With the ASX200 closing down 16.9 per cent over the year to 30 June 2008, many funds are facing the worst returns for over 20 years. While trustees will be keen to put the negatives behind them and focus on a recovery, we can expect a lot of members to be upset and angry about negative returns.
The investment objective of a typical balanced fund might indicate that investors can expect negative returns every six or seven years. In this context, negative returns in 2001-02 and again in 2007-08 seem to be nothing out of the ordinary – returns for many funds over the whole cycle will track closely to their investment objectives.
However, industry insiders often forget that these are complex messages, and that superannuation funds are competing with other businesses for valuable space in consumers’ “mental bandwidth”. The Australian Institute of Superannuation Trustees (AIST) recently held a luncheon series to discuss how members might react, and to devise strategies trustees and other super professionals can use to help ensure members don’t make poor decisions when they get bad news.
The first message that trustees will need to drive home is that it’s the cyclical nature of investment markets that creates negative returns, and not the trustee’s investment process. However, as our panel identified, most members don’t read the financial press, or even financial articles in the mainstream press. Even when members receive and understand messages about negative events on financial markets, they often don’t associate those events with their super fund returns.
To make matters worse, by the time members actually receive their statements, media coverage of the key causes will be ancient history, and for many members, the negative messages which are preoccupying the media currently (eg petrol and food prices, emissions trading scheme) are likely to crowd out any residual awareness of the sub-prime crisis, and the associated fallout on Australian markets.
Our panel agreed that the members most likely to be effected by negative returns are those nearing retirement. Obviously, the immediacy of retirement is a factor, but they are also more likely to see their account balance move backward, because of higher amounts invested, relative to incoming contributions, and while the apathy of younger members is well known, the youngest members have never experienced negative returns, or any kind of widespread economic adversity, and may react irrationally, switching funds, or moving to a more conservative option.