The great super struggle

Just when you thought it was safe to look at your fund statement, markets fall again, writes Annette Sampson.

Just when you thought it was safe to look at your fund statement, markets fall again, writes Annette Sampson.

Ouch! So near and yet so far. Just when our retirement savings were within cooee of recouping losses suffered during the global financial crisis we get hit with GFC Mark II. Just over a month ago, at the end of the financial year, the median balanced super fund was within 4.5 per cent of its pre-GFC highs.

Figures from research company SuperRatings show the median balanced fund returned 8.7 per cent after fees and taxes in the year to June 30. Following on from a 9.8 per cent gain the previous financial year, this did much to improve the health of super fund balances and ensure those important three- and five-year returns were in positive figures.

But that was June. Since June 30 the Australian sharemarket's All Ordinaries Index has fallen about 12 per cent.

The managing director of SuperRatings, Jeff Bresnahan, says losses on world sharemarkets since June 30 are likely to result in the median balanced fund likely being down about 4.5 per cent to the end of last week. They lost about 3 per cent in the first week of August alone.

For the majority of Australian fund members who have their money in the balanced option of their fund, which is 60 per cent to 76 per cent invested in growth assets such as shares and property, this is hardly welcoming news. It will also further pull down funds' longer-term returns, which at just 1.2 per cent annually over the past three years, and 2.5 per cent over the past five years, were already failing to meet funds' targets of 2 per cent to 3 per cent above the inflation rate.

To some extent, this has been coming for a while. Back in March, it appeared the average super fund would report double-digit returns this year.

But ongoing debt crises in Europe and concerns about weak prospects for US economic growth have seen share prices edging down from their highs back in April.

Those fears about Europe and the recent bickering over raising the US debt ceiling and the US credit downgrade have simply turned nervousness into full-blown panic and anxiety.

"Volatility is here to stay," Bresnahan says. "There is no doubt that the fallout ... of the GFC will continue for some time to come, which is likely to see debt crises to continue to rear their ugly heads and impact markets until investors are confident that the underlying issues have been resolved, rather than just averted."

Nevertheless, Bresnahan reckons balanced funds are a good place to be in uncertain times despite the natural inclination to switch to cash.

In an uncertain climate, he says balanced funds offer exposure to both growth and defensive assets, allowing them to navigate the ups and downs.

While cash can seem like a safe haven when markets are falling, the danger with being too defensive is missing the inevitable upswings, which can often come out of the blue and move quickly.

SuperRatings' analysis shows investors who sat in cash since the GFC trough suffered poorer returns than those who remained with the balanced option - though if you switched to cash at the peak of the market, you would be better off.

Arguably, as the analysis only goes to June 30, switching in the latter part of the June quarter would have also protected you from losses, though it is a rare investor who can accurately pick market peaks and troughs.

The cover graphic looks at the rocky path taken by the average fund since the pre-GFC peak in 2007.

An account of $100,000 at this time, assuming no contributions were added, would have fallen about 25 per cent over the next 18 months, to a low of $74,973 in February 2009. Since then it has been a tough struggle back.

After a strong start and a few blips along the way, that account would have been back to $95,492 by June 30 this year - still 4.5 per cent below the pre-GFC peak. Now it has dipped again.

By contrast, SuperRatings says a fund invested entirely in cash would now be worth about $116,475 while the median capital stable fund would have grown to $108,018. While the average capital stable fund still fell during the bad times, reaching a low of $90,239 in February 2009, it had recovered its losses by December that year. (See also Page 8.)

But human nature being what it is, few investors managed to call the peak correctly.

Those who did switch to cash tended to do so after the markets had fallen and things were looking grim.

SuperRatings says those who got it wrong and switched to cash at the bottom of the market would have enjoyed returns less than half of those who had stayed in the median balanced fund during the recovery.

Bresnahan says it is important to look at the longer term where balanced funds have served the average investor well.

The graph on page 6 follows the growth of a similar $100,000 balance.

But instead of focusing solely on the impact of the GFC, it tracks performance over the 10 years to June 30.

Despite substantial ups and downs that saw the $100,000 invested in the median balanced fund soar to $170,151 before falling back to $126,632 in 2009, SuperRatings show it was the best option for investors over the decade.

That $100,000 would have grown to $161,289 - about $10,000 more than the cash option, despite it not having suffered any losses during the 10-year period.

Interestingly, the median balanced fund did better than the average growth fund over both the past 10 years and the GFC period, reflecting the fact that while shares provide a big boost to long-term returns, a more diversified portfolio of investments has much going for it.

SuperRatings says Australian shares remain the big driver of returns for balanced super funds, with on average 30 per cent of their portfolios invested in local stocks. So when sharemarkets go up, balanced funds should do well and vice versa when markets fall.

SuperRatings says local shares have contributed more than 40 per cent of the post-GFC returns for balanced funds, while alternative assets such as infrastructure and property have performed steadily and didn't suffer as much during the downturn.

In a higher risk environment, fixed interest has also garnered strong returns, as is evident in the solid performance of capital stable options. Over the past three and five years, SunSuper's fixed-interest option was the best performing super fund.

The company says the hedging strategy of your super fund on its international investments also played a big part in post-GFC returns.

At the start of February 2009, the Australian dollar was trading at barely more than US63?.

By June 30 this year, it was at $US1.0739, wiping out most gains on any unhedged overseas investments.

In 2010-11 alone, international shares returned an impressive 22.3 per cent fully hedged or protected against currency movements. But on an unhedged basis, the rise of the Aussie stripped that return back to a meagre 2.7 per cent.

SuperRatings says the majority of super funds hedge about half their currency exposure, though some have moved away from this benchmark as the Aussie has risen.

This was one contributor to the big variation in growth options where the best performer last year, QSuper's Aggressive option, outstripped the bottom growth fund by more than 14 percentage points. It returned 13.4 per cent while the worst fund in that category suffered a 0.5 per cent loss.

That variation in growth funds also shows that it is not just what type of fund you're in that matters you need to ensure your fund is competitive with others that have similar investment objectives.

According to SuperRatings, while 99 per cent of super fund options delivered positive returns last year, there were big differences between the best and the worst.

For the specialists, the year's top performance was 29.2 per cent reported by AGEST's Listed Property option.

But even within the more mainstream balanced funds there was a difference of about 60 per cent last year between the top and bottom funds surveyed.

While 26 per cent of balanced funds reported double-digit returns and the top performer 11.4 per cent, the poorest performer managed a return of just 4.7 per cent.

Over the past five years, annualised returns for balanced funds ranged from 4.9 per cent to minus 0.9 per cent.

Over a full working life, even a difference of 1 per cent can make a big difference to your retirement savings. Differences of this magnitude have a dramatic effect on outcomes.

While investors should never judge their fund on one year's performance, it is telling that many of the high flyers in the SuperRatings survey have performed well over both short and long periods.

Catholic Super, which topped the balanced funds over the past year with a net return of 11.4 per cent, ranked third over the past five years with an annual return of 4.3 per cent. The fund ranked eighth over the past 10 years with 6 per cent annual returns.

REST's Core Strategy option was the best performing balanced option over the past 10 years with an annual return of 7 per cent a year and still made the top 20 over the past year with an above-average 9.6 per cent return.

Telstra Super, AustralianSuper, Care Super and Equipsuper were all funds that ranked in the top 10 over both the past year and the past decade.

Bresnahan says given balanced funds can generally be expected to lose money once in every five years, investors have done well since the introduction of compulsory super. Over the past 20 years, there have only been three years where the median fund has lost money and the average annual return has been slightly more than 7 per cent - above their target of inflation plus 3 per cent.

However, he warns they may need to lower their expectations to account for changes in the investment climate. Even without the concerns generated by the latest falls, he says, we are already under pressure from rising inflation.

He says there are no balanced funds that have beaten the inflation plus 3 per cent target over the past five years and just 34 per cent of funds are beating this target over seven years.

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