AUSTRALIA’S superannuation funds have just produced their lowest annual returns for the past 10 years. And for the first time in a decade, inflation (6 per cent per annum) was higher than the median return.Super fund trustees now face the unenviable task of trying to explain these results to their members.Just how difficult this task will be depends on how well members’ expectations have been managed previously.Some members will have mistakenly assumed that the high returns achieved in 1999-2000 would be repeated consistently.But any experienced investment professional knows that annual returns are volatile, especially from international and Australian shares.The trade-off for patient investors is the higher returns they can expect over a longer time frame, of five years or more.Consulting group InTech has just completed its survey of super funds’ investment returns for the year to June 2001.The median return for Balanced funds (which spread their money across the main asset classes of shares, property, cash and fixed interest) was 5.5 per cent.The median return for Growth funds (which are also diversified but have a higher proportion in shares) was virtually the same at 5.4 per cent.The returns from individual funds varied from a high of 10.8 per cent (Maple-Brown Abbott) to a low of minus 0.2 per cent (BT).The poor returns of the past year are mainly due to the negative returns from international share markets, which fell on average by 16.0 per cent. This was partly offset by the falling Australian dollar, so in $A terms the fall was about 6.0 per cent.In contrast, Australian shares produced a more respectable 9.1 per cent return (as measured by the S&P/ASX200 Accumulation Index).With the benefit of hindsight, many fund managers mistakenly invested extra money in international shares. InTech said the average Growth fund had 22.7 per cent of its money in international shares in June, up from 19.7 per cent one year earlier.The amount invested in Australian shares was relatively stable at 38.6 per cent of funds under management.The year-to-year volatility in investment markets was highlighted by the returns from international shares. In contrast to last year’s 16.0 per cent fall, international shares rose by 23.8 per cent in the previous financial year.Looking at longer-term returns provides a useful perspective.The table (right) shows that, during the past three years, the traditional relationship between risk and return holds true.High Growth funds, which favour international shares and experience the highest volatility, have produced the best returns.In contrast, Conservative Growth funds, which aim for stable annual returns, have produced the lowest longer-term results.Reflecting on the past year, InTech said there was a populist view that professional fund managers should somehow be able to foresee, and therefore avoid, investments that are going to perform poorly.While that is not possible, at the sector level, superior skill may result in managers delivering better returns than the broad market.“For example, InTech research shows that the better active managers of Australian equities have consistently outperformed the benchmark index,” the company says.InTech suggests that super fund trustees should restate some important investment maxims when writing to their members.“First, that there is an element of time in the risk/return relationship and, second, that the best protection against increasingly volatile investment markets is to maintain exposure to all the main asset sectors.”
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