Hello I’m Brian Parker, Sunsuper’s Chief Economist.
Looking back: investment returns over the past 10 years
Australian superannuation fund members have enjoyed some very strong investment returns over the past decade. Over the 10 years to the end of June 2019, the median or typical balanced investment option, in which most fund members are invested, has delivered a return of better than 8.5% per annum, and that’s after investment fees and after superannuation tax. For Sunsuper members, the return has been higher than that, at just over 9% per annum.
Importantly, these represent very strong real or after inflation returns. Over the last decade, inflation in Australia has averaged a little over 2% per annum.
So AFTER investment fees, AFTER tax and AFTER inflation, the typical superannuation fund member has enjoyed a return of around 6.5% per annum over the last decade.
To put this in perspective, it’s worth comparing that return to the kind of investment returns that we EXPECTED 10 years ago.
Let’s assume for the sake of argument, that you left school or university in 2009, started your first job, and also started your superannuation journey. As part of that process you picked up a product disclosure statement for your new super fund and you looked at the range of investment options available – options that may have invested in a single asset class – such as shares or property – or a diversified option.
A diversified option allocates your investments across a range of different asset classes, such as shares, fixed income and property and cash. In a super fund’s PDS, we are required to show an investment return objective for each of our diversified options.
It’s been wisely said, that prediction is hard, especially about the future, but this return objective is our best estimate of what kind of returns – after investment fees, after tax and after inflation – are realistic and achievable over time. These objectives are not set or changed lightly.
This chart shows the real return objective for three of our diversified options: our Growth, Balanced and Retirement options as shown in Sunsuper’s PDS issued in 2008.
Over time, investors are rewarded for risk they take – the risk of loss, but also the volatility of their investments. We indicated that over the next decade – the one just finished! – the growth option would produce a real return, net of investment fees and taxes, of 5%, for the balanced option, 4%, and for the retirement option 3.5%.
Well, ten years later, how do the actual returns achieved over the past decade compare?
The answer is very well indeed. Both the Growth and Balanced options delivered real net returns of around 7%, while even the more conservative retirement option still delivered a 5% real net return.
Why such a large difference between the expected returns and what was actually delivered? The short answer is that ten years ago, world share markets were cheap, and subsequently, markets have been very kind! Over time, the best investment returns generally occur in the years after a major market downturn – when assets can be acquired cheaply.
In 2009, the world was just barely over the worst of the global financial crisis – the worst global economic crisis since the 1930s – and world share markets had only just begun to recover from their larges losses in 2008. While 2009 was still a year of great uncertainty, it was a very good time to begin your superannuation journey.
Looking ahead: expected investment returns over the next 10 years
Well that was then, but what about now?
In 2018, the Sunsuper Board decided to reduce the real return expectation we provide in our PDS to members. This chart shows how the objectives for our three key diversified options compares to the objectives set a decade ago and the returns achieved over the past decade. In each case, the current return objective is lower than that set a decade ago, and SIGNIFICANTLY lower than the actual returns achieved over the last decade.
Why have we taken this decision? It’s because the Australian and world economies are likely to be growing at a slower rate over the next decade than the past decade or two. Populations are aging, the working age population is going to be growing at a slower rate, and in some countries, such as Japan and China, shrinking. Ultimately, investments returns flow from the performance of the economy. And slower growth means lower investment returns.
At Sunsuper, we have no way of knowing with any certainty how the economy and financial markets will evolve over the short-term. We don’t invest money on the basis of our own, or anyone else’s short-term market forecasts. We carefully construct portfolios with a view to meeting and preferably exceeding, these medium to long-term investment objectives.
What could lower returns mean for your super and retirement?
We know that crises, major market downturns and recessions, while extremely difficult to predict, are inevitable. We also know that every crisis, every bear market, every recession comes to an end BAR NONE.
For all our members, it’s important to ensure that the Sunsuper investment option you have is right for you – that it suits your financial needs, your tolerance for risk, your ability to tolerate, and perhaps take advantage of, the volatility in financial markets.
And much of that depends on your stage of life.
I’d encourage any of our members, but particularly those members approaching or in retirement who are concerned about what any decline in share markets may do to their retirement plans, to contact Sunsuper and speak to one of our financial planners. Please give Sunsuper a call on 13 11 84.