End of year spells down time for super
Most superannuation funds will face a less than rosy end to the financial year with prediction that they will see out the 12 months with negative returns.
According to Mercer Investment Consulting those funds with exposure to more than 40 per cent in local or international equities can expect negative returns, with the bad news reaching across all types of superannuation vehicles.
However Mercer says that fund trustees and individual fund members should not try to move assets into conversative investments despite the fact that returns for the 11 months at the end of May show that Australian shares in the ASX 300 will return negative 0.4 per cent to funds.
Investors with offshore exposure will fare worse with international equities following the MSCI World Index (ex Australia unhedged) are down by -19.2 per cent to the end of May.
Mercer says the reason for the drop is overall market downturns since September 11 combined with a cooling global economic environment. This has in turn lead to drops in corporate profitability, and uncertainty about corporate financial reporting driven by the Enron collapse also contributed to the negative outcome.
Mercer executive director Tony Cole, says the negative nominal return in 2001/2002 will be only the fourth such outcome in the past 30 years since Mercer started tracking supernannuation returns.
“The 2001/2002 negative return is likely to be minor, relative to the three earlier events. The weak global economy and recent terrorism have had less impact on financial markets and investment returns than the oil crisis of the 1970s or the market crash of 1987.”
“Negative returns experienced in the 1970s and 1980s were exacerbated by much higher levels of inflation than prevail today which greatly increased the investor’s loss of real purchasing power. It’s very important to put this year’s returns into perspective.”
Cole says high nominal rates of return are unlikely to continue and in a lower inflation environment single digits returns are consistent with good real rates of capital growth and long-term retirement income accumulation.
However Coles says going ahead investments should fare better due to continued economic growth in Australia and inflation being held in check. He also says there is no reason why negative returns will become more frequent and advises against adjusting long term superannuation investment strategies.
Other sectors which have bucked the negative trend were:
Property (following the Mercer Direct Property index, to April 2002): 8.0 per cent
Australian fixed income (following the UBSWA Composite All Maturities index): 4.9 per cent
Overseas fixed income (following the Salomon Brothers World Govt Bond hedged to A$ index): 6.3 per cent
Cash (following the UBSWA 90 Bank Bill index): 4.3 per cent
AUTHOR
Jason Spits
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