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.
Those funds who have put in the hard yards educating members are likely to be rewarded in the current climate. Not only can ongoing education acclimatise members to negative returns, engendering loyalty and containing call centre costs, but it can also prompt more risk averse members to consider their objectives, and move to a more conservative investment option.
One strategy is to raise members awareness of the impending negative prior to the member statements hitting their mailboxes. Market commentary is other people’s money; the member statement is their own!
So what can trustees do? There is consensus on the basics:
• Warn your members about what’s coming, don’t leave it till they see the impact on their account, and don’t assume they don’t care;
• Focus on the long term, stress the cycle;
• Provide good quality information, without jargon or technical language;
• The more your members understand the reasons for your returns, the more loyalty they will exhibit. Conversely, if you don’t help them understand, they are likely to make a poor switching decision, or leave your fund altogether.
Many trustees and communications executives are looking for the silver lining in the negative returns cloud: that it may be a great opportunity to engage with your disengaged members. Rather than just smoothing members’ ruffled feathers, fostering genuine understanding of the drivers of fund returns might engender loyalty from members and make it an easier message next time markets turn down.
ACSI and AIST to co-host international corporate governance conference in Sydney next year
The International Corporate Governance Network will hold its annual conference for the first time in Australia next year with the Australian Council of Super Investors (ACSI) and the Australian Institute of Superannuation Trustees (AIST) to be co-hosts of the event.
The conference – to take place from 13-15 July 2009 at Sydney’s Hilton Hotel – is expected to attract more than 500 international delegates, drawn from ICGN’s 40-country membership, responsible for an estimated US$15 trillion in assets.
Michael O’Sullivan, president of the Australian Council of Superannuation Investors and one of about 30 Australian delegates who recently attended this years’ June ICGN conference in Seoul, South Korea said the Sydney conference should attract some of the world’s leading speakers across globalised investment markets and corporate governance. “Australia’s own record will be exposed to world-wide scrutiny,” he added.
The ICGN is based in London and brings together institutional and other investors, advisors, lawyers, academics and researchers from developed and emerging markets. Background, policies and interventions are available on the website www.icgn.org