Nothing negative about fund warning

FUND managers should warn their members early that this year would most likely return negative growth. This should ward off any knee-jerk reaction from unhappy members, according to head of investment research at fund researcher InTech, Dennis Sams.

“In InTech’s view, this is one of those occasions when a break from routine communications cycles may be warranted,” Mr Sams said.

“If trustees have the flexibility to do so, they should consider putting out an advance note to members explaining what this year’s result is likely to be and put it in a proper context.

“That way, when the actual return is announced, members will already be prepared for it.

“This is important, because in funds where they have a choice of investments, members will be less likely to make a knee-jerk decision to switch to a more conservative option – a decision that could eventually lessen their standard of living in retirement.”

Mr Sams also believes preparing the ground was important for funds where members had no choice.

“Being told what to expect will give them time to digest and understand the explanation, soften the eventual impact and demonstrate the trustees’ commitment to open and helpful communication,” he said.

Fund managers are struggling to keep their assets in positive territory, despite diversification. Funds with an exposure to international shares have fallen 14.9 per cent in the 10 months since July 1 2001.

Even moves by fund mangers to hedge against the fluctuating Australian dollar in relation to the US currency has not been enough to counter the decline, with an average fall of more than 11 per cent in international share value.

Although Australian shares have performed strongly, they remain 1.4 per cent down for the 10-month period, while the positive returns from bonds, property and cash have not been sufficient to outweigh the strong negative influence of the poor performers.

Mr Sams said it was important that members did not have unrealistic expectations, especially those investing in funds geared toward high growth sectors.

Historical research by Intech suggests investors should expect one in six years to return negative growth.

“Yet looking back over the past 30 financial years the typical growth fund would have only produced a negative return three times – the last occasion being 20 years ago in the year to June 1982,” Mr Sams said.

What is surprising, therefore, is not that returns may be negative this year, but that this hasn’t happened more often and more recently,” he said.

Based on performances since 1971, Australian shares are likely to fall one in four years, unhedged international shares, one in five, property securities, one in nine, and Australian bonds one in 19.

“Through the 1990s the strong performance of local and, especially, international shares drove fund returns at double-digit levels, even while inflation was falling,” Mr Sams said.

“It was only in 2000/2001 that the long ‘purple patch’ for fund returns came to an end, signalling a return to longer-term norms.”

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