Super – Any real returns
It’s hard not to be disappointed by the returns on superannuation in recent years but take heart, writes Annette Sampson.
The best balanced super funds reported returns of 10 per cent or more in the past financial year. But if you feel like you’ve been treading water, rather than building a healthy nest egg for retirement, you wouldn’t be far wrong. The average fund is still in the red over the past three years and has barely beaten inflation over the past five.Figures from the research company SuperRatings show that 2009-10 was a good year for super, with the average balanced fund reporting a return of 9.8 per cent. (These funds have 60 per cent to 76 per cent of their investments in so-called “growth” assets like shares and property and are most commonly used by Australian investors.)
..But they needed a good year. After significant losses the previous two years, the average fund has still lost 3.5 per cent a year averaged over the past three years. Even going back five years – which includes the sharemarket boom – funds have averaged a mere 3.5 per cent a year, outgrowing inflation.
As the graph shows, if you had invested $50,000 in the average balanced fund on June 30, 2005, it would have grown to just less than $60,000 now, though you’d have experienced a hell of a ride along the way.
Just a few short months ago, at the end of April, your $50,000 would have been worth more than $62,000; in October 2007 it would have topped $68,000; but by February 2009 it would have been almost back where you started at a mere $51,000.
What’s more, the figures show that even over the past 10 years, the median balanced fund returned just 4.51 per cent, well below the common objective of inflation plus 3 per cent or 4 per cent.
TWO MARKET CRASHES
As the chief executive of the industry fund REST, Damian Hill, points out, that’s partly a timing glitch. The past 10 years have been atypical, including not one but two market crashes – the global financial crisis and the tech wreck of 2000-2001. In a year’s time, failing another big downturn, that 10-year figure should improve substantially.
Over the past seven years (which excludes the tech wreck) SuperRatings says the median balanced fund has done much better – an annual return of 6.21 per cent.
Look really long term and they have done better over the past 20 years as well, with an annual return of 7.23 per cent. But it’s still hard not to feel disappointed.
The chief executive of the Australian Institute of Superannuation Trustees, Fiona Reynolds, says it’s important for fund members to remember that while the past year has been a good one, super funds – like the world economy – are still recovering from “the worst financial crisis seen in our lifetime”.
“When you look at the headline figures you think you could have done better putting your money elsewhere but super is still valuable,” she says. “Australians are not savers and without compulsory super many people wouldn’t be saving for their retirement. You’ve also got to remember that most people will be in the workforce for 30 or 40 years, so even 10-year returns don’t give the full picture.”
The chief executive of the Association of Superannuation Funds of Australia, Pauline Vamos, says it will take some time for markets to recover from the GFC and super fund account balances won’t spring back overnight, either. “Markets fell 35 per cent to 45 per cent,” she says. “The average return for funds in that time was about minus 14 per cent.”
But over the past 40 years, she says super funds have returned about 11.7 per cent a year. “That’s well in excess of the annual increase in inflation of 5.9 per cent over the same period,” she says. “If you take that and the tax concessions offered both within super funds and when you retire, super is still the most secure and best-return investment around.”
Hill says while super funds are unlikely to meet their goals all the time, investors should look for persistency – that ability to meet what they set out to do over time. “The last 10 years have been unusual but they do highlight that when you have double-digit returns for five years, as we had before the GFC, it’s very difficult to sustain that,” he says. “Over full market cycles it is difficult to increase wealth in a real way.”
DIFFERENCE PAID OFF
Averages can also be misleading. As Reynolds says, many funds have actually managed to achieve their goals over the past 10 years, with many not-for-profit funds returning about 7 per cent. SuperRatings says REST’s balanced option was the best public-offer balanced fund over the past decade, with a return of 7 per cent, ahead of Buss(Q) with 6.3 per cent and Equipsuper (5.9 per cent).
Hill says this can be attributed to a willingness to invest on fundamentals rather than following the herd.
“We had very low weightings to global equities prior to the tech crash and no listed property trusts in 2007 plus quite a degree of cash going into the financial crisis,” he says. “We went quite heavily into equities and credit in late 2008/early 2009 even though the crisis wasn’t over.
“The fundamentals were such that we might get our timing wrong for even two or three years but we had skewed the fundamentals in our favour. We were prepared to give up some returns.”
Hill believes the tendency of funds to focus on their relative performance to other funds works against fund members. Each fund has its own membership demographic and he would “love to see more focus on whether the trustees have met their objectives for those members” rather than where they rank in short-term performance figures.
He says the fund also realised during the GFC how important absolute, rather than relative, performance is to members. During the tech wreck, he says, REST lost money but did very well compared with other funds. But all members could see was that their accounts had gone backwards.
There’s a natural temptation when times are bad to decide it’s safer and simpler to keep your money in cash. In fact, as the graph shows, you’d have done better in cash over the past five years. That $50,000 investment would have growth to $62,485 – or about $2500 more than in a balanced fund. But as Reynolds points out, investors are notorious for switching to cash at the wrong time, realising losses when markets are down and missing out on recoveries. SuperRatings’ figures show the median cash fund returned just 3.3 per cent last year, against 9.8 per cent for the median balanced fund.
Over longer periods, Vamos says, a balanced portfolio generally does much better than cash: “Super is a long-term investment. You can’t measure it against what you’re currently getting on money in the bank.”
The SuperRatings figures show the importance of a diversified portfolio over time. Those investors who chose international shares in 2005 have done appallingly badly, losing 2.1 per cent a year for the past five years and 5.03 per cent a year over the past 10 years.
VARIED PERFORMANCE
But even within funds of the same type, performance can vary dramatically. According to SuperRatings, the best balanced fund last year, Local Government Super’s balanced growth fund, was well into double digits with a return of 12.8 per cent. All the top 10 managed more than 10 per cent ( the worst performer returned 4.7 per cent).
Reynolds says that while you shouldn’t switch funds on the basis of short-term performance (master funds, for instance, did better last year as they have more money in shares and listed property but they were hit harder when the value of these was falling), even over longer periods, there can be big differences between the best and worst performers. Over the past five years, OSF Super had the best-performing balanced fund, with an annual return of 5.8 per cent according to SuperRatings; the worst performer registered just 0.1 per cent. There was a similar range of returns for most growth-style funds but even with more conservative investments, which you’d expect to deliver closer figures, there were big differences between best and worst.
Over the past five years, SuperRatings reports the best cash fund managed an annual return of 5.3 per cent, almost double the 2.7 per cent of the worst performer. And the return of the best capital stable fund, at 5.9 per cent a year, was more than four times that of the 1.3 per cent return reported by the worst (see page 13). “If you can see persistent outperformance by other funds over longer periods you need to seriously consider moving,” Reynolds says, although you wouldn’t make that decision on the basis of just one or two bad years.
IMPACT OF FEES
Fees can also make a big difference to fund returns and are already coming under increasing pressure, given the focus on costs by the recent Cooper review of the super system.
The managing director of SuperRatings, Jeff Bresnahan, says the average funds earned about 11 per cent before fees in the past financial year but didn’t report double-digit returns because fees had to come out of this figure. While the industry claims fees have come down in percentage terms, they have risen in absolute terms because of the continuing flow of new money into super.
As with returns, there are big differences in fees between funds with similar investment strategies.
Recent SuperRatings analysis for Money found average fees on $50,000 range from 0.78 per cent for corporate funds to 2.07 per cent for retail master funds, though individual funds have both higher and lower fee levels.
Reynolds says the average fund fee is about 1.25 per cent and the Cooper review indicated it would like to see fees below 1 per cent; anyone paying close to 2 per cent or more needs to question whether they are getting value, as high fees can make a big difference to returns over the longer term.
Vamos says you can’t just look at fees in isolation.
“We’re finally starting to see a focus on net returns after fees, taxes and taking risk into account,” she says.
“That’s the real measure of whether a fund is performing.
“You have to look at what has ended up in members’ accounts.”
While the latest performance figures should provide comfort that funds are recovering lost ground, there are still very real questions as to where we go from here. Has recent market volatility been merely the result of markets having recovered too much too fast, or are we facing the prospect of a double-dip international recession?
CHALLENGES AHEAD
Hill says we’ll certainly see continuing volatility and shakiness, especially in Europe. “We won’t be going back to the environment of the mid-2000s. Growth will be stronger in emerging markets but there will be high volatility and anaemic growth in the developed world so investors will need to remain very diversified,” he says.
“If you make too many big bets it could go very long and long-term performance will suffer significantly.
“We also need to focus on the fundamentals of individual investments rather than indexing, because you could get caught up in the greed or fear cycle. It’s important … to have real assets with a very strong likelihood of generating strong yields for long periods.”
Vamos says most super funds have reviewed their investment strategy in the wake of the GFC to see whether there are better ways of maximising returns while minimising risk.
“One thing they have learnt is that you can’t automatically say certain types of assets are growth or defensive,” she says. “Funds are having to focus on the characteristics of individual assets within their portfolios.
“Equities, for example, can be growth or defensive assets depending on the nature of the underlying company.
“It’s all about understanding these complexities and getting the maximum efficiency from the overall portfolio.” Hill says the GFC also emphasised the importance of liquidity in portfolios.
But while he wouldn’t want to increase REST’s holding of unlisted assets, he says criticism of funds holding unlisted assets fails to acknowledge they generally give stable yields. “They can be attractive at the right price,” he says.
Bresnahan is also hopeful that the recent recovery will boost members’ confidence and interest in their super accounts. “Notwithstanding the struggling short-to-medium-term results for our major super funds, when Australians finally see a solid positive return on their member statement this year we should begin to see a gradual improvement in consumer confidence.
Since the onset of the GFC, consumers have shut down activity with their super funds, with personal contributions down by more than 50 per cent and transfers between funds and new memberships running at significantly lower levels,” he says.
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