A few people have read my earlier post on this subject of 10 year super fund returns and wondered just what point i was making… (thanks for the feedback Neil and others!). The post was primarily aimed at showing the average 10 year return of the average super fund (which was not much over 4%pa) and to look at some of the alternatives that were currently being highlighted as offering better value. The reason this is important is that funds generally do not promote their very long term returns, and so superannuation fund members looking at current published returns (which are usually only 12 months or 3 years) can end up confused as to how well or badly their particular fund is going.
Many people change super funds over the respective returns of one fund over another, and often after looking at the last years’ performance or some other relatively short period. However, few people that i have encountered can validly illustrate just why or how higher returns will be achieved in the new fund or new strategy (and i include people from within the industry in that comment).
It is extremely important to look at this in todays marketplace, as we are sitting at the bottom of a fall in global share and property markets that reflects one of the biggest shifts in dollar economics since the Great Depression. This means that any measurements made at this point in the cycle will inevitably be flawed if used as a guage of future expectations.
Let’s put some specifics into the equation… Let’s look at how the ‘average’ super fund has performed over the last 1, 5 and 10 year periods.
For the sake of an example, we will look at Vanguard’s four diversified funds which are a good proxy for average returns for the various types of fund and their most commonly used names:
Do you notice the conundrum?
Over 10 years, “High Growth” has resulted in the lowest growth! Talk about unfortunate naming…
This means that investors who have exposed themselves to a higher level of volatility risk (through having more shares or property in their portfolio) are showing the lowest returns, on average. And this is over 10 years! Surely this is long enough for long term strategies to play out, i hear you ask?
Looking at this result has led many people to question the validity of maintaining a growth strategy or leaving super money in ‘default’ options and even whether the traditional buy-and-hold strategy has merit any more.
This is especially the case in superannuation, where opinions are heavily influenced by the ongoing Industry Funds advertising campaign aimed at convincing the public that public offer super funds and financial advisers are crooks and that Industry Funds will rescue everyones’ retirement savings. As this site has predicted a number of times, that is beginning to turn around and bite the Industry Funds themselves, as investors are more and more cynical about all managed investments and some of the changes being proposed are unlikely to have the outcomes their proponents are expecting.Please note, my point is not against the actual superannuation funds because they are generally well run, cost effective and oriented towards member interests. My point is against the ideology that causes the spokespeople for these very good super funds to somehow think it is ok to have one of the largest advertising splurges in the financial marketplace to try and force every Australian into their particular strategies. To force changes that are well outside the scope of superannuation and to seek legislation that could be expected in Russia or China but not here in Australia. If there is any interest in exactly how this is coming about, let me know and i can provide you with sufficient examples to prove the point in a later post.
Here are a couple of examples of the types of commentary that is around at the moment with regards to super fund returns (and please keep in mind that this actually has nothing at all to do with superannuation… these returns are simply the result of whatever investment strategies are in place. Even supposed ‘experts’ continue to get this point mixed up and wrong!).
Here is the ABC reporting on super fund returns. The comments posted on the site suggset that most people are still unaware of the difference between super and investment and there is a lot of anger being directed at the superannuation system.
So, we can ask ourselves, “are these strategies valid today or are we in a ‘new world’ where new strategies are required?”
i have read of many articles (especially from overseas sources) that suggest that bond funds or credit funds or various forms of fixed interest accounts will offer the ‘best’ return in the future. They suggest the chances for profitable enterprise are simply too risky and uncertain. In the last post gold was also mentioned as having performed very well over past years. The inference is, of course, that this will continue to be the case and that it too should be considered for inclusion in a portfolio.
i have no idea whether that will be correct or whether it will prove to be a silly idea. The short term future is simply not that predictable (and never has been). What is really being said here is that the best return will come from areas considered more ‘secure’, like cash and fixed income investments.
So i ask you the question, “does this make sense to you?” Is it logical that the best return over the next 10 years will be from traditionally ‘defensive’ type assets such as bonds and cash? If it does, who do you think is going to be providing the interest return on the investments? If everything goes ‘pear shaped’ it is highly likely that a lot of those fixed income holdings will see defaults in the payment of interest and even failure to return capital. As we have noted previously, deflation or stagflation are the worst possible outcomes that are likely to bring these horrible results into play but at this stage (and especially for Australia), that seems an incredibly unlikely outcome. If you think that it has a higher likelihood then it’s time to start thinking about selling your home – which is something that not a lot of people are really prepared to do. Or maybe buy gold and bury it in the backyard?
My suggestion is that this does not make sense at all. Markets rise and markets fall. It is pretty much standard behaviour for investors, analysts, commentators and observers to believe that things will ‘never get back to where they were’. In other words, it seems impossible for markets to recover from large falls. The ‘double dip’ of the Great Depression resulted in the United States sharemarket losing over 80% of its value – and yet it still did eventually recover, and move on to substantial returns over time.
If you were to look at the short, medium and long-term returns for various asset classes back in 2007 you would have been strongly convinced that listed and unlisted commercial property was the only place to be. And you would have been just in time to participate in the 80% drop in values of listed trusts and substantial drops in unlisted accounts (many of which have been ‘frozen’ by their managers to try to stop a stampede of panic selling of the type that demolished property values back in the early 1990’s).
Unfortunately, modern technology has brought with it a flood of useless and confusing data that is making it harder and harder for the average person to make sense of what is happening in the world and how they can deal with those changes. Even supposed experts are now talking about strategies that are very expensive and fraught with hidden traps when the idea is supposed to be that they are reducing risks for investors. I have just read an industry magazine suggesting that ‘buy and hold’ is no longer suitable as a strategy, and that investors have to be more active.
Perhaps someone should point out to Warren Buffet (arguably the world’s wealthiest investor) that he could have earned an awful lot more money manically trading his investments rather than simply buying very good stuff and keeping it for long enough to take away some of the business cycle timing risk that is associated with every purchase ever made?
Perhaps someone should point out that active trading incurs more capital gains tax, more income tax, higher transaction costs, greater timing risks, greater behavioural based decision making and a significantly higher return requirement just to reach market return levels?
Now, more than ever, your own personal ‘risk profile’ is the key to working out what is best for you. This takes time to work out, time to understand, and time for any resulting strategy to be implemented. If this post is aimed at anything, it is to suggest that the average commentary on investment and especially superannuation returns that you will be exposed to today is just a little bit better than rubbish. Take it with a grain of salt, check the sources and the detail and be mindful of those who sit back and say that this or that is bad without proposing any reasonably workable alternative.
If there is interest in more specific commenatry on super fund returns then i will post more detailed articles later. For now, it is Friday evening and i think i might just call it a day.
Why have i used Vanguard as the example funds?
Vanguard have been used as they offer low-cost, broadly diversified funds based on “indexed” strategies, which would reasonably be expected to deliver “average” returns when compared to the universe of available funds. It is always difficult to identify suitable funds to benchmark against, owing to the different interpretations of “conservative”, “balanced”, “growth” and other commonly used but little understood terms.
The Vanguard funds operate on the assumption that for “conservative” funds there will be 30% in shares and property areas and 70% in defensive areas such as cash and fixed interest securities. “Balanced” operates on a 50%/50% basis and “growth” the exact opposite of the conservative mix (in other words, the growth fund has 70% in shares and property and 30% in cash and fixed income areas).
Some funds use the term “balanced” and yet they may have 80% or more of their funds in areas such as shares/property/direct assets. This is the kind of difference that makes fund comparisons fraught with traps for the unwary.
In the examples used above, i have taken the figures from Vanguards’ pooled super trusts (PST’s), as these have been around longer than the retail offerings, and therefore can show historical longer term returns.