With equities having been the primary drivers for the double digit returns recorded by most superannuation funds in 2003-04, it is tempting to believe there has been a return to a more traditional investment environment in which alternatives such as hedge funds and private equity assume a lower order of priority in asset allocations.
However, there were enough uncertainties through 2003-04 to ensure that funds maintained their exposure to alternative asset classes, and this seems likely to be the case through 2004-05, particularly in circumstances where the future of the US economy remains clouded.
The message coming from most research houses and asset consultants is that superannuation fund members need to take a long view and not make knee-jerk changes.
With everyone attributing the double digit superannuation returns to the recovery in domestic and international equities, it is easy to overlook the fact that listed property also turned in a strong performance.
Indeed, the InTech Financial Services review of the year notes that listed property recorded its best year since 1996-97, albeit this was spurred on by an anticipated consolidation in the sector.
Equally, the InTech analysis pointed to bonds having recorded their worst year since 1994, with Australian bonds returning 2.3 per cent while international bonds returned 3.1 per cent — around half the cash rate.
At the same time, hedge funds turned in steady, if not stellar performances, justifying the common 1 per cent to 3 per cent allocations of most funds.
Hedge Funds of Australia portfolio manager Peter Coates says he believes that even in a strong equities environment, there is a place for absolute returns, especially where there is a need to avoid placing pressure on capital.
According to InTech, the last 12 months have confirmed that superannuation investing is, by definition, a long-term proposition.
“Investors who maintained a growth-oriented strategy, despite the past two years of negative returns, are now looking at a median return of 2.5 per cent over three years,” the research house says. “While this doesn’t quite match inflation, it is still a big improvement on the same time last year.”
“Unfortunately, for those investors who lost the faith last year after consecutive negative annual results and switched to cash or bonds, this year will mean enduring another year of disappointing returns,” InTech says.
Importantly, however, InTech is cautioning superannuation fund members against believing the 2003-04 results represent a return to the days of double-digit performances which were a hallmark of the 1990s.
It says that, in fact, these returns are atypical. The results are driven by falling inflation and interest rates globally, and unusually settled and robust economic conditions in Australia and the US.
“Over the long term, InTech expects returns of around seven per cent a year from this type of strategy, or four per cent after inflation,” it says.
“Interestingly, over the past seven years, the time-frame over which growth-oriented funds are managed, is pretty close to this. So despite the unsettling environment, the last seven years has been reasonably representative of what might be expected, despite feeling very extreme,” InTech says.
