Returns on the run

For the third consecutive year, most Australian superannuation funds have rewarded their members with double-digit returns, defying the predictions of many of the key commentators.

The outcome became obvious in the closing days of 2005-06, with the managing director of Sydney-based ratings house SuperRatings, Jeff Bresnahan, predicting that average fund returns for the 12 months were likely to be in the order of 13 per cent, with some of the better performing funds getting as high as 16 per cent.

Acknowledging that the outcome for 2005-06 had defied some of the predictions he and other commentators had made at the close of the previous financial year, Bresnahan said that the returns needed to be seen in the context of a longer timeframe.

“If you look at the five-year returns, then the averages are just above benchmarks,” he said.

The likelihood of a strong double-digit return for 2005-06 was clearly indicated in the SuperRatings figures for May, which showed that despite a negative month, average annualised returns were still well over 10 per cent.

The overall picture painted by the SuperRatings data has been confirmed by the other key ratings houses, all of which have noted the recent dip in Australian and global equities, but pointed to a strong outcome for superannuation fund members.

At the top end of the superannuation fund return scale, members can expect to receive as much as 16 per cent, however at the bottom end the worst-performing funds may only return 9 to 10 per cent.

Figures from Intech Investment Consulting and other key researchers indicate that super funds delivered returns of around 13 per cent over the last financial year. Among the top 10 performing funds they identified were AMP Balanced, Optimix growth and INVESCO growth.

By comparison, SuperRatings nominated its top performing funds up to May as being Local Super, Telstra Super, MTAA Super, and STA.

Averaged across the year, the high returns can be largely attributed to the strength of equities, with domestic returning 20 per cent and global 13 per cent. “It’s been a good year generally for equity and growth markets,” says Andrew Korbel, senior consultant with Intech.

When asked about the retreat in Australian shares in recent months, which saw them fall nearly 10 per cent from their peak in May, he responded by saying “it’s all pretty normal”.

Australian shares returned a negative 2 per cent over the last quarter, while global markets were down almost 5 per cent, but Korbel is not panicking just yet. “After three of the best years we could have had, a pull-back at some point was inevitable,” he says.

According to Korbel, this highlights the importance of superannuation investment managers taking a long-term strategic view, rather than reacting tactically or chasing past performance.

“[After lower returns for the first two quarters] people may ask why not cash up now,” says Korbel. However, he quickly points out that if managers invested in growth superannuation funds had shifted their focus to more defensive assets on the basis of negative speculation around the same time last year, they would have missed out on the positive returns of the last 12 months.

For his part, Bresnahan reinforces the point that superannuation fund returns are at higher than normal levels, which are unlikely to be sustained over the longer-term.

However, he said that in circumstances where fund performances had continued to defy predictions over three years, he was loathe to suggest when they would begin trending down.

A quarterly survey conducted by RussellInvestment Group in June last year gauged investment manager sentiment as ‘bearish’ on Australian equities, with nine out of 10 believing the domestic market to be either ‘fairly valued’ or ‘over-valued’. This was particularly pronounced at the small end of the market, with almost 73 per cent nervous about small-cap domestic equities.

Fears about the sustainability of the remarkable returns delivered by Australian shares over the last three years are reflected in the Russell survey for the June quarter. Forty two per cent of managers are now bearish on the domestic market, with concern continuing to trend upwards from 31 per cent last quarter.

On international equities, while still remaining the most favoured asset, Russell’s latest survey also shows a weakening in investment manager bullishness toward global stocks for the first time in three quarters. Enthusiasm peaked at the end of the last quarter, with 80 per cent of those surveyed ‘bullish’ on international equities, but this has now pulled back to 58 per cent.

According to Peter Gunning, Russell’s chief investment officer, this is not surprising given concerns about a slowing US economy and the Federal Reserve Bank’s decision to increase interest rates. “Sentiment got ahead of itself, it’s not nearly as extreme as it was, but Australia still hasn’t given up on international [equities],” says Gunning.

“Interest rates are the real story here,” he says. “The larger theme for equities is the continuing pressure on interest and inflation rates, increasing concern about central banks tightening excessively and tightening US and domestic growth.”