Your members have less money in their super accounts than what they started the year with. They are angry. Here’s what you should be saying to them, according to GABRIEL SZONDY.
It’s been several years since Australian superannuation funds have had to report bad news to members. But the 12 months to June 30 2008, has been a year for negative returns – a shock to a system that has been enjoying doubledigit growth. The six-year bull run on domestic and international equities has come to a juddering halt, replaced instead by the uncertainty and volatility of a bear market (from a high in November 2007 to June 30, 2008, markets globally shed 28 per cent of their value), concerns about a global recession, including Australia, and the ongoing fallout from the subprime credit crisis.
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.
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.
It’s also instructive to note that returns from high growth, growth and balanced funds over the five years returned double-digit annualised growth, while the conservative, steady, low volatility investment in cash returned about 50 per cent less annually over the same period. Fees are another point to consider. Members with large balances, in particular, should keep a close watch on fees because the impact they have on net returns can be significant. Funds that offer either a discount for high balances, or a cap on the fees once super savings reach a considerable amount, will be at an advantage.
Apart from some public sector funds, typically industry funds are the least expensive for members. However members should also increasingly examine the fund’s investment strategy to ensure it has a long-term plan and uses specialist advisers and funds managers with a depth of investment experience. Certainly after the recent financial crisis, more members will read the fine print to discover the strategy about derivatives, reserves and buy/sell spreads on entry to or exit from the fund. The more knowledge members acquire about how a fund operates, the more secure they will feel about their retirement savings.
Gabriel Szondy is the managing director of the Centre for Investor Education and a trustee