Inside Money: Unbalanced returns a drag for savers

Is the Australian superannuation scheme all it's cracked up to be?

The Australian superannuation system is often cited as evidence for introducing compulsory KiwiSaver - note that our top CEOs appear to be in favour of it.

And as far as building up a massive (A$1 trillion plus) pool of financial assets, Australian super has been a mega-success.

In regards to meeting its core promise to investors, though, Australian super loses its role model status.

As the latest returns data from Australian superannuation research house SuperRatings shows, the average super fund investor has barely kept pace with cash over the last decade.

The pertinent figures to refer to in the SuperRatings data are in the 'balanced fund' column as between 60-80 per cent of Australians end up in balanced funds (that invest about 70 per cent in 'growth' assets - mainly shares - and 30 per cent in 'defensive' assets such as bonds) by default.

According to the SuperRatings returns data for the 50 largest Australian super funds (a good proxy for the entire industry), balanced funds returned only 0.92 per cent over the five years to the end of September, trailing the cash return of 4.57 per cent over the same period by quite a margin.

For the 10 years to end of September 2011 balanced funds returned 5.16 per cent versus the cash return of 4.35 per cent.

Super fund members could quite legitimately wonder why they've bothered to take on such investment risk for these poor returns.

It is possible that the previous decade is merely a blip on the risk/return monitor and the expected relationship (higher risk=higher returns) will reassert itself over longer periods - a comforting thought for super/KiwiSaver investors with 40 plus years of saving to look forward to.

Alternatively, as this Sydney Morning Herald article argues, there's something fundamentally wrong with the traditional asset allocation model.

"The focus is always on the potential reward - not on the risk - and particularly not the "unexpected" risk that continually shakes up equity markets around the world," the article says.

The author describes a new approach to asset allocation that supposedly protects against these 'unexpected' risks - although, those like myself who find weightlifting as dull as analysing superannuation fund return data will struggle with his 'barbell' analogy.

While New Zealand doesn't have a trillion dollar real-life investment case study to refer to, research published by actuaries Eriksens Global and Melville Jessup Weaver both show long-term returns have been disappointing.

For example, the latest Eriksen's 'master trust' survey - that essentially measure the returns of many non-KiwiSaver employer-based super funds - shows balanced funds have returned just 0.5 per cent (net of fees and tax) over the five years to the end of September.

Or as Melville Jessup Weaver noted in its October Investment Newsletter: "The last 15 years have been tough on investors with a high exposure to growth assets. They have not been rewarded for the additional volatility that they have experienced."

Bearing in mind the compulsory warning that 'past returns are not necessarily indicative of future performance', Melville Jessup Weaver nonetheless makes a gloomy forecast.

"Perhaps the only clear conclusion to reach from the analysis is that investors will need to lower the investment returns they expect in the future and manage to this new normal accordingly."