Shares bias hits super

Australian super fund members are particularly vulnerable to wild swings in world sharemarkets thanks to the high level of shares held in the average portfolio.

By InvestSMART · 10 Aug 2011

By InvestSMART ·
10 Aug 2011

Comments

Australian super fund members are particularly vulnerable to wild swings in world sharemarkets thanks to the high level of shares held in the average portfolio.

AUSTRALIAN super fund members are particularly vulnerable to wild swings in world sharemarkets thanks to the high level of shares held in the average portfolio.

An Organisation for Economic Co-operation and Development report on pensions found Australian funds had the third-highest exposure to shares and similar assets in the developed world. About 46.5 per cent of super money was invested in equity markets.

In most OECD countries bonds were by far the dominant investment class, accounting for about half funds' investments, and often more. But Australian funds were among the more aggressive with just 11 per cent in bonds, and about 15 per cent in cash and deposits.

The bias to shares helped super funds produce strong returns while markets were good. But Australian funds have underperformed the OECD average in the aftermath of the GFC and will suffer wide swings in value as the debt crisis plays out. Before yesterday's bounce-back, the average fund looked like being down 7 to 8 per cent since July 1. A loss of this magnitude would have wiped out most of last year's gains.

SuperRatings managing director Jeff Bresnahan said funds were still down about 4 per cent and had yet to regain all the losses suffered during the GFC.

No one knows in which direction markets will head next, though Mr Bresnahan said he would be ''hard pressed'' to see them retesting their 2009 lows. ''A lot of what is happening is being driven by sentiment,'' he said.

But already investors are saying enough is enough.

''I get the sense people are saying not again, and are overwhelmed by the powerlessness of it all,'' said Challenger retirement income chairman, Jeremy Cooper, who also chaired last year's review of the super industry. ''It's not just something outside their own control, it's happening outside the country.''

Mr Cooper said Australian super funds ''do risk in a big way'' compared with other countries and might need to re-examine this. ''At the moment we have a one-size-fits-all soup of assets, and that may need to change, especially in retirement where people feel losses the most.''

Ian Silk, the chief executive of the $44 billion industry fund Australian Super, said it had seen a 20 per cent increase in calls over the past two days with ''a significant proportion'' indicating they would be switching to a more conservative investment option.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

Why are Australian super fund members particularly vulnerable to world sharemarket swings?

Australian super funds hold a high proportion of shares in the average portfolio — about 46.5% — which increases exposure to global equity market volatility. The OECD report noted Australian funds had the third-highest exposure to shares and similar assets in the developed world, making members more sensitive to sharp market moves.

How much of Australian superannuation is invested in shares compared with bonds and cash?

According to the article, roughly 46.5% of super money was invested in equity markets, about 11% in bonds, and around 15% in cash and deposits, reflecting a clear bias toward equities over fixed income and cash.

Has the shares bias helped or hurt super fund returns recently?

The shares bias helped produce strong returns while markets were rising, but since the GFC and during recent debt-crisis volatility Australian funds have underperformed the OECD average and experienced wide swings in value. Before a recent bounce-back, the average fund had looked like being down about 7–8% since July 1.

Are Australian super funds still recovering from GFC losses?

SuperRatings managing director Jeff Bresnahan said funds were still down about 4% overall and had yet to regain all the losses suffered during the global financial crisis, indicating recovery remains incomplete for many funds.

What are experts saying about where markets might head next?

Experts in the article note uncertainty: no one knows the next direction, and much of the action is being driven by sentiment. Jeff Bresnahan said he would be 'hard pressed' to see markets retest their 2009 lows, but cautioned about ongoing unpredictability.

Should retirees rethink their investment mix because of sharemarket volatility?

Industry voices in the article suggest reconsideration may be warranted: Jeremy Cooper said Australian super funds 'do risk in a big way' compared with other countries and that the one-size-fits-all mix may need to change, especially in retirement when people feel losses most.

How have members reacted to recent super fund volatility?

The article reports growing investor frustration and a sense of powerlessness — 'not again' was a common sentiment — and practical reactions: Australian Super saw a 20% increase in calls over two days, with a significant proportion of callers indicating they would switch to more conservative investment options.

What does the OECD comparison reveal about Australian superannuation risk posture?

The OECD comparison shows Australian funds are relatively aggressive: while most OECD countries held about half of pension investments in bonds, Australian funds had much higher equity exposure (about 46.5%) and much lower bond allocations (about 11%), which increases potential returns but also increases volatility risk for members.