Which way now?

Super fund members will start receiving statements in the next few weeks showing almost every investment option, apart from cash, in the red.

With the global recession only months old, a sustained turnaround in investment markets is still likely to be a long way away.

Even the asset consultants who advise the funds' trustees on how they should be investing see only a faint flicker of light at the end of the tunnel.

"The extent to which markets have become dislocated is really quite unprecedented," says Graeme Miller, the head of investment consulting at Watson Wyatt Australia.

Watson Wyatt, which advises a diverse range of mostly corporate super funds, including Qantas Super, CBA super and Health Super, is discouraging funds from making knee-jerk reactions and encouraging them to stick to their long-term asset allocations.

Fiona Trafford-Walker, the managing director of Frontier Investment Consulting, which gives advice to about 20 industry super funds, says: "It is an unfortunate part of the market cycle and what we are trying to do with our clients is to get them to focus on what they have achieved over the long term."

She says the funds advised by Frontier have produced average annual returns of three or four percentage points above inflation over 10 years.

"We have always said that we invest for the long term," she says.

Despite the tough conditions, Frontier's funds are doing better than others and have avoided much of the downturn's "sting in the tail".

That is largely because Frontier advises its funds to have big tilts to unlisted investments such as infrastructure and direct property.

The funds advised by Access Capital Advisers, which include MTAA, Westscheme and Statewide Superannuation Trust (SA), have also tended to do better than most because of their big tilts, between 40 per cent and 50 per cent, to unlisted investments. Most other industry funds are about 20 per cent invested in unlisted markets. Retail funds, those run by the large financial institutions, have only small exposures to unlisted markets and the big hit to listed markets has flowed straight through to their returns.

Access's bold call to invest heavily in unlisted assets has paid off for the members of the funds it advises.

MTAA's default fund, for example, has been a top-quartile (top 25 per cent) performer over one, three and five years in every financial year since 2004.

Access Capital Advisers partner David Chessell says: "It has been a tough time for everybody, but unlisted markets, especially infrastructure, have been a lot more resilient than listed markets. The returns have been much better than for funds that have relied on the traditional model, which is to use equities as their main driver of returns."

Chessell is the most pessimistic of the three asset consultants. He says the global financial crisis is moving to the real economy, with the global recession still having some way to run. And he expects Australia to go into recession this year, in contrast to official forecasts.

Trafford-Walker says Frontier is a long-term investor in unlisted markets but its clients' portfolios hold plenty of equities. She says there are "some pretty good deals in listed markets because things have been so badly beaten up".

The industry funds Trafford-Walker and her team advise have capital available to invest and take advantage of these opportunities in listed markets, though the unlisted strategy will remain at the core, she says.

While the typical default fund, a balanced fund with between 60 per cent and 70 per cent of the money invested in growth assets, lost about 20 per cent over 2008, the biggest surprise will be for fund members invested in conservative balanced options, which have lost about 14 per cent.

Capital stable options are down about 8 per cent over 2008. These funds typically have a 30 per cent exposure to growth assets such as shares and property and 70 per cent in defensive assets such as fixed interest and cash. These options are preferred by retirees and those close to retirement who cannot afford to take the same risks as younger investors.

Many funds' conservative options are not as defensive as they used to be (see page 8). Increased competition among funds has increased exposures to lower-quality corporate debt, emerging market debt and mortgage-backed securities.

Less money has been going to the traditional defensive assets of investment-grade corporate bonds, government bonds and cash.

Warren Chant, the co-founder of super fund researcher Chant West, says conservative balanced options (about 50 per cent in growth assets and 50 per cent in defensive assets) are expected to have one negative year in about every seven years.

Capital stable options are meant to be a more defensive portfolio than conservative growth options. For capital stable options, the frequency of negative years is about one in every 11 years. But members in these options should not think a negative return last year means no more negative returns for several years.

One of the problems for fund members is that many of the funds are not telling their members what they should be expecting from each investment option.

A SuperRatings report last year found fewer than 100 of the more than 400 investment options on its database had clearly defined and measurable investment objectives.

The law requires funds to provide the "investment objective" of their investment options in their product disclosure statements. But how that is included in the statement is up to them.

As SuperRatings points out, the following investment objective leaves the reader none the wiser: "To provide moderate to higher returns over the medium to long-term through a portfolio across all asset types but with an emphasis on shares and property."

SuperRatings says ambiguous investment objectives such as this one can inhibit a member's ability to select an appropriate investment option to match their risk and return profile.