In reality, generally it’s not the fund that has been underperforming, it’s the markets. It is important for fund members to understand why their funds have produced negative returns before making any rash decisions that could cost them retirement savings dollars in the long run. Most members of large superannuation funds place their retirement investment funds in balanced and growth investment options. These options are ones that have a relatively high component of equities exposure, and hence reflect the volatility of the share market over the past 12 months.
Despite this, most superannuation funds have exposure to other asset classes and cash holdings – defensive positions that help shore up those double digit returns of past years, now under attack during the current volatility. That’s why superannuation returns for the past difficult year will appear to be a negative single digit figure, and not anywhere near the 28 per cent loss in value that the global share markets have suffered between November 2007 and June 30, 2008.
One timely piece of advice for superannuation fund members who may be tempted to jump, after receiving notification of a negative return, is to check out how the fund has performed against funds with similar asset allocations. As a benchmark, the median balanced fund return for the past year has been negative 6.4 per cent. Members, after being directed by their trustees to make this comparison, should be comforted knowing the fund’s performance is not that bad compared with others and that an uneducated, knee-jerk decision would probably prove costly down the track.
Also, there is the ability to make investment decisions inside a fund. But members should be advised not to run scared and over-react with an asset allocation that is heavily weighted towards low risk cash and fixed interest assets because of the current market turmoil. Timing the market is risky. Research has shown that investors who try to “time the market” by switching investments generally perform badly over the long term.
Equally, members should be warned that getting out of the market when it is low could mean that any loss is crystallised, as well as missing out on any upswing when the market recovers. A clearer way for members to understand their superannuation nest egg is to emphasise five-year returns. Over five years, funds have typically experienced different market cycles. The rolling median return of the 50 largest balanced portfolios for five years up to 30 April 2008 was 11.1 per cent. The highest performing balanced funds were experiencing nearly 16 per cent annualised growth.