Negative start for superannuation funds no cause for negativity

Australian superannuation fund returns have started the 2011/12 financial year in negative territory but, as Mike Taylor reports, most members have learned enough from the GFC not to crystallise their losses.

At the close of the 2010/11 financial year, many Australian superannuation fund members could look at their account statements and, if they knew how, make the assessment that while they had enjoyed close to 18 months of positive returns, they still had some way to go to make up losses incurred during the global financial crisis (GFC).

The market volatility which has marked the closing weeks of July, and most of August, suggests it may be as much as another 18 months before members of Australian superannuation funds can claim to have regained their GFC losses.

Data released last week by specialist research houses Chant West and SuperRatings confirmed that Australian superannuation funds had started the new financial year in red figures, with the median growth fund declining 1.5 per cent in July (Chant West) while the median balanced fund declined by 1.38 per cent (SuperRatings).

Importantly, neither Chant West principal, Warren Chant, nor SuperRatings managing director, Jeff Bresnahan were predicting the market volatility which had undermined returns was likely to end any time soon.

According to Bresnahan, the current extreme bout of market volatility is not expected to go away quickly.

“It has been with us since the GFC and will remain with us,” he said.

While superannuation fund returns through July and August were reminiscent of the GFC, so too was the relative performance of industry funds and retail master trusts. Just as had been the case in 2008/09, retail master trust returns proved to be harder hit than those of industry superannuation funds due to the former’s higher exposure to equities.

Therefore, on the back of their higher exposure to unlisted and less frequently valued assets, the industry superannuation funds will emerge from the opening months of the new financial year in better shape than their retail master trust competitors.

According to Chant West principal, Warren Chant, industry funds with their lower weighting to listed markets returned minus 1.5 per cent during July compared to minus 1.9 per cent for industry funds.

What both Chant and Bresnahan might have noted, however, is that retail master trust returns outstripped those of the industry funds through much of 2010 because the same exposure to equities which saw returns diminished also sufficed to see them recover at the same pace as the equity markets.

At the same time, the returns of many industry funds languished amid some slow adverse revaluations of their unlisted asset holdings.

The good news for financial planners and their clients is that having experienced the adversity of the global financial crisis, they are well aware of the scenarios that are likely to evolve and the reality that switching funds in a crisis most often results in the crystallisation of losses.

Hardly surprising in the face of two consecutive months of negative returns, Chant and Bresnahan were last week choosing to point to the fact that superannuation is supposed to be a long-term investment and that, taken over the long haul, has tended to outperform expectations.

Chant points out that both growth and conservative superannuation strategies based on CPI plus 3.5 per cent and CPI plus 2 per cent respectively have performed above expectations about 60 per cent of the time.

Bresnahan argues that market downturns are going to occur about once every five years, and that a panicked switch to cash is not the way to go.

“Short-term, knee-jerk reactions are never a good idea, and even less so when they involve retirement savings and lead to the crystallisation of losses,” he said.

“The fact is that over the longer term, balanced funds and even fixed interest funds, outperform cash.”

“Members certainly shouldn’t panic, having been through the worst of the GFC and then seeing their balances recover,” Bresnahan said.

While at the height of the GFC, a number of superannuation funds undertook advertising campaigns which appeared aimed at encouraging disenchanted members to switch funds, the latest Roy Morgan Research suggests that switching is not high on most members’ agendas.

Switching is still most likely to occur when people change jobs but the Roy Morgan research confirms that the most important element for members remains the level of their returns.

When superannuation returns are in negative territory across the board, Australians appear to have learned enough to stay put – knowing that industry funds returns may be slower to decline, but very often they are even slower to recover.