If there was any doubt that the country's $1.3 trillion retirement savings are too dependent on the vagaries of the sharemarket, take a look at the impact of the recent equities bloodbath on the performance of our super funds, which have lost a fortune in the past six weeks.
The latest figures from Chant West and SuperRatings show that super funds have started the new financial year in the red.
The sharp fall in equities, more than 11 per cent since June 30, has hit all types of funds hard.
According to SuperRatings, weak equity markets saw the median balanced fund fall 1.4 per cent in July and up to 5 per cent since June 30.
The big losses put the spotlight firmly on the country's super industry and its heavy exposure to equities, particularly after the havoc wreaked on retirement savings during the global financial crisis, when it suffered its worst performance in 20 years as well over $150 billion in value was lost from the funds.
Stories abounded of people being forced to postpone their retirement due to the poor returns of their super funds. It prompted an unprecedented number of people to shift their assets into self-managed funds to see if they could do a better job themselves - the jury is out on that because there is no proper data available.
Whatever the case, funds have been clawing their way back since the dark days of the global financial crisis, but with the debt issues plaguing the US and Europe - and the stronger markets such as Germany getting caught up in the contagion - it looks like the bull market has gone into hibernation and the bears are out in force.
Paul Keating, who was treasurer when compulsory super was introduced, came out last week and said as much. In an interview as the industry celebrated 20 years of the super guarantee, Keating said: "One of the problems super has is that there is not enough members' money invested in debt instruments. Funds are too heavily weighted in equities [and] not enough in fixed interest."
Most people think a balanced fund is 50 per cent growth (shares, property, alternatives, private equity, infrastructure) and 50 per cent defensive (cash, fixed interest, bonds).
Some funds masquerade as balanced but they are 85 per cent growth and 15 per cent defensive, according to financial adviser Matthew Ross from Roskow Independent Advisory.
Ross cites a few super funds that he believes are not offering balanced options, but say they are. "This is an issue that really gets under my skin ... Australian Super's balanced fund is 85 per cent growth, 15 per cent defensive. This is not balanced. Host Plus balanced fund is 76 per cent growth. REST Core Strategy is 75 per cent growth and Catholic Super is 68 per cent growth," he says. "They're high-growth funds, calling themselves balanced. Higher risk equals higher reward. So the more risk they take in the balanced fund, the more return they can boast about - but they're taking risks consumer aren't aware of."
Chant West does its own reclassification of funds. In the case of MTAA Super's balanced fund, which was one of the worst performers in the past one, three, five and seven years, Chant West puts it in the high growth option due to the high risk nature of some of it assets.
But even the defensive category might not be as conservative as some funds claim. When it comes to cash, some funds that invest in cash-plus and cash-enhanced funds, are investing in things other than cash.
Such funds offer better returns than straight cash by investing in shares and property as well as bank bills and fixed-interest securities, but they are much higher risk - and some investors don't realise this.
Fixed interest can also be deceptive. While some fixed interest products might be AAA-rated Australian government bonds, others are junk bonds, including insurance linked securities, which are a euphemism for catastrophe bonds.
The reality is funds need to provide clearer definitions for what they are investing in and there needs to be a greater focus on how to get super funds to invest in low-risk, steady, regulated returns of certain infrastructure classes.
With an infrastructure backlog of $32 billion last year, and more than $700 billion to be spent in the next 10 years to return the quality of infrastructure to a point that will sustain national prosperity, infrastructure bonds should be considered.
While they are not the panacea for the country's worsening congestion, bottlenecks and electricity outages, they would help super funds realign their balanced portfolios.
But there is another option: allow individuals to use their accumulated super fund balance towards the purchase of owner-occupied housing. It might not be a balanced fund, but it is something worth considering.
Frequently Asked Questions about this Article…
Why have Australian super funds fallen in value recently and what caused the sharemarket downturn?
Super funds were hit hard by a sharp fall in equities — more than 11% since June 30 — which pushed many funds into the red. SuperRatings reported the median balanced fund fell about 1.4% in July and up to 5% since June 30. The article links the losses to weak equity markets and global debt worries in the US and Europe that have knocked investor sentiment.
What does a "balanced fund" actually mean in superannuation and why does it matter?
Many investors assume a balanced fund is roughly 50% growth (shares, property, alternatives) and 50% defensive (cash, fixed interest). The article notes that some funds labelled "balanced" are much heavier in growth — examples include AustralianSuper’s balanced option at 85% growth, HostPlus 76%, REST Core 75% and Catholic Super 68% — which means higher volatility and bigger swings when the sharemarket falls.
Are cash, cash-plus and fixed interest options always low risk?
Not always. The article explains cash-plus or cash-enhanced products may invest in shares and property as well as bank bills, so they can be riskier than straight cash. Fixed interest can also vary widely: some holdings are AAA-rated government bonds, while others can be junk bonds or insurance-linked (catastrophe) securities. Investors need to check what’s actually inside these options.
What should I know about how fund researchers classify super options?
Research groups like Chant West sometimes reclassify funds based on the risk profile of their assets. For example, Chant West reclassified MTAA Super’s 'balanced' option into a high-growth category because of its risky asset mix. That shows labels alone can be misleading — look at the underlying asset allocation.
Would switching to a self-managed super fund (SMSF) be a good response to poor returns?
After the global financial crisis many people moved to SMSFs trying to do better, but the article says the jury is out and there’s no proper data proving SMSFs outperform. The message is to be cautious: switching to an SMSF is a big decision and not guaranteed to improve outcomes.
How could infrastructure bonds or investment in infrastructure help super funds?
The article suggests super funds could rebalance towards low‑risk, steady, regulated returns from certain infrastructure assets. With an infrastructure backlog of about $32 billion last year and more than $700 billion slated for spending over the next 10 years, infrastructure bonds are offered as one way to provide steadier returns and realign balanced portfolios.
Did compulsory super suffer big losses during the global financial crisis and is another big drop possible?
Yes — the article notes the super industry suffered its worst performance in 20 years during the global financial crisis, losing more than $150 billion in value. While funds have been clawing their way back, current international debt issues and market contagion suggest periods of significant volatility (and potential losses) can recur.
What practical steps can everyday investors take to protect their retirement savings right now?
Based on the article: check your fund’s actual asset allocation (growth vs defensive), don’t rely solely on labels like 'balanced' or 'cash-plus,' ask your fund for clearer definitions of what they invest in, consider diversification into different asset classes (including the potential role of infrastructure or genuine fixed‑interest investments), and be cautious about switching to an SMSF without evidence it will improve returns.
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