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What was an average return for the financial year?

Sitting at home through another economic shutdown, I can't help but notice the flood of industry super fund advertisements throughout breaks in the now daily AFL games.
Investing 101

Sitting at home through another economic shutdown, I can’t help but notice the flood of industry super fund advertisements throughout breaks in the now-daily AFL games. The sector appears to be making a concerted push to attract new members during the pandemic, in hopes of offsetting the huge withdrawals under the loosened hardship loophole. The advertisements remain focused on two things, performance and fees; in this short article I wanted to focus on the former.

There seems to be a substantial amount of misunderstanding and more importantly lack of access to appropriate benchmarks for DIY investors. Advertisements showing returns exceeding 10%, but with the important disclaimer that past returns are no guarantee, are abundant. In fact, the entire APRA (Australian Prudential Regulation Authority) “Heat Map” system for comparing funds has been based on performance, rather than risk or asset-class allocations; meaning the focus is on the wrong area. Unfortunately, many funds (both industry and retail) are “gaming” the system, in two ways: 1) taking more risk (sometimes up to 90% in high-risk assets) in a ‘Balanced’ option; and 2), allocating high-risk assets to the low-risk (or defensive) component.

Where do I find an appropriate comparison?

  • In the first case, the return should be compared to your objective return; generally quoted as a CPI+ figure. For instance, Australian Super’s Balanced option targets a return of CPI (consumer price index)+4% over the long-term; in today’s world equating to a return of around 6.0% to 6.5%.

    In the second case, you should seek out appropriate benchmarks. Unfortunately, in most cases we are attracted to the most widely available and best-performing fund as a benchmark; which is clearly not accurate or insightful, particularly in the case of the so-called ‘Balanced’ Fund. On this basis, we advise the use of Chant West’s Median Super Returns, available shortly after the end of each month.

    The team at Chant West works tirelessly to ensure that every fund it covers is closely assessed and actually fits into the firm’s allocations:

    • All Growth: 96 – 100% growth assets
    • High Growth: 81 – 95% growth assets
    • Growth: 61 – 80% growth assets
    • Balanced: 41 – 60% growth assets
    • Conservative: 21 – 40% growth assets

    According to the information available on AustralianSuper’s website, the asset allocation of its ‘Balanced’ option actually fits into the High-Growth group in Chant West’s analysis. As you can see, AS’ market-leading 8.8% per annum return for the last ten years is only slightly above the 8.4% average for the sector. When it is (erroneously) compared against most DIY or SMSF portfolios, which are more conservative at around 30-40% in low-risk assets, it looks like the best option around.


    So what should my returns be for the financial year?

    The table below shows the median return for each asset allocation for periods of 3 months, 1 year, 5 years and 10 years:

    Category 3 Months 1 Year 5 Years 10 years
    All Growth 9.7% -2.1% 6.6% 8.8%
    High Growth 7.9% -0.9% 6.7% 8.4%
    Growth 6.5% -0.5% 6.2% 7.7%
    Balanced 4.7% 0.3% 4.8% 6.4%
    Conservative 3.1% 1.0% 4.2% 5.4%

    We have highlighted the ‘Balanced’ returns before for ease of comparison, because this represents the most common portfolio, carrying 40% in defensive assets like cash and fixed interest and 60% in growth assets like equities, property and infrastructure. As you can see, the average return for the 2019-20 financial year was 0.3% and more importantly, the 10-year return is around 6.4%.

    This is clearly vastly different from that reported by many major funds taking substantially more risk; so as they say, “buyer beware.”

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