No happy returns for those who chose a balanced fund

INVESTORS in super funds are set to receive little or no returns this year as weak equity markets eat away at gains in other asset classes.

By InvestSMART · 1 Dec 2011

By InvestSMART ·
1 Dec 2011

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INVESTORS in super funds are set to receive little or no returns this year as weak equity markets eat away at gains in other asset classes.

The average balanced super fund is down 0.7 per cent this year, according to the research company SuperRatings, and unless there's a sharp and unexpected turnaround in equity markets most members will receive no returns in 2011.

It's been a wild ride for superannuation investors over the past four years, with the average balanced fund falling in value by 19.7 per cent in 2008, rising 12.9 per cent in 2009, and rising 4.6 per cent last year.

"We've really only had two negative years," the chairman of Superratings, Jeff Bresnahan, said. "If you look at returns from the last 10 years, super funds are still showing returns of about 6 per cent a year, which is absolutely in line with what funds' long-term objective is, which is about inflation plus 3 per cent."

Super is a $1.3 trillion industry in Australia and increasingly a politically sensitive issue with the federal government proposing to increase the super contribution from 9 to 12 per cent of a worker's wage. Poor returns could enhance the sensitive nature of the push towards a 12 per cent contribution.

A balanced super fund is a portfolio of holdings in cash, fixed income, local and international shares (equities), and property. When markets turn down, a heavy weighting towards shares can give super funds the worst returns.

According to figures from the research company Chant West, the returns for funds with a share of equities of 61 to 80 per cent are down 2 per cent so far this year.

Mano Mohankumar, the investment research manager at Chant West, said as long as investors react sharply to bad news, Australian funds are in danger of losing more value.

"If Europe does indeed fall into recession, as looks increasingly likely, there are sure to be flow-on effects for our part of the world," he said. "Now is not the time for complacency because, while we are half a world away, we are certainly not immune from events in the euro zone."

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Frequently Asked Questions about this Article…

What are the average returns for a balanced super fund so far in 2011?

According to research firm SuperRatings cited in the article, the average balanced super fund is down 0.7% so far in 2011. The article notes that unless equity markets stage a sharp and unexpected turnaround, most members are likely to receive little or no return for the year.

How have balanced super fund returns performed over recent years?

The article reports a volatile run: the average balanced fund fell 19.7% in 2008, rose 12.9% in 2009 and increased 4.6% in 2010. Over the last 10 years, SuperRatings says super funds have returned about 6% a year on average, roughly in line with their long‑term target of inflation plus 3%.

What is a balanced super fund and what assets does it typically hold?

A balanced super fund is a diversified portfolio that holds cash, fixed income, local and international shares (equities), and property. The mix is designed to balance growth and risk, but heavy weightings to shares can hurt returns when equity markets turn down.

Why are share‑heavy super funds underperforming this year?

Chant West data in the article shows funds with 61–80% in equities are down about 2% so far this year. When markets fall, those with a higher share allocation tend to have the worst returns, which explains why share‑heavy funds are underperforming in the current environment.

Could weak super returns affect the federal plan to raise compulsory contributions to 12%?

The article says Australia’s $1.3 trillion super industry is politically sensitive and that poor returns could increase scrutiny and sensitivity around the federal government’s proposal to lift compulsory super contributions from 9% to 12% of wages.

How might problems in Europe impact Australian super fund returns?

Investment research manager Mano Mohankumar warns in the article that if Europe falls into recession there will likely be flow‑on effects for Australia. While we are geographically distant, Australian funds are not immune to events in the euro zone, so international turmoil could further pressure returns.

What should everyday investors avoid doing in response to bad market news?

The article highlights Chant West’s view that sharp, reactive moves to bad news can harm fund value. While it doesn’t give specific personal advice, the message is clear: knee‑jerk reactions to negative headlines can increase the risk of losing value in your super.

How large is Australia’s superannuation industry and why does its size matter to investors?

The article notes Australia’s super industry is about $1.3 trillion. That scale makes superannuation both economically important and politically sensitive — meaning fund performance and policy changes (like contribution rate increases) draw significant attention and can affect members broadly.