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Lessons of a bull market

Columnist
— 1 minute read
Trustees have some lessons to learn before they enter the next bull market, CIE's Frank Gullone says.
No-one in our industry needs reminding that the negative returns over the past two years are the worst in its history.

For the first time in nearly 50 years, superannuation funds recorded two consecutive years of negative growth. The last time funds went into negative territory was 2001/02, but the market shake-out from the tech wreck was nothing compared with 2007-09.

These negative returns are causing funds to adopt a root and branch approach to every aspect of their business, whether it be investment strategy, governance, operations, default options or member engagement.

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The global financial crisis (GFC) exposed some serious flaws in the system that require addressing.

That said, a word of caution is needed at this critical time for the industry.

Recent figures from the Association of Superannuation Funds of Australia showed that over the past 40 years the average superannuation fund with growth assets of between 60 per cent and 80 per cent (typical for a default investment option) has had annual returns of 11.7 per cent a year. That's well in excess of the 5.9 per cent annual increase in the consumer price index (CPI) over the same period.

According to the study, annual returns have fallen into negative territory seven times. These returns are the investment norm from a growth-orientated strategy.

Also, super funds have held up much better than the broader share market. On average, fund returns are down about 20 per cent over the past two years compared with about 40 per cent for equity markets.

These consistent returns are worth pondering; they mean that for six out of seven years over nearly five decades funds have experienced positive returns and provided retirement benefits for their members.

So trustees should not act rashly and significantly change the make-up of their fund unless they have a very good understanding of their members' demographics and views.

From my perspective, these figures also bear out what emerged as a critical issue at the recent Centre for Investment Education Major Market Players conference that looked at investment trends and strategic asset allocation issues.

There was no doubt the consensus of opinion among trustees, in particular, was that fund members broadly understand the long-term nature of superannuation and as such are not all that interested in how their fund performs against its peers.

In the industry we have seen the emergence of myriad yardsticks that measure how funds are performing and, that with the advent of choice of fund, there was a belief this would influence what fund employees would choose.

In particular, there were fears members would be influenced by short-term investment numbers.

In large part, this hasn't happened. It seems members are not fixated with where their fund finishes in the top quartile every three months, and, providing the medium to long-term results are within the industry norm, they are typically content to stay with the fund.

This observation, incidentally, shouldn't send a message to trustees that they have been communicating effectively with members. In many instances, that clearly hasn't been the case.

Indeed, what emerged at the conference was the acknowledgement that in the bull market before the GFC, funds became far too focused on their performance and tended to neglect the issues that were really concerning their members.

Here we had a situation where funds were taking bigger and bigger investment risks to stay ahead of the pack when most of their members really wanted to have a secure, low-cost fund giving them solid returns above the CPI over the long term. It's a message trustees would do well to remember when we enter the next bull market.

 

Lessons of a bull market
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