Right now, it looks like funds will be reporting more of the same for the current financial year and possibly beyond. In this environment, most superannuation funds, particularly those with large exposures to listed equities, have declared negative returns for the first time in years. For many superannuation members, their 2007-08 fund report will give them their first experience of negative returns. The last time members looked at their super fund results and got such a shock was in 2001-02, when, in the wake of the “tech-wreck”, median returns were negative 3.1 per cent. But in these volatile times, it is imperative superannuation fund members keep their perspective – with their trustees’ help. Fund stewards need to hammer home the good news – which is that bear markets, on average over the history of modern investment, last 14 months; bull runs have a habit of running for 42 months.
That’s why superannuation, in the long run, benefits from investment in the share market and it’s why members with most of their working and post retirement lives ahead of them should not panic. For superannuation fund trustees, the current situation will require a thoughtful response to ensure there is not an exodus of members spooked by the current turmoil in the financial and equity markets. [However, fund members, looking to move to another fund, will find it virtually impossible to find one that didn’t have a negative return in 2007-08.]
It will be up to the trustees to educate members about the markets so that they are aware of their inherent volatility and that it is wrong to believe that markets go only in one direction – up – ad infinitum . In addition, it’s dangerous for members to change course on the basis of one year’s returns. After all, on a compound basis over the past five to 10 years, members are still well ahead notwithstanding the current negative returns.
What the negative returns of 2007- 08 do, in fact, is give trustees a golden opportunity to engage with members and explain the nature of markets and how to manage risk and expectation. It must be explained in plain English – market downturns will happen. However, history tells us that markets do recover and spend a lengthy time growing again. Fund members must be made aware of this and other fundamentals of market investment. Most fund members who feel tempted to jump to another fund solely on the strength of one year of negative returns are acting illogically.