Finance Your Super Double digit returns on super – but will it last?

Double digit returns on super – but will it last?

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For the second year in a row, you will probably be getting a double digit return on your super.

Super comparison website Chant West expects a median return of 13 per cent for most Australians in the 2013-14 financial year. This is the majority who have between 61 and 80 per cent of their super in shares, property and similar growth assets.

For those in a high growth fund (81 to 100 per cent growth assets), Chant West predicts a median return of 17.2 per cent.

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SuperRatings also thinks you’ll be happy when you open your annual statement. It foresees a return of 12.6 per cent for those in a median balanced option (those with 60 to 76 per cent in growth assets).

This is the second year that median returns will probably be more than 12 per cent, according to Chant West.

Source: Chant West.

Industry Super Australia deputy chief executive Robbie Campo says these bumper years are an important part of the growth cycle for super funds.

“Obviously, we are all really happy when markets perform well, and it’s an important part of that accumulation over your lifetime. The good periods balance out the periods when equity markets are not performing so well,” she says.

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Keep an eye on the bigger picture

But Ms Campo warns that super fund members should not get too caught up on looking at monthly or annual returns.

Five, seven or 10-year returns are more important, she says.

“Because superannuation is an investment that you hold for 40-plus years, the performance in any one year is less significant than the returns that you see over the longer term,” Ms Campo says.

Why such good returns?

Sydney University economist Dr Michael Rafferty, one of Australia’s leading superannuation experts, explains that super returns are closely linked to the stock market because they invest heavily in shares.

According to Chant West, the typical growth fund has an average 57 per cent allocation to shares and listed property.

“Australian superannuation funds have one of the highest exposures to the stock market of any fund industry across the world,” Dr Rafferty says.

Thus, when share prices increase, super funds ride the wave. But this can come crashing down, as it did during the global financial crisis of 2007-2008.

“As we saw during the GFC, when the stock market falls, superannuation goes backwards,” Dr Rafferty says.

In early 2012, the 500 largest Australian listed companies (known as the All Ordinaries Index) was valued at approximately 4200-4300 points. These companies are now collectively valued at about 5400 points, an increase of approximately 20 per cent.

To put this in context, the index reached a low of 3,111 points in March 2009. Its highest ever value was 6,873 points in November 2007, just prior to the GFC.

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Don’t expect it to last

Chant West director Warren Chant says such strong returns may be short lived.

“Going forward over the next year, don’t expect the same returns,” he says.

Mr Chant says these strong returns are surprising because they don’t seem to be backed up by strong economic performance.

“There’s a general feeling that the share market has gotten well ahead of what’s happening in the real economies,” he says.

If Mr Chant is correct, and the share market is outperforming the economy, then there is a good chance it will stop doing so at some point, with spillover effects on the super funds.

Industry Super Australia’s Robbie Campo is slightly more optimistic. She thinks that these high returns will continue over the short and possibly even the medium term.

But she also foresees an eventual decline, thanks in part to a slow down in growth in the mining sector and interest rate hikes.

How to cash in on strong returns

While it’s heartening to hear that super funds are performing well on the whole, what really matters is how your fund is working for you.

Chris Brycki, founder of Stockspot, an online share market investment tool, says the fees charged by your super fund are the most important consideration.

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He thinks that many people are paying way too much in fees, sometimes upwards of 1.5 to two per cent a year.

“Up to a quarter of their returns across the cycle are basically disappearing and ending up in the financial service companies’ profit statements as opposed to the bank accounts of Australian consumers,” Mr Brycki says.

But Warren Chant warns that you should not simply pick the fund with the lowest fee.

“That’s not necessarily your best strategy. It’s not unusual for funds with higher fees to actually be very good performers because they’re spending their money wisely,” he says.

A fund’s net return (which is the return it achieves after investment fees and taxes) is a better point of comparison, Mr Chant says.

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