Wednesday, 27 May 2015

An interesting feature of the superannuation industry in Australia is that it places a strong emphasis on single year investment returns. Funds report annual returns to members, and ratings agencies together with the media promote league tables comparing super funds using single year performance.

So what does a single year’s performance tell us about whether a fund’s members are on track to achieve adequacy in retirement?

The answer is not a lot.

This focus on comparing funds’ short-term performance can create real shortcomings for members.  This drives behaviour within the industry (whether it is stated or implicit) where funds target risk relative to competitors rather than targeting risk relative to a member’s retirement needs. The objective arguably becomes the matching or bettering of peer funds rather than ensuring members retire with a balance that can generate a reasonable level of income in retirement.

To go back to my opening question, an absolute return target is an investment objective that seeks to return a nominated, positive return over a set period of time, e.g. 3.5% plus CPI (consumer price index, a measure of inflation) over rolling ten year periods. This is distinct from a relative return target which seeks to match or outperform a market benchmark such as the S&P ASX200 index or, in a super context, an index measuring funds’ performance.

QSuper’s approach is to focus on setting objectives that meaningfully target retirement adequacy; then tailor and implement investment arrangements that seek to increase the probability of achieving these objectives, for its Lifetime option. The extent that a fund can successfully narrow the range of returns around the targeted objective implies that it is using risk more efficiently in the context of its members’ needs.

There are two challenges in targeting absolute returns. Firstly, there will be times when the pursuit of absolute returns means we will perform very differently from the majority of funds, which seek peer relative returns. Secondly there is a challenge in communicating how and why we approach investing for retirement differently to other funds.

We believe that the pursuit of absolute returns to target retirement adequacy is an approach that is better aligned with the risk preferences expressed by our members. In short, absolute returns matter more than what XYZ fund returned last year.

A starting point in understanding whether you’re on course for retirement adequacy is to look at how your fund is tracking in terms of delivering the nominated absolute return and whether this has you on track towards your long-term retirement goals.

The views of the author and those who provide 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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