super returns compare to previous years like 2010, 2009 and the 2008 global financial crisis?

Chant West reported that super returns in 2011 were negative, following positive returns of 4.7% in 2010 and 15% in 2009. However, 2011 losses were far smaller than the roughly 21.5% losses seen during the late‑2008 global financial crisis.

What do experts expect for superannuation performance and asset allocation in 2012?

Experts in the article offered a cautious outlook for 2012. Paul Saliba of Lachlan Partners expected low‑risk assets to outperform shares again because of global economic risks, while predicting corporate bonds should do well. Salvador Saiz of SuperRatings said improving US economic data could boost sentiment, but members should moderate return expectations.

How did the European debt crisis affect superannuation investors and equity markets?

The article quotes Paul Saliba calling the European debt crisis a 'dire risk' that could keep investors 'gun shy.' He warned that in a world of weak growth and deleveraging, there is a clear downside risk for equity returns, which influenced asset‑allocation decisions and investor sentiment in 2011.

Should everyday investors change their super strategy after the 2011 results?

The article doesn't give personal financial advice but suggests a few themes for everyday investors: balanced funds are diversified across growth and defensive assets, conservative funds benefited from higher bond weightings in 2011, and experts advised moderating return expectations for 2012. Those points imply thinking about diversification and realistic return expectations rather than making dramatic changes based solely on one year's performance.