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Funds fallout worst on record

AUSTRALIAN superannuation funds produced their worst returns on record in 2001-02 and have a “higher than normal” probability of posting negative returns again this year, according to consulting group InTech.

The average return by “growth style” super funds was about minus 4.5 per cent in the year to June 30, InTech reported.

Looking ahead, it said the probability of another negative return in 2002-03 was about one in four – greater than the normal long-term average.

The InTech data is based on a survey of investment managers with growth style super funds.

Growth funds invest primarily in Australian shares, international shares and property, and their returns have been heavily affected by the poor performance of international markets.

The US and Japanese share markets both fell about 20 per cent last year, Germany was down 26 per cent and the UK fell by 14 per cent.

The Australian share market fared better, but still fell by 4.7 per cent, while property assets rose strongly. Listed property securities were up 15 per cent, while real property was up 9 per cent.

The average growth fund return of minus 4.5 per cent would make 2001-02 the worst financial year on record.

InTech noted that 2001-02 was not the worst 12 months on record. Following the October 1987 stock market crash, super funds posted average returns of minus 15.5 per cent for the year to September 1988.

Based on long-term trends, InTech said growth funds were expected to post negative returns once every six years.

It added: “The likelihood of a negative annual return immediately following a negative year is about one in four. This is not surprising given that investment markets tend to operate in cycles.”

Despite all the negativity, InTech chief investment officer Ron Lilling has advised trustees of super funds to “stick to your long-term strategy”.

He offers some telling statistics to back up this advice.

Over the past 22 years, growth funds averaged around 12 per cent per annum (net of fees and tax). He considers this a very good return compared with the inflation rate over the same period of 5 per cent.

Mr Lilling counselled against selling growth assets such as shares and investing in defensive assets such as cash.

“Over the past 32 years, equities (ie shares) have outperformed cash around 60 per cent of the time,” Mr Lilling said. “Furthermore, the average magnitude of the out-performance during the positive years was very large.”

In the positive years, Australian shares returned 15.6 per cent more than cash, while international shares returned 18.5 per cent more.

At times of market weakness, many investors are tempted to sell with the intention of buying back at a later time when the market is due to recover.

However, Mr Lilling described market timing as a difficult task at the best of times and “particularly hazardous during these uncertain times”.

Looking on the bright side, Mr Lilling said: “There is a strong probability (ie three in four, or 75 per cent) of a positive return next year, and this is much larger than the corresponding probability of a negative return”.

“If a positive return is recorded next year, there is a reasonable probability that it will be of sizeable magnitude,” he said.

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