Investment Update
The downturn in global economic conditions and problems faced by some international financial institutions seems to have dominated our newspapers and electronic media over the past year.
What does all this mean and, more importantly, how has this investment market volatility affected your superannuation account?
What return will I receive?
The following table provides the final returns for the Scheme's accumulation investment options to the end of the last financial year.
Final Crediting Rates to 30 June 2008
|
Option
|
One Year (p.a.)
|
Five Year Average (p.a.)
|
|---|---|---|
|
Balanced Growth
|
-4.9%
|
10.8%
|
|
Balanced
|
-0.1%
|
8.6%
|
|
Total Shares
|
-13.1%
|
12.4%
|
|
Total Cash
|
4.7%
|
4.6%
|
Please note: The above are superannuation accumulation fund returns. As the investment returns for the Income Streams are not taxed, these will differ slightly.
Interim Crediting Rates
An interim rate is calculated to enable benefits to be paid during the year. These rates can be found here.
While they provide an indication of the Scheme's returns, these rates are only applied when calculating benefit payments and benefit quotes.
Why are returns for most options negative for last financial year?
If you are a member with an accumulation account, your superannuation is invested according to the strategy set by the Trustee for the option that you have chosen. These can be found in the Scheme's Annual Report. If you haven't selected an option, your account will be invested in the default Balanced Growth option. The returns of share markets will have a significant impact on most options as they have a strong influence on other investment markets and most of the Scheme's options have a significant allocation to shares.
In general, share markets around the world continue to be affected by the fallout in the sub-prime mortgage market in the United States and the subsequent lack of debt finance. In very simple terms, investment products that included access to these 'lower quality' loans became worth significantly less as rising interest rates forced some to default on their loan re-payments. These issues affected a number of financial institutions, including banks and other finance providers to the extent that most share markets suffered (and on average lost around 20% for the last financial year).
In Australia, the share market's performance was driven by the impact of the global credit crunch, negative market sentiment, inflationary pressures and fears of a slowdown in the global economy. While strong commodity demand from countries like China and rising oil prices helped the share price of a number of companies, it wasn't enough to offset other issues. As a result, the Australian market fell by nearly 14% during the financial year.
What is the latest?
As anyone who monitors the media knows the impact of the financial crisis has started to filter through to the real economy and has led to slower economic growth globally. Both Europe and Japan are in recession. Many consider that the United States is not far behind. All financial markets have been extremely volatile over the first few months of the new financial year and this volatility is expected to remain high, at least in the short term.
In recent months this slow down in growth has resulted in falling commodity prices, and the value of the Australian dollar as well as the share prices of major local resource companies. Generally, asset classes considered to have more risk have performed more poorly as this crisis has continued. These include shares in smaller Australian companies, the resources sector and emerging markets. These naturally impact directly on the returns of superannuation fund investments.
In the midst of the financial doom and gloom it is important to note that globally governments are taking virtually unprecedented levels of action to restore faith in the financial system and to help improve economic conditions. Central banks and policy makers have responded with large and wide ranging measures that have been designed to ease liquidity and improve credit conditions. These measures have included coordinated official interest rate reductions, with more on the way looking likely, and purchase of equity in banks by some governments.
The Australian Reserve Bank Governor, Glenn Stevens, while acknowledging that the Australian economy faced significant challenges, has urged Australians to have "quiet confidence" about their future. "We ought to go forward with some quiet confidence in our own abilities and in the opportunities that are on offer", said Mr Stevens in a recent address.
Should I switch options?
It is entirely up to you if and when you switch options. Members can select the investment option that best suits them in terms of risk, potential returns and investment term - and change as often as monthly.
When deciding on your investment strategy, or plan - be it for your superannuation or life in general, you need to consider your investment time frame. For most, superannuation is a long term investment. For many, it is a lifetime decision as they transfer their superannuation account balances into the Scheme's popular Income Streams upon retirement.
Rises and falls are part of investing. While concern is a natural response to volatility and negative returns, it's important to remember that they have been a part of investment markets since they were established.
The return table above demonstrates how a prudent long term strategy can provide a final result that is consistent with expectations - even after periods of negative returns. This can be seen in the following graph.
Taking money out of the superannuation system or changing investment options at this time will crystallise a paper loss into a real loss. There is little doubt that financial markets and investment returns will recover, though of course it is not possible to predict the precise turning point.
The Trustee, together with its investment adviser (Frontier Investment Consulting) continues to monitor investment developments closely and will make changes as required. However, it should be noted that the asset allocation in each of the Scheme's investment options has been selected for its real (or Inflation plus) return focus to enhance long term growth.
Therefore, any change that is made will be done so within the parameters of each investment option's asset allocation range in order to achieve the stated objectives. The asset allocation range and the objectives of each option are published in the Scheme's Annual Report.
If you are a Defined Benefit member that part of your benefit is based on a formula; it is not directly affected by investment returns.
Finally, a few words from the Association of Superannuation Funds of Australia may help.
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