Posted by Scott Keefer on Sep 16th, 2008

In August the Association of the Super Funds of Australia published a paper looking at the returns for the past financial year in context of historical returns – Super Returns – putting them into perspective. The paper looked at balanced portfolio financial year returns over the past 15 years using data from Super Ratings. (They also provided a table with the past 40 year data.) The 2007/08 financial year returns have been by far the worst over that period – down 6.8%. The next worse year was 2001/2002 with a negative 3.5% average return and then 2002/03 with only a 0.1% positive return. The 2000/2001 year with an average return of 5.6% was the only other year in the 15 year period where returns failed to beat inflation (CPI).

When we look at these one year returns it seems to make sense to question the appropriateness of investing in growth assets such as Australian shares, international shares and property which have been the cause of these years of poor performance. However, taking a wider view of time periods provides quite a different perspective. The paper proceeded to look at 5, 10, 15 and 20 year periods putting this issue into wider periods of perspective.

Over the 5 year period leading up to the 30^th of June of each year, the data showed:

- only in the period 1974 – 1978 did the average returns from balanced investments under-perform inflation. For those who experienced this time, it was a very difficult time economically with high levels of inflation and poor share market returns

- in the periods ending 2003, 2004 & 2005 returns went close but still out-performed inflation

Over the 10 year period leading up to the 30^th of June each year, the data showed:

- the ten year period leading up to 1979 and 1982 saw average balance returns underperforming inflation

- all other periods provided above inflation returns with most well above

Over the 15 year period leading up to the 30^th of June, the data showed:

- all periods out-performed inflation

Over the 20 year period leading up to the 30^th of June, the data showed:

- all periods out-performed inflation

The issue that stood out to me in the data is that we need to be careful assuming that growth returns will be better than inflation over a 5, 7 or even 10 year period, as not until we get to 15 year and 20 year periods do balance returns out-perform.

For those with over 15 years until reaching 60 this should provide some comfort in investing in growth assets in superannuation.

For those approaching closer to retirement more care needs to be taken to properly structure investments so that a period of poor performance in growth asset classes does not provide a significantly detrimental result or even cause you to delay retirement. Our approach is to be very closely looking at income planning, making sure clients have at least 5 to 7 years of income requirements in retirement held in defensive assets such as cash and fixed interest securities. This means that you should not need to sell down growth assets in times of depressed prices in order to sustain their cost of living. (Unless you sell growth assets at depressed prices you do not realise losses and history tells us that growth asset prices will rebound.)

A point to note here is that investing in a diversified superannuation fund or investment that does not segregate the account into distinct defensive and growth assets does not protect an investor from having to realise falls in growth asset prices. When it comes to the time to retire, investors in non-segregated funds would need to sell down a certain number of units in order to get the income that they need. In a balance account (40/60 split) this would require redeeming both defensive assets (40% of each unit) and growth assets (60% of each unit). Thus you would be forced to realise the poor prices for growth assets.

In a nutshell, our take on this is that in the 15 years leading up to your preferred retirement date, we think you should start to focus on income planning. In doing so you are building towards having the necessary amount of assets set aside in cash and fixed interest so that you are not forced to redeem growth investments at the wrong time and/or not having your retirement date dictated to you by investment markets.

Regards,

Scott Keefer

www.acleardirection.com.au