Wednesday, 8 July 2015

At the end of each financial year we often hear reports of the latest superannuation returns. Super fund performance is typically measured as an annual percentage change in a unit price over a one, three, five and ten year time frame. But what often seems to get the most interest is the latest annual return for each option.

I think it’s important to point out how limited the information in an annual return figure can be. Markets can be very volatile, meaning annual returns, even in a balanced investment option (often the type of option most super fund members are placed in by default), fluctuate markedly from one year to the next. On average, the largest balanced superannuation funds in the country saw falls of almost 13% at the height of the global financial crisis. Returns then rebounded nearly 10% in the following financial year1.

Even in more ‘normal’ times, strong or weak performance in any year is not likely to be repeated. For this reason, you should look to longer term returns to measure how a superannuation fund is performing against its objective. Looking at longer returns smooths out the impact of year to year market volatility and will give a more meaningful measure of investment performance.

The role of risk in returns
However even long term return metrics ignore a very important part of the investment performance equation. What I’m referring to is risk, or how volatile the investment returns have been. Or how much risk was taken to generate each of the returns you are comparing. A more volatile investment is likely to see larger fluctuations in its return and value than a less volatile investment – think shares versus cash. However, over the long term, an investor should be rewarded for bearing that risk in the form of investment returns. But this volatility can go unrewarded when investors take on unnecessary risk.

An efficient investment is one where the amount of unnecessary risk has been reduced as much as possible and the returns have been generated with the minimum amount of volatility. This is what we are aiming to do through our Accumulation account default Lifetime option and our Balanced option. By having a highly diversified portfolio, we are aiming to generate more stable investment returns in a variety of market environments – that is we do not only perform well when sharemarkets are roaring.

Consider investment volatility too
So if you are comparing investment options across different superannuation funds, I would encourage you to look at how volatile the returns have been, as well as the level of actual returns. Put simply, this means looking at how much the returns vary on a year by year basis. This will likely give you an indication of how efficient the fund has been in generating those returns and potentially how well the fund will fare in different market environments. A single annual return figure can only tell you part of the story.

1. Analysis is drawn from data from the SuperRatings SR50 Balanced Index at 30 June 2009 and SuperRatings SR50 Balanced Index at 30 June 2010 respectively.

The views of the author and those included in the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
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