Australian super funds rebound

While the rest of the world seems to be losing its head financially, Australia still seems to be keeping on the straight and narrow, especially when it comes to the performance of our super funds. Super Ratings Jeff Bresnahan explains what this super performance really means.

Q. Super fund balances showed an increase of 2.8 per cent in October. Is this increase the beginning of a turnaround or is it a one off result?

Jeff: The strong October super results are reflective of the world stock markets’ mini-rally during the same month. Whilst it would be nice to think this is the beginning of a turnaround, I don’t think anyone has the confidence to predict that the problems in Europeare over, and hence we will continue to see volatility in our super fund returns. By way of example, November looks like taking away some of Octobers’ gains.

Q. There has been much talk of doom and gloom in the financial markets but have super balances really taken the battering which people believe?

Jeff: Despite all of the problems associated with economies around the world, super funds have been amazingly resilient, to the point where a $100,000 investment in a balanced super option 10 years ago, would have grown to $162,256, a return of some 62 per cent, or the equivalent of 5.11per cent compound annual return every year for the last decade. So, a balanced investment option has done what it is supposed to, namely to beat inflation and cash investments, both of which have been comfortably achieved. Notwithstanding this, a balanced option aims to return around CPI plus around 3 per cent per annum, which most funds have fallen marginally short on over the last decade, but they have met this target when you look at funds since the introduction of compulsory super in 1992. Even now, super funds are only around 7 per cent off their November 2007 peak, which when you realise that the Australian share market is down around 35 per cent over the same period, shows the benefits of the diversification in balanced options..

Q. If people are worried about the performance of their particular super fund compared to others during turbulent times, is it worthwhile for them to consider moving funds, or looking at other avenues of investment?

Jeff: The key lesson to come out of the last four years, since the onset of the Global Financial Crisis (GFC), is quite simple. Australians need to take some ownership of their superannuation. The first step in this process is to understand where their money is invested. Keep in mind that the average balanced option has over 50 per cent of its money in share markets around the world, so it is going to produce volatile returns over the short term. However, nearly every fund inAustraliaoffers investment options ranging from no risk cash, right through to pure share plays, and everything in between. So before you start to point the finger at the funds when returns don’t meet your expectations, just reflect for a moment on how well you understand your own super. Better still, find yourself a quality advisor and get some advice on what you should be doing with your super. This is even more important for those in their mid-forties or older, as there are some great tax benefits to be obtained as you move towards retirement. Finally, don’t forget that super is simply a tax structure and for most, making the same investment inside a super fund, as opposed to outside, will normally result in a much better net return. So don’t go running out and cashing your super in on retirement. Again, get some advice.

Q. Australian based super funds are considered to be some of the best performing despite the market volatility. Is there a reason for this and are we protected to some extent from overseas forces?

Jeff: Lastly, Australian super funds have fared pretty well throughout the GFC, as discussed above. The diversified nature of a balanced investment option, which is where the majority of Australians have their super invested, has allowed funds to benefit from different asset classes. So whilst share markets took a pounding, assets such as fixed interest and cash have helped to steady the returns. It’s the old adage of not having all of your eggs in the one basket, and this seems to be paying dividends, even if the share market isn’t!

Jeff Bresnahan
Founder – Chairman
SuperRatings Pty Ltd

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