Take a balanced view of the market

Negative returns have left some super fund members feeling stranded, writes John Collett.

Negative returns have left some super fund members feeling stranded, writes John Collett.

The woeful performance of investment markets is endangering the long-term returns of superannuation. Ever since the global financial crisis, researchers have been reassuring fund members that funds - though struggling over the short term - have been meeting their long-term performance objectives.

But data from the researcher Chant West released this week shows that for the 10 years to October 31, the medium-performing "growth" or default option, where most fund members have their super, returned 5.2 per cent a year on average.

Since the start of compulsory super in 1992, the typical growth option has returned about 7 per cent. That is in line with the researchers' expectations of long-term returns but any further deterioration in investment markets, which most analysts are expecting, will see those returns dip below 7 per cent.

Time to recover

"The long-term numbers include the tech wreck and the GFC and it is unusual in a 10-year period to have those two things," says the co-founder of Chant West, Warren Chant. The "tech wreck" of the early 2000s in the US, when share prices of technology stocks crashed, caused sharemarkets around the world to plunge, including Australia's. The GFC really was a "black swan", or very rare event, he says.

"In the year to December 31, 2008, super funds were looking at a negative return of 22 per cent. That really knocked around the long-term performance objectives and it will take some years to recover," Chant says.

Default investment options (balanced funds) have about 55 per cent in shares, high by world standards. Sometimes, allocations to shares can be as much as 80 per cent.

"Sharemarkets, which are the main drivers of growth fund performance, continue to react sharply to news - good or bad," Chant says. "If Europe does fall into recession, as looks increasingly likely, there are sure to be flow-on effects for our part of the world because of the inter-connectedness of world economies and financial markets."

Big differences

While the typical performance of funds has been poor, there is a big range in performances.

Some of the biggest retail funds - those run by the banks and insurers - are among the poorest performers of the past seven years.

Data from Chant West shows that some of the funds offered by big names such as BT, owned by Westpac, and Colonial First State, owned by the Commonwealth Bank and AMP, among others, have produced returns of less than 4 per cent over seven years to September 30.

Not-for-profit funds - which generally have less exposure to shares and low fees - have performed better. The best-performing not-for-profit funds have produced returns of about 5.5 per cent over those seven years, compared with a median return for all funds (retail and not-for-profit) of 4.5 per cent.

SuperRatings numbers show that $100,000 invested in the best- and worst-performing options over 10 years to September 30, would have grown (after fees and taxes) to $185,045 and $125,655 respectively, a difference of 46 per cent.

So are the exposures to shares

too high?

"The question gets asked now and most commentators say it is too high," the founder of SuperRatings, Jeff Bresnahan, says. "But four years ago when the five-year numbers were in double-digits, it was considered all right," he says.

Over the 10 years to October 31, 2007, just before the Australian sharemarket fell with the onset of the GFC, the typical fund produced a return of 9.43 per cent.

The financial planner Wayne Leggett, of Paramount Wealth Management, says the high sharemarket returns of the 1980s, 1990s and in the 2000s up until the GFC were an aberration. "We got used to that being the norm, but it wasn't," Leggett says. "I remember back in the mid-1980s that a real rate of return [after inflation] of 2 percentage points was considered pretty darn good."

The high returns of the past 25 years were never going to last and the market will have to correct to below the long-term "trend line" return, Leggett says. Fund members are "only ever entitled to the long-term trend line returns", he says.

Wake-up call

Nevertheless, Bresnahan says the high shares exposure of most default investment options is appropriate, given that they are trying to provide the best outcomes for a wide range of members with differing ages and tolerances for risk. But it is a wake-up call for fund members to take more interest in their super, he says. Fund members should be getting advice on what is appropriate for them, he says.

Chant also thinks the typical exposure to shares and other riskier assets, such as property, is appropriate for most people still building retirement nest eggs. Most fund members need earnings from their super of 7 per cent a year, on average, over the long term, plus super contributions, to save enough for a comfortable retirement.

"If you invest more conservatively you have to make higher contributions to super or you run the risk of not saving enough," he says. "When people say let's get into things that give the same returns [as shares] with less risk, it is easier said than done."

Super funds are making allocations to investments that they believe will provide similar returns to shares but with less volatility, he says. But these "alternative" assets, such as private equity, hedge funds and infrastructure, can be relatively illiquid. Hedge funds can be expensive to access and at the worst of the GFC, did not perform as well as expected. But then, every investment "went sour" during the worst of the GFC, Chant says.

Retirees reduce risk

RETIREES are more likely to be invested in "conservative" investment options through allocated pensions, which have a typical allocation to shares and property of 30 per cent instead of the usual 70 per cent exposure in default opations that most accumulators are in.

Conservative options have produced about the same return as growth options, of just above 5 per cent, over the past 10 years. But it has been a much smoother ride for investors in conservative options.

Over the five years to October 31 this year, the typical conservative option produced an average annual return of 3.6 per cent compared with the return of the typical growth option of 1 per cent. Many older people moved to more conservative options during 2009 and 2010, Warren Chant says. The move to more conservative options makes sense for many older fund members as it has cushioned the blows of volatile investment markets, Chant says.

An adviser at Hewison Private Wealth, Chris Morcom, says switching to a more conservative option on retirement or on reaching a particular age is simplistic and risks leaving the fund members outliving their savings. They need advice that is tailored to their circumstances, he says.

"If you retire with enough capital to provide adequate income to meet your needs then all you need is for your capital to keep track with inflation," Morcom says. If a retirement savings portfolio with an exposure to shares is meeting your income needs, why would you sell now, he asks.

"All you may be doing is selling at a low point in the market and locking in the losses."

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