Annus Horribilis For Super Funds Caught In The Storm
Sydney Morning Herald
Friday December 19, 2008
As super funds brace to report their worst calendar year on record, the question for investors is: did it have to be this bad? The dreaded November figures are due out on Monday, but in the 12 months to October 31 the average balanced super fund had lost 17.61 per cent, according to the researcher SuperRatings. What's worse, the past year was showing signs of having all but eroded the benefits of the double digit returns leading up to this crash.
For the three years to October, SuperRatings says, the average annual return for balanced funds was just 2.4 per cent and the five-year return had fallen to 6.67 per cent. The good news is those figures are still positive, but another downward leg in this cycle could well see the hard work of the past three years wiped out. Questions are also being asked about valuations of unlisted assets such as direct property and infrastructure. So far these have held up and cushioned some of the better performing funds from the full extent of the downturn.But if the economy moves into recession, these assets are also likely to fall in value - if they haven't done so already.Super funds are by no means alone in being surprised by the severity of this downturn. But as long-term investment vehicles, they have a greater responsibility than most to have a robust strategy that will carry their members through good times and bad. For balanced funds - which SuperRatings classifies as funds holding between 60 per cent and 76 per cent of their assets in investments like shares and property - that strategy has been to take advantage of the fact that these assets have historically provided the best long-term returns, while retaining part of their portfolio in more defensive assets such as property and cash to smoothe returns and protect the portfolio from the extremes of investment cycles.You could argue they have done just that. While no one would celebrate a 17 per cent loss, it's worth remembering that at the end of October Australian shares were down by about 40 per cent and some sectors, like listed property, had fallen by more than 50 per cent. Comparatively, the result wasn't too bad. But was it good enough? Averages have a smoothing effect of their own and tend to disguise the wide variation in fund returns. Over the 12 months to October, the best balanced fund in the SuperRatings report lost 11.2 per cent, but the worst lost more than double that - 27.4 per cent. That's a 16 percentage point difference between the top and bottom performers. While investors in the top performer might be grizzling at losing money, investors in the bottom funds would be the ones with real cause for complaint. Similarly, big variations existed between the best and worst funds with other investment strategies. Growth funds ranged in returns from -15 to -30 per cent; Australian share funds from -28 to -39 per cent; international share funds from -16.7 to -37 per cent; and even capital stable fund returns ranged from -2 to -13.5 per cent (not so stable after all, it seems). Spare a thought for investors who chose property as their investment option. Those in the best fund received a positive return of 10.1 per cent while those in the worst lost a staggering 54 per cent. The difference was largely due to whether the funds held direct or listed property investments. And even in cash, which you'd think was a generic investment option, the best return of 7.1 per cent was more than double the lowest of 3 per cent. While you shouldn't judge a long-term investment on one year's returns, the huge differences over the past year do highlight the dangers of choosing the wrong fund. Unfortunately, most investors take little continuing interest in their super and may be jeopardising their chances of a comfortable retirement by sticking with an underperforming fund. Another problem is that even when they do take an interest, it is not always easy to understand what you're getting. The reason researchers put their own definition on terms like "balanced" is that there's no industry standard on fund naming or disclosure. Funds that describe themselves as balanced or diversified can range from conservative funds with 30 or 40 per cent invested in growth assets to much more aggressive products invested 80 or 90 per cent in growth. Recent research, again by SuperRatings, found fewer than one in four funds described their investment objectives in terms that were easy to understand. How are you supposed to work out whether your fund is doing a good job if you don't even know what it's supposed to be doing?With the Financial Services Ombudsman reporting a 152 per cent increase in complaints about managed investments, how long will it be before disgruntled investors take action against a super fund for not delivering what investors were led to believe it would?Around 90 per cent of fund members stick with their employer's default fund rather than making their own decisions. If the default fund is well chosen, that can be a safe and simple decision. But a recent Australia Institute/Industry Super Network discussion paper recently claimed the current system fails to protect those who choose not to choose. Launching the paper, the Superannuation Minister, Nick Sherry, conceded not all default funds make the grade. Measures being undertaken include considering default funds in industrial awards and providing information on individual funds for comparisons through the Australian Prudential Regulation Authority. The discussion paper recommended going further by requiring all default funds to meet minimum standards such as capping fees and charges to a level set by an independent regulator, banning entry and exit fees, and prohibiting fees and commissions for financial advice.
© 2008 Sydney Morning Herald