How to beat the super doom and gloom

The rapid decline in global equity markets has stripped wealth from superannuation nest eggs in an investment environment that looks challenging for at least the next 12 months. The popular default options of the nation’s super funds are likely to return an average loss of 4 per cent for the 2007/08 financial year, according to financial services researcher Rainmaker. But other superannuation monitors say the average default option is likely to return a loss of 6 per cent. Australians have more than $1 trillion in super and Rainmaker estimates about 80 per cent is invested in default options, which is generally a growth orientated strategy weighted in favour of shares and property.

Super funds are poised to post their first negative return since the equity bull market began in March 2003 – a sobering reminder that good times don’t last forever and double digit returns of the past few years are, at least for now, a fond memory. The default option in super funds averaged a positive return of 15 per cent in 2006/07, on top of 14 per cent the previous year, according to Rainmaker. But those healthy returns were posted in times of strong equity markets prior to the US sub-prime crisis and its accompanying credit crunch. This year’s negative returns flow from a 17 per cent fall in the benchmark ASX 200 in the 2007/08 financial year on top of weaker international shares and downturns in other asset classes, such as property.

The challenge super funds and members face is how to build wealth in what is clearly going to be jittery financial and investment markets. Superannuation is a long or short-term strategy for building wealth depending on your age, personal financial circumstances and when you plan to retire. And those three factors can influence your investment decisions within a fund or convince you to switch funds depending on performance. A good start would be to examine the performance of your fund, notover one or two years, but a decade, as a longer timeframe will average out returns. Finance planners say an annual return of 3-to-4 per cent above inflation over a five-to-10 year period is a satisfactory result.

Another must is to closely examine fees as the percentage you pay can be the difference between a comfortable and struggling retirement. High fees over 30 years or more can strip hundreds of thousands of dollars from retirement next eggs. Alex Dunnin, of Rainmaker, says for every additional one per cent in fees means 25 per cent less in retirement next eggs. Dunnin says fees generally range between 1 and 1.5 per cent on the amount invested in the fund. Fees of industry funds are generally lower than retail funds, but retail funds offer more services, such as access to financial planners. Dunnin says: “There is nothing wrong with paying higher fees, but you want to be getting value from the financial planners.”

It’s a good time to re-visit your investment strategy given negative returns and a gloomy outlook. Super fund members aged in their 20 and 30s can afford to maintain an aggressive risk/return approach as most are not retiring any time soon and can wait for an eventual recovery in financial markets. But a defensive strategy, weighted towards cash and fixed interest, may be more suitable for those approaching retirement. It may also be a good time to consolidate multiple super funds as it can save fees and make it easier to keep track of performance.

Finance planner and investment adviser Gerard O’Shaughnessy says salary sacrificing is a tax-effective strategy to boost super. O’Shaughnessy, of Carroll, Pike & Piercy, encourages super fund members to salary sacrifice as it will reduce personal income tax and boost savings. Earnings in the fund are taxed at 15 per cent along the way and members can access their tax-free super when they retire at 60 or beyond. O’Shaughnessy suggests those aged in their early 50s contribute as much as they can to super as the tax concessions make it one of the best investment platforms. But members must remember that additional contributions are locked away until retirement.

O’Shaughnessy says super fund members aged 55 or more should consider taking advantage of a “transition-to-retirement” pension. The strategy enables members to keep working, but earnings in their super fund become tax-free. But their salary and the pension that’s required to be taken allows them to continue topping up super. O’Shaughnessy suggests super fund members in their 30s and 40s repay non-deductible debt, such as housing loans and high interest-rate credit cards before making extra contributions to super. That doesn’t mean they shouldn’t at least salary sacrifice a percentage of income to reduce tax. He is also urges investors to work out how much money they are going to need to fund a reasonably comfortable retirement. That means executing suitable strategies to generate sufficient cash flow from investment options in and outside super. “Those looking to retire in three-to-five years shouldn’t embark on a high growth super strategy, where their portfolio is heavily weighted towards shares and property,” he says. “Those approaching retirement should take a more conservative approach by investing more of their super portfolio in cash and bonds.” But, O’Shaughnessy, warns that now is not the time to totally sell out of shares in favour of cash or fixed interest as investors risk missing any sharemarket upside. He relies on statistics to show that days of big sharemarket gains are relatively few. Between June 1997 and June 2007, the average annual investment return was 13 per cent from 2609 trading days. “If you missed the best 50 trading days in that decade, then annuals returns plummeted to 2 per cent,” O’Shaughnessy says.

Finance planner Dominic Alafaci, of Collins House, says super fund members should sit tight amid global financial market turmoil and resist the temptation of switching to this year’s better performing funds. He says past performance is no guide to the best performing managers in the future. “The chaser looks at what happened last year,” Alafaci, managing director of Collins House, says. “Asset allocation is the best way to go, according to risk profile and personal circumstances.”

Dunnin, of Rainmaker, says it’s definitely not the time to panic, and cool-headed investors making considered decisions are destined for better returns in future than those who make split-second judgements based on the performance of today’s struggling financial markets. Avoid impulse decision making. Dunnin says: “Every time I bought something on impulse, it was a dud.” He says disappointed super fund members have every right to seek answers about poor returns from their super funds. If switching to another fund, they should also be clear about their investment options. It’s pointless switching funds just for the sake of switching.

Dunnin says those who believe they can outperform the professionals by setting up a self-managed super fund should do tonnes of homework. “An SMSF is just another investment structure, but not an investment in itself” he says. “Setting up an SMSF means you’ve turned up with your car at the race track, but your’re still to run the race.” Dunnin says SMSFs can be a terrific retirement savings vehicle for those willing to put in the time seeking the most effective investment strategies. He says most of the 330,000 SMSFs worth a collective $295 billion across the nation have posted negative returns in the past 12 months, considering 44 per cent of portfolio funds on average are invested in Australian equities followed by 13 per cent in property. “Self-managed super funds tend to like Australian equities and shy away from international investments,” he says.