My Biggest Gripe

At the end of every financial year the media generally does a wrap up of how various asset classes performed over the previous year. As you would expect some went up some went down and some went up and then down in spectacular fashion. Nothing new or enlightening.

These lists are good only from an interest only perspective since they dont really convey anything meaningful about the trajectory of various asset classes over an extended period of time.

Everyone by now will realise that superannuation is one of my major sources of annoyance. Not the idea but rather the execution of the idea by those charged to do it at least vaguely professionally. To be blunt super funds are rubbish no matter how they try and spin it – their long term return remains firmly rooted in the low single digits. This incredibly poor performance in which all under perform the market. And a large number even under perform a simple cash investment is a societal problem since most people with average super contributions and sub par returns will not be able to retire with anything near what is required for an even modest lifestyle.

It is here that my self interest kicks in. If people cannot provide for themselves then others will have to chip in and assist them; that means you and me.

But I have deviated. The original source of my irritation was this grab from the Melbourne Age –

Super returns

Thanks to the share market’s strong performance, superannuation returns are reaching those heady days before the financial crisis.

Balanced super funds are expected to return 15 per cent in the year to June 30, said Mano Mohankumar, investment research manager at super researcher Chant West.

This is a touch off the 15.6 per cent return recorded in the 2007 financial year, and the second highest return since the late 1990s, he said.

Balanced funds are the most common super category, mostly invested in growth assets such as equities.
Most of the returns can be attributed to the rally in sharemarkets over the eight months to February.

“The post-GFC period has been a good one for super investors as in 09-10 funds returned 10 per cent, in 10-11 they returned 9 per cent, in 11-12 they returned 1 per cent and this year they should do 10 to 11 per cent,” Mr Dunnin said.

“That’s a cumulative return of 33 per cent since the GFC … This is not bad in anyone’s language.”

 

Firstly, it is cherry picking data. Secondly, it attempts to portray the notion that superannuation funds have recovered from the GFC – they have not by any stretch of the imagination. If we make the assumption that a balanced fund derives its push from its exposure to equities then we have to also assume that they track the basic movements of the index. This means that each of these funds will prbably have had a drawdown of around 50% during the GFC. If my super balance was $100,000 pre GFC then at the depth of the GFC it would have been $50,000. Making 33% on my remaining $50,000 takes me back to $66,500 – a long way short of my original $100,000.

If I had wanted to retire during this period I would have been stuffed. In fact if I want to retire anytime in the next ten years Im stuffed.

This raises the question of a possible solution to this somewhat endemic problem of under performance and its consequences for society in general. The easiest solution I can think of is for the Government to set up a very low cost fund that simply buys the All Ords TR index. Simply buying and holding the index will out perform most (read all probably ) funds on offer at present. And the reduced fees will greatly enhance the return to investors.

I am not a fan of buy and hold since it is lazy and ineffective and simply timing the index and moving into cash when it falls below the long term moving average would greatly enhance the performance of the fund. It would put a stop to the enormous wealth transference (con)  scheme that is superannuation.