Modest super fund losses show need for diversification

Australian Financial Review, Managed Funds Quarterly, May 2008

Australian super funds lost money in the March quarter – but nothing like as much as the stock markets, showing the benefits of diversification.

According to SuperRatings, the median super fund (assuming the balanced investment option that most people opt for) was down 4.71% in the first three months of this year, and is down 1.43% over the 12 months to March 31. That’s not welcome, but better than stock markets might suggest: the S&P/ASX 200 was down 14.4% and 7% respectively over the same period, and the MSCI World ex-Australia, representing global equities, 12.4% and 14.6% respectively.

Since the balanced options of super funds tend to put big chunks of their holdings into things like bonds and cash, investors have been insulated from the full hit of these market plunges. Besides, super is an investment that should be viewed over the long term, and in that regard it still looks more than healthy – a median return of 11.2% per year in the five years to March 31, according to SuperRatings.

Still, for investors who have got rather used to high returns, this year is going to be a shock. “Even with a likely positive outcome for April, nearly all balanced options will more than likely show negative returns at year end, some for the first time in their 20 year history,” says Jeff Bresnahan, managing director of SuperRatings.

It will be the investors who have opted for conservative positions who come out best this year. In the 12 months to March 31, cash options have fared best, delivering 5.2%, followed by diversified fixed interest and capital stable options, the only other ones in positive territory. Growth options and Australian share options have gone backwards, while international share options are down 12.2% and property options even worse, at -14.6%.

Over the long term, it’s the funds with the bigger allocations to alternative assets that are leading the field. MTAA Super, with 14.8%, and Westscheme, with 12.6%, occupy first and third places in the SuperRatings ranking of the best funds over five years. Both share the same consultant, Access Economics, who divides the funds’ assets into two pools, a market portfolio (made up of traditional equity, fixed income and cash investments) and a target return portfolio (alternative assets). In Westscheme’s case, for example, at the end of January, out of a total fund size of A$2.82 billion, $78.9 million was in subordinated debt, $420.5 million in property, $469.3 million in infrastructure equity, $51.2 million in an investment in Timberland, and $41.7 million in CDO equity. That made a total of $1.316 billion, or 46.6%, of the fund in these alternative asset classes (although not everyone would consider property an alternative).

Between MTAA and Westscheme in the SuperRatings ranking is BUSS(Q), an industry fund founded for Queensland’s construction industry. This follows a more traditional approach to asset allocation, with a target allocation of 30% to Australian equities, 25% to international equities, 13% to Australian property, 6% to international fixed interest, 4% to Australian fixed interest and 4% in cash, but still has a substantial chunk in alternatives: 9% infrastructure, 4% private equity (mainly domestic), and 5% absolute return strategies. It uses a roster of nearly 40 managers to do the investing; when last disclosed on June 30, the ones with the biggest allocations were QIC (for international equities and cash) and PIMCO (for fixed interest).

Industry funds continue to dominate the rankings in superannuation surveys. AustralianSuper, Hostplus and Cbus – all industry funds – tie for fourth, and the Telstra Super Corp Plus fund, a corporate fund, is the highest ranking non-industry fund in 7^th place.

The super industry enjoyed significant growth last year: according to Plan for Life, inflows into retirement income markets grew 83.8% year on year, individual superannuation 38.5% and 25.9% for group superannuation. Largely this reflects the one-off opportunity the government gave to invest additional amounts into super and retirement income in the middle of the year, but advisors believe that the weaker stock market is a good time to put more contributions into super, since it allows them to buy assets while they’re cheaper and build them over the long term.