News & Commentary

An overlooked side of market volatility 28 May 10

Whenever markets experience the extreme volatility of the past month, the thoughts of many investors obviously would go to the changing immediate value of their investment portfolios.

Of course, some of the most-astute investors make a practice of blocking out the day-to-day “market noise” and mainly concentrate on ensuring that the long-term asset allocation of their portfolios properly reflects their personal circumstances, including needs.

There is, however, a potential adverse impact from sharp downwards volatility over the short-term that is probably much-overlooked.

As Jeff Bresnahan, managing director of super fund researcher SuperRatings, discusses in his latest monthly report, super fund members are sometimes particularly hard hit in volatile markets when switching super funds or investment options. This can occur when funds take a long time to process their requests.

“The statutory maximum period for switching between funds is 30 days,” Bresnahan emphasises, “and in many cases switching between options within funds can also be 30 days.

“Both of these time delays could easily result in active Australian investors seeing significant losses through no fault of their own,” he adds. “A 6% mnthly swing could mean a difference of $18,000 on a $300,000 account balance.”

In some cases, this could mean the loss of a full year’s income for a retired member, says Bresnahan.

What practical steps could fund members take to try to protect themselves in volatile times from losing money when switching between super funds or investment options?

Presumably, some fund members would make a point of gaining a proper understanding of the amount of time that their funds take to conduct these transactions. And this knowledge – gained long before wanting to switch funds or investment options – may be just one of the factors taken into account when deciding whether a fund is appropriate for them.