Your Average Australian Super Fund

Reddit

Now there’s a real decoupling. Friday’s unemployment figures came out in America. They showed that 8.2 million Americans have lost their job since the GFC began in 2007. The official unemployment rate (the one that under-measures actual unemployment) is at 10.2% and growing. The Aussie employment report comes out on Thursday.

Stocks rallied on this news.

Employment is said to be a lagging indicator. Economists tell you it’s the last thing to recover from a recession. Businesses don’t begin hiring until after they are sure the worm has turned in the economy. But right now, there is a pretty big decoupling between the stock market’s verdict on the economy (it’s all good, man) and the employment market’s verdict (it sucks, man).

But there’s no doubt the rising market has lifted a lot of spirits…and superannuation balances. Aussie Super data firm Rainmaker says the average super is now down just -0.8% as of the end of September. To be honest though, we found this data incomprehensible.

Is it down 0.8% for the year (since January) or in the last twelve months? Or is the average super fund down 0.8% from its all-time high? The average super fund fell 21% from its heights to its lows during the GFC. But the Aussie market has rallied 55% this year.

So does this mean super has done well? Average? Above average?

In today’s Age, Eric Johnston reports that for the last three years, the average super fund is down 0.3%. Over five years, the average fund performance is a bit better at 5.2%. And over ten years, a 6% average super return just means boring old government bonds at 5.6%.

To us, this suggests that the equity premium in stocks really is collapsing. What’s the point of getting average super returns if you’re better off in bonds? Or, if all you can get in the average super is a performance that barely beats bonds, wouldn’t it make more sense to stick half your money in bonds, 30% cash, and actively manage the other 20% in your own self-managed super?

You could do worse, of course. Maybe it’s a lousy idea. So we asked the man with the wealth gampelan, Kris Sayce, what he made of the enigmatic super figures. He’s on the super beat full time. It’s a sensible complement to the growth-stock tipping he does at the Australian Small Cap Investigator.

“I think what this research shows you,” Kris writes, “is the utter failure of the funds management industry. The research claims the S&P/ASX200 is up nearly 55%, yet the best performing fund manager has only managed a 9.9% return. Something doesn’t quite add up for investors.

“But still they’re charging you between 1% and 3% for underperforming the market! That’s just bizarre. Then again, I’ve always thought you’re better off investing in the shares of a fund manager rather than in their funds.”

Australia’s super annuation industry is often trumpeted by the government (and the industry) as one of the best pension schemes in the world. And there’s a lot of talk now about raising compulsory contributions from 9% of salary to 12%. This would be a real gift to the funds management industry.

But according to a report from Boston Consulting, the GFC hit Australian investors about as hard as anyone in the world. The report says the GFC wiped out 27% of Australian pension “wealth.” That was the third-worse wipe-out of 62 countries surveyed. Only Britain (-32%) and Sweden (-28%) were worse off.

If you’re having a hard time reconciling that fact with the rosy picture routinely painted by the media and the funds industry and the government, you need to dig a bit deeper and see how your fund is investing your money. At the very least, you ought to know whether your super fund is underperforming the market and over-exposing you to a certain class of stocks.

If it’s your average Australian super fund, odds are it’s doing both. According to an OECD report released earlier this month, “Australian superannuation funds had the highest exposure to equities last year and were the third worst performing group of pension funds in the world.” The default Aussie super has 60% of its assets invested in shares and 70% of those shares are growth stocks.

Not only does this mean the average Aussie super investor is over-exposed to equities, he’s way over-exposed to growth stocks. Granted, that might be exactly the sort of asset allocation you wanted if you were a young investor with time on his side, investing at the beginning of secular bull market.

But now? And let’s not forget that the half of the total average return for stocks over time comes from reinvested dividends, not capital gains. That means that Aussie investors probably have too few income producing stocks in their portfolio, and too many stocks period.

If you have an asset allocation plan already (some percentage of your assets in stocks, property, bonds, cash, and gold, respectively), it may not be a bad time to revisit your percentages (rebalance). And if you don’t have a plan – if you’re leaving it to your super fund to make your asset allocation decisions for you – the odds are THEY don’t have a plan either. They’re just chucking your money into growth stocks and clipping your ticket.

That’s not a plan at all. But it’s probably a better plan than stick all your money into bonds willy nilly. That’s not a plan either. Or, if it is a plan, and those bonds are U.S. bonds, it’s a really bad plan. Worse than no plan at all (owning equities blindly).

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
Reddit

Comments

  1. Ah Dan D! If you are looking for the underlying smoking gun in the numbers then take a peek at the “completely unhedged” international shares performance of Aussie Super during calendar 2008 and then compare it with the AUD over the same period. Here are the raw monthly percentage change numbers in AUD published by Aussie Super:

    Jan-08 -9.11
    Feb-08 -3.49
    Mar-08 0.00
    Apr-08 2.90
    May-08 0.58
    Jun-08 -7.74
    Jul-08 -1.24
    Aug-08 4.48
    Sep-08 -4.09
    Oct-08 -6.10
    Nov-08 -5.33
    Dec-08 -5.18

    If you work it into an end of month SDR exchange rate you might come to the conclusion that they lost +60% of their international share portfolio principal in the period. And then they made a comeback in the first half ’09 on the back of a falling AUD. How is it so? Don’t try asking them or APRA because Bernie is a national icon and Aussie Super don’t pay commissions.

    Reply
  2. After 10 years of woeful performance by my AMP super fund, I finally found a way to create my own SMSF without requiring the “minimum $200,000” that’s always quoted in the press. I wont mention the outfit by name in case it’s construed as advertising, but they’re Australian and they have automated the process of having a SMSF as much as they can to make it cheaper – the same price or less than the majors charge. You can Google them.

    I finally got out of AMP after I moved 100% of my super into cash at the end of 2007 and still lost 3% over the following year !! Over the 10 years I had AMP super, I calculated that, once my extra contributions were removed, it made approximately 0% over that time. The best year ever was about 13% in the early 2000’s, and this was when the market was being reported as increasing at 25% p.a.

    I figure I can do a better job than these thieves/incompetents, even if it just sits in a term deposit.

    Gut Feeling
    November 9, 2009
    Reply
  3. well said Gut.
    Buy side fund managers are mostly second rate.
    Buy side super fund managers are incompetent and negligent.

    Reply
  4. I started a UK private pension based on their system of ‘with profits’ where a portion of profits are not returned to the fund but held over to smooth out years of poor of negative returns.
    Nice idea in principle, however, the system must clearly be geared to increasing the profits of the provider (in this case Legal & General) .. Why do I say this. Well since inception in 1995 with 10 years of contributions until 2005 (when I moved to the Australian employment World), my fund value never once exceeded the contributions.
    It was last valued in 2008 and was ‘still’ less than the contributions.
    With profits my arse (as a famous UK comic character used to say).
    As an investment vehicle the underside of my matress is better than Legal & General in the U.K and they are not untypical of the pension/investment providers.

    Reply
  5. Joe,
    the whole pension/super industry is a scam.

    In Australia you have no choice. But don’t add more than the min.

    In the UK you have a choice so avoid the pension schemes like the plague. Take the extra cash up front.

    Reply
  6. Self managed funds are not a scam, unless one is fooling oneself.

    Reply
  7. Yeh, I gave Prozak a “1” there Dan – Thought that popped through my mind at the time being Just what could a 20’s something financial fingy in a tired old country like the UK that goes off to the IMF just a bit too boringly regularly with hat in hand know about being in a genuine growth region of the world? But expect he reads widely – And I respect book learning too! :)

    Reply
  8. Course we got a choice Prozak … We can just sell up and come back home – To the old country … And bask in the abundance of cultcha and intellectual refinement – With you. Lucky us!

    Reply
  9. Dan,
    I never suggested SMSF are.

    I agree that these are a much better option and have said so on here in the past. In fact why not lok up the page a bit and see where I supported “Gut Feeling”.

    Reply
  10. Ned,
    truly pathetic yet again. How embarrassing for you.

    But everyone here is coming to expect that from you, so why should I be surprised?

    Maybe your chum will come and make a comment as well. Oh joy, now that would really get you excited.

    Reply
  11. perhaps I should be flattered that I have my own DR stalker?

    Ned – do you post to me on other parts of DR as well?

    Even where I haven’t made a comment in some strange hope that I read it and make a comment?

    so that you can continue your weird DR intercourse with me?

    C’mon admit it. You do don’t you?

    Sad little man.

    Reply
  12. Prozak – I was, if anything, supplementing your response – I agree with you otherwise.

    Reply
  13. Dan,
    oh fair enough. my misunderstanding.

    cheers.

    Reply
  14. Look the World are going to steal our super, we have always been the gullible end user in global finance……..we jump into wars and any global social economic order…..check out Lima agreement, the super will be used by other countries…..I was hoping the Govt would nationalise the public super instead of borrowing US fiat from Asia. Now the Aus Govt is trying to raise bonds using our super, they will have to get on the cue.

    tar and feathers
    November 16, 2009
    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au