There’s a cooler breeze sweeping through Australia based on a new era of conservatism. People are saving more and spending less, taking on less debt and reducing risk across their investment portfolios. The hot-headed debt binge of the early 2000s is well and truly over.
Super investors should be evaluating their portfolios in line with this new conservatism. The period of deleverage across the globe will take years to unravel and a new secular bull market, where asset prices rise strongly, could be some years away. For now, investors need to ensure that they protect the value of their existing assets, avoid consecutive months of negative returns and to at least cover inflation over the long term.
Most super investors choose a ‘balanced’ investment option for their super money, often thinking that this is the most conservative path. You may be surprised to learn that most balanced options have 50-60% of their investments in equities, meaning 50-60% of their super money is tied to the performance of the sharemarket. It’s common to find balanced funds with an even higher allocation to volatile assets such as shares, as high as 70-80%. While these funds tend to top performance tables during bull markets, they’re significantly more exposed to volatility and losses than their moderate and cautious 'balanced option' title implies. It's important to learn that not all balanced funds are alike.
Many members in 'balanced funds' watched their super balances drop by 30 to 40% following the Global Financial Crisis. Members accounts have never recovered.
The table below shows the average return of super funds across the range of investment options. Collated by SuperRatings, the average balanced fund in Australia lost 1.38% of investors’ money over the past month, and was down 2.26% over 3 months. Over a 10-year period, the average balanced fund averaged 4.92% yearly for investors (SuperRatings tallies the returns of 25 to 50 super funds across each category). You can use this table to compare the performance of your super fund to its industry average, using the appropriate investment category of course.
When times get tough your super fund manager will know what do, right? That’s not necessarily the case. Fund managers invest according to the fund’s underlying investment mix. If it’s a balanced fund, then around 50-60% of the fund will be left in shares regardless of how dire sharemarket conditions become. If the entire sharemarket craters, so will the fund’s returns – and there isn’t much that the fund manager can do about it.
What should you do?
If you’re in your 40s or under, then you needn’t worry. A market whiplash lower can be a prime opportunity to add to your fund holdings at lower prices. And if the market downturn spans years and years, all the better; simply stock up on more units in your super fund at lower prices.
Those approaching retirement, however, can’t be so flippant. If you’re five years from retiring, or less, you need to assess how your super account will look if the market downturn continues. Can you afford to lose a further 5 or 10% of your holdings over the next five years? And if not, then maybe it’s time to switch to a lower-risk investment option.
Switching randomly between investment options based on news-driven macroeconomic factors is not a clever strategy, but neither is doing nothing. As Winston Churchill said: “I never worry about action, but only inaction.” Undertaking a level-headed analysis of the comparative performance of your super fund, and its constituent investments is worth undertaking during these times. For instance, what is your super fund actually invested in?
Members of the Motor Trades Association of Australia (MTAA) Super Fund’s ‘balanced option’ were no doubt shocked when their super fund turned from being a top performer to losing over $500 million during the global financial crisis. Roughly half of the fund’s money was used to buy unlisted assets such as commercial property, ports, airports and carparks, which were difficult to sell and were hit much harder than listed shares during the crisis. According to Chant West, the MTAA balanced fund was the worst performing fund of the 50 funds it tracks.
The story of MTAA is a reminder that members should be up to speed with the types of investments their fund is making, and not just its returns and fees.
The tough decision is to switch when your account balance is off its highs. Indeed, it’s common to hear investors say, ‘I’ll switch to a lower risk option when the sharemarket hits 5000.’ Well, that requires a 20% gain from here – and is this going to happen overnight? If not, how long will you have to wait, and what risk are you taking on over that timeframe? A more sensible approach is to consider the returns that you want to achieve over the next five-year and the losses that you can honestly take on the chin. If you can no longer afford losses in your portfolio, then switching might be something to consider.
This article is of a general nature only and does not take into account your individual circumstances. For advice, TheBull recommends that you employ the services of a qualified financial adviser.
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