May 19, 2009

The Super disaster lurking for the unwary

In publishing super tables, there is a significant danger that consumers will make decisions that could seem them losing out twice, writes Alan Dixon.

Bernard Keane’s article last week raises some excellent points but also obscures the massive danger for regular Australians making decisions about their super.

From a starting point, it is clearly a good idea that consumers get to see the returns super funds have made. However, there is a significant danger that consumers will forget the simple warning that ‘past returns are not reflective of future returns’ and make decisions that could seem them losing out twice.

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3 thoughts on “The Super disaster lurking for the unwary

  1. Andrew Baker

    The title and conclusions of this article are inappropriately alarmist. There is no “massive danger” for Australians considering placing their super with an industry super fund.

    It is correct that on average industry funds have outperformed retail funds over the longer term by about 1% or so. It is also correct that in the past year, that gap has blown out to about 6% as Alan Dixon states.

    But it is not right to fully attribute that difference to unlisted assets which are about to plummet in value. The average industry fund had 21% of its assets in lower liquidity assets at June 2008 and this would have risen by only 2-3% at the bottom of the equity market in March, thaks to funds’ strong inflows. It’s unlikely any of them exceeded 50% exposure, and most would not have exceeded 25%. But this is far from the whole story – industry funds have been stockpiling cash, with an average 7% allocation. This has also helped protect returns in the equity bear markets.

    If a 25% devaluation was applied to unlisted assets, the average fund might fall by about 5% over a period of time – some more, some less. But let’s put this into context – we’ve just been through an environment where sharemarkets have been regularly rising and falling 5% in a DAY!

    In fact, the devaluation process has already started and hardly anyone has noticed or cared. MTAA’s Target Return portfolio has fallen by about 12% in the past 3 months, for example. So far from it being an impending disaster for the unwary, it is already being dealt with.

    If indeed the average industry fund was progressively devalued by 5% – well guess what, that just takes us back to the 1% margin that has prevailed for years. Hardly case closed on “very poor years ahead”. More likely, the impact will simply be lost in the noise of the returns from funds’ many other assets, as has been the case so far. For virtually all industry funds, shares will continue to be the dominant impact on returns.

    I agree that no investment decision should be simply on the basis of past returns, and the status of industry fund portfolios is an important topic. It’s one that deserves more accurate, and less sensationalist analysis than is the case here.

  2. Harvey Tarvydas

    Good on ya Dix (& Crikey).
    Much needed alert.
    Lets see who gets alarmed.

  3. meski

    How is it sensationalist to advise against making a hasty decision to move your super from a low performing to a high performing fund? You’d essentially be selling at your current super fund’s low point, and buying into a super fund at a relative high point.

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