Smart Investing
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The Federal Budget’s confirmation that the annual cap on concessional superannuation contributions for all fund members over 50 will halve to $25,000 from the 2012-13 financial year, has some investment commentators envisaging that more investors will turn to negative gearing.
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We've been told by the financial community at large that it's a tough time to be an investor. The financial markets are extremely volatile. Bond yields are near historic lows. The outlook is uncertain.
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The latest bouts of sharemarket volatility and this month’s cut in official interest rates once again highlight the crucial role of bonds in a properly diversified investment portfolio.
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Self-managed super funds typically have a much high exposure to cash than fixed interest.
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The Australian superannuation industry reverted this week to its unwanted status as one of the government’s favourite Budget ‘hollow logs,’ with billions of dollars in savings extracted from the system by reneging on a tax break meant to encourage higher retirement savings, and a doubling of the concessional tax rate on the super contributions of those earning more than $300,000.
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News & Commentary
Looking forward, looking back 24 Nov 11
As our superannuation savings are battered with market reaction to the latest negative news from Europe, it’s worthwhile looking at how super funds have performed over both the shorter and longer term.
Certainly, past returns are no guarantee of future returns. However, a glance at past returns can help investors look past the prevailing market turbulence to plan their strategies for the future.
Superannuation fund researcher Chant West records in its latest newsletter that the median “growth” fund returned a negative 2.4 per cent in the financial year to October 31. A growth fund, as defined by the researcher, has 61-80 per cent of its portfolio in growth assets.
And we all know what’s happened so far in November as concern about European debt crisis deepens. (October was actually a good month, producing a positive median return of 3.1 per cent for these funds after investment fees and tax.)
In the five years to October, the median growth fund returned just 1 per cent a year. And over the past 10 years, the median fund returned 5.2 per cent a year.
While these returns are far from exciting, keep in mind that super funds over the past 10 years have had to cope with the triple whammy of the tech wreck, the GFC and the European debt crisis. And the past five years’ returns have been slugged with two of the three.
Chant West notes that since the introduction of compulsory super with the superannuation guarantee contributions in July 1992, the median return of growth funds has beaten their objectives “more often than not”. (Their typical objectives are CPI plus 3.5 percent a year over rolling five-year periods.)
But the latest underperformance of the funds’ objectives, beginning three years ago, is the longest since the birth of compulsory super.
What message should investors take from looking back over these past returns?
Undoubtedly, the returns reinforce the importance of having a portfolio that is appropriately diversified for risk and return given an investor’s personal circumstances.
And perhaps looking at these returns should encourage investors to seek quality professional advice about the appropriateness of their portfolio’s strategic or long-term asset allocation.
* Written by Robin Bowerman, Principal, Corporate Affairs & Market Development at Vanguard Investments Australia.
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