Super funds in black (just) for 2011/2012 year

The median superannuation growth fund delivered 0.5% for the 12 months to 30 June 2012, which means super funds have delivered a third consecutive positive financial return, according to rating company Chant West. Even so, super accounts have still not recouped all of the losses suffered during the Global Financial Crisis.

Following a median return of 9.2% for the 2010/2011 year, and 10.4% for the 2009/2010 year, the small positive result means the 3-year average return is now 7% per annum, which is ahead of the long-term expected return and ahead of inflation which has averaged about 2.6% a year over the 3 years, says Chant West director, Warren Chant.

“The 2012 financial year was a tough one for funds to navigate because there were opposing forces at work that shifted market sentiment to and fro and prevented any clear pattern emerging. On the one hand, the global economy was clearly working its way out of the GFC-induced trough, although the pace of growth was slow and far from uniform. But against that there was the negative sentiment associated with the debt crisis in Europe, where successive bailout packages just seemed to buy a little time before the next scare emerged either in Greece or, more recently, in Spain.”

Due to the lingering impact of the Global Financial Crisis (GFC) however, the 5-year average return is in the red (just) with a loss of 0.1% each year, and the 7-year average return being 4% a year, which Chant believes will be a challenge for super funds to explain to fund members.

“Even three positive years have failed to reverse the losses from the GFC. The median fund lost 27% during the course of the GFC, which ran from late October 2007 to the end of February 2009. Since then, it has recovered 31.5%, which in normal times would be quite impressive. Unfortunately, the way the maths works, a loss of 27% requires a gain of 37% to return to where you started, so as the financial year ends we still need about another 4% gain to get back to that October 2007 level,” says Chant.

Did super funds meet investment objectives?

Chant suggests that super fund members need to look back beyond the GFC to decide if their super fund has met its objectives. He says: “Performance objectives are set for the long term, and we now have reliable data for all the major funds going back 20 years to July 1992. That’s when compulsory super came in… The typical objectives for a growth fund are to beat inflation by 3 to 4% (after investment fees and tax) over rolling five year periods, and to post a negative return no more frequently than one in every 5 or 6 years on average. If we look back over those 20 years, we can see that funds have broadly achieved those objectives. The annualised return over that period was 7%, the annual CPI increase was 2.6%, so the real return above inflation averaged 4.4% per annum. So the return target has actually been exceeded over the long term.”

Chant also considers that most super funds met their risk target as well, that is, the number of years delivering investment losses over a set timeframe. Chant says: “There were three negative years out of the 20, which averages nearly one in seven, so the risk objective was also met. This may surprise people, but that’s because we tend only to remember the recent past. It’s worth noting that all of those three negative years occurred in the past 11 years, which included not only the GFC and before that the ‘tech wreck’. In the previous nine years, not one was negative – in fact the lowest return in those nine years was 6.0%. So when we talk about objectives like ‘a negative return once in every 5 or 6 years’, it’s important to remember that we’re talking averages, not a predictable regular occurrence.”

Impact of the GFC

According to Chant the table below shows how damaging the GFC has been: conservative options have outperformed growth options over 5, 7 and 10 years. He says the current long-term performance figures are the opposite of what you would expect, namely that super funds investing in growth assets should outperform more conservative options over the medium and longer term.

The table below lists the performance figures for the five main asset allocations for: 3 months, 6 months, 1 year, 3 years, 5 years, 7 years, 10 years.

Note: Performance is shown net of investment fees and tax. It does not include administration fees or adviser commissions. Negative returns appear as follows: -0.1% means a loss of 0.1%.

Source: Chant West 25 July 2012 media release (www.chantwest.com.au)

Based on Chant West’s rankings, a growth fund typically holds between 61% and 80% in growth assets such as shares and property. A median is simply choosing the return for the fund in the middle of the list.

Although the term ‘growth fund’ covers those super funds with investment options having a 61% to 80% allocation to growth assets, some super funds describe the identical asset allocation as ‘balanced’ option. Chant West’s description of ‘balanced’ however is 41% to 60% in growth assets.

The returns for Chant West’s version of ‘balanced’ option are 2.8% for the 12 months to 30 June 2012. You can find more detail on the investment returns for growth or balanced options in the table above.

Note: The balanced/growth asset allocation is the default option for most large super funds which means that at least 80% of all super fund members have their superannuation money invested via a growth or balanced investment option. If you don’t actively choose your investment options for your super account, then your retirement savings will be invested in the default option.

If you do actively choose your investment option/s then your super savings may be invested in another type of investment option such as conservative or high growth.

According to Chant West, the performance of the growth investment options for industry super funds came out ahead of master trusts/retail funds for the 12 months to 30 June 2012, with industry funds returning 1.0% for the year and master trusts/retail funds losing 0.2%.

Over the past 10 years to 30 June 2012, industry super funds have outperformed master trusts/retail super funds by 1.4% per annum, returning an annualised 6.1% (industry funds) compared with 4.7% (master trust/retail super funds).