2008 proves a challenging investment year

Putting your super’s investment returns in some context

Date of publication: 17 July 2008

There is no doubt about it; the historic five-year boom that sharemarkets enjoyed from 2003 to 2007 came to a stunning halt during the 2007–08 financial year.

As UniSuper prepares to issue its next round of six-monthly statements, which will provide a snapshot of your account at 30 June 2008, it is an opportune moment to provide some insight into how Australian and global investment market developments over the past year may have affected your retirement investments.

Importantly, the impact that recent market volatility may have on your super account will depend on your selected investment choice. As well, there are several elements that should be considered as part of a long-term retirement investment plan. These include:

• the long-term potential benefits that can come from investing in sharemarkets
• the temptation to ‘time’ markets by switching investment options
• the impact fees can have on your account.

The boom has ended

One thing we know for sure is that the phenomenal climb the Australian sharemarkets experienced from early 2003 to late 2007 has come to an end. This can be seen in the five-year graph of the Australian sharemarket’s top 300 companies (S&P/ASX 300 Accumulation Index) from 1 July 2003 to 30 June 2008.

S&P/ASX 300 Accumulation Index

1 July 2003 to 30 June 2008

In brief, the Australian sharemarket fell more than 13% in the last financial year (from 1 July 2007 to 30 June 2008) and was down more than 16% since 1 January 2008.

But this was not simply a local phenomenon. Internationally, the world’s most watched market index, the Dow Jones, fell by more than 15% over the same period. Interestingly, at the start of the new 2008–09 financial year, the Dow Jones was below its peak in 2000, meaning the US market has effectively treaded water for the last eight years. By contrast, the Australian market over the eight-year period from 1 July 2000 to 30 June 2008 is up by around 118%.

While no one likes to see markets losing ground, it is important to understand that market volatility is entirely normal. In fact, it is precisely because of their volatile nature that sharemarkets are able to offer members higher returns over the long term than other types of investment, such as cash, fixed interest and even property.

It’s also the reason that UniSuper believes investing your super on the sharemarket is best done with a long-term perspective.

“One year in five” is the phrase of the moment

As you will know if you are an accumulation super member, part of choosing where your super is to be invested involves taking into account a number of risks. One of these is the likelihood of a negative annual return. The information that UniSuper provides in its investment booklet, Investing for the future is shown in the tables below.

UniSuper’s pre-mixed investment options

UniSuper’s self-select investment options (now available from 1 July 2008)

As you can see, in this context, the volatility recently experienced in both Australian and international markets over the last financial year was anticipated; for example, UniSuper’s Balanced portfolio could expect to return a negative balance “one year in five”.

Of course, knowing this may not make the impact of a negative return any easier to bear. Thus, it is important that you are comfortable with the risks your retirement investment portfolio is exposed to and that your investment selection is appropriate for your personal retirement goals.

The itch to switch

The obvious question that arises is: if volatility was predictable, why does UniSuper continue to invest members’ funds in Australian and international markets? The answer is a simple one: not to do so would potentially disadvantage members.

While the temptation to switch to a ‘safer’ investment option, such as cash, might seem attractive, historically those investors who have held their investment during periods of market volatility have tended to perform better than those who have attempted to ‘time’ markets.

Another problem typically associated with switching in and out of investment options is that it changes the focus of a long-term investment strategy, causing it to be driven by short-term market movements. And, as demonstrated by several empirical research findings, this can have a detrimental effect on the investment returns that are achieved.

For instance, one influential US researcher, DALBAR Inc. examined investment flows into and out of managed funds in the US for the 20-year period from 1984. What it found was, while the US S&P 500 index for the overall market grew at average compound rate of 13% over the period, the average investor earned only 3.5%. In fact, those investors who switched their investments based on short-term market movements couldn’t even keep pace with average inflation figures¹.

What these investors did was switch out of the market after the market fell and switch back in once it had risen again. The end result was they effectively cemented short-term losses and missed out on market rises and rebounds.

The lesson is two-fold:

• Fund members should understand that volatility is a normal function of investment markets. As we know, investing riskier assets, such as shares, will occasionally result in losses. But, over the long term, sharemarkets have historically outperformed other asset classes.
• Super is a long-term investment that calls for a long-term, disciplined approach. Switching between investment options can actually compound the negative impact of short-term market volatility.

Advice when you need it

Seeing your super account deliver a negative return over the last six months can make taking these lessons on board difficult. Especially when the previous five years have been so overwhelmingly positive.

Fortunately, UniSuper is licensed to provide financial product advice to members and our Education and Advisory Services Team regularly offer individual consultations to members about how they can better achieve their retirement goals.

Even if you need financial advice that extends beyond super and retirement planning, we can help. UniSuper can refer you to a panel of experienced licensed financial advisers who have been screened and found to meet our strict criteria. For members consulting with these planners we’ve already negotiated favourable rates and we do not receive any remuneration, commission or other benefits for this referral service. Members simply pay the planner they select directly.

“One of Australia’s best value for money funds”

One very positive outcome from the focus on super returns as a result of market volatility has been the recognition of the important role fees can play in determining the returns on your super account. Even very small differences in fees can have a large impact over time.

Comparing UniSuper to both its industry and retail peers is an important exercise that we encourage members to do in relation to both investment returns and fees. The simplest way members can do this is by using Chant West's AppleCheck calculators. This will show you how UniSuper measures up against more than 100 other super funds and 90 pension funds.

UniSuper has also been awarded a ‘Platinum Rating’, meaning it is recognised as “one of Australia’s best value for money funds” by SuperRatings, an industry research agency.

This ‘low cost, great value’ reputation was also confirmed in 2008 research conducted by Chant West, which found that UniSuper had the lowest fees across both industry and retail fund segments.

According to Chant West, “this is partly due to lower administration (due to the relatively small number of participating employers and the high level of contributions submitted electronically) and promotional costs. The fund also enjoys substantial benefits of scale with its investment fees.”

The importance of a single-minded super strategy

Looking to the future, it is clear that attempting to make short-term predictions about the direction of investment markets is fraught with danger. Over the long term, however, we can be more confident, which is why UniSuper continues to promote the idea that super is a long-term investment strategy.

One thing we can be sure of is that Australia has a modern, well-regulated and efficient market system, backed by a robust economy whose exports are in strong demand. The fundamentals of Australian, and indeed global, markets are solid and UniSuper looks forward to the 2008–09 financial year with optimism, believing it can continue its record of consistently outperforming long-term investment benchmarks and the results posted by its peers.

For more information on your super or pension balance, log onto to MemberOnline or call the UniSuper Helpline on 1800 331 685.

This information is general information only and is not intended to be advice. It has been prepared without taking account of your objectives, financial situation or needs. Before deciding to acquire or hold an interest in any UniSuper product, you should consider whether it is appropriate for you and consider the relevant product disclosure document, which is available from your employer or UniSuper.

Issued by: UniSuper Management Pty Ltd ABN 91 006 961 799 Australian Financial Services Licence No. 235907 Level 37, 385 Bourke Street, Melbourne VIC 3000 UniSuper Helpline: 1800 331 685.

For more information about ratings, contact SuperRatings Pty Ltd ABN 95 100 192 283 at www.superratings.com.au or Chant West Pty Limited ABN 75 077 595 316 at www.chantwest.com.au.