Investment Performance - The Year in Perspective
By any measure 2007-08 has been an extraordinarily difficult year for financial markets and investors, given the extreme volatility experienced in global markets; fuelled by concerns about recession in the USA, the sub-prime credit crisis, rising oil prices, fears on inflation and compounded by the extraordinary growth story in the emerging giant economies of China and India. Indeed the past twelve months is a timely reminder of just how fickle share markets can be and how quickly investment fortunes can change.
In the six years prior to December 2007, Australian super fund investors witnessed very strong growth in investment returns, largely as a result of sustained “bull” runs in both domestic and international equities. During this period, members of most super funds enjoyed returns in the mid to high teens; the domestic equity markets in particular providing stellar returns. However, investment markets tend to run in cycles, and since the beginning of 2008 we have witnessed extreme amounts of volatility in markets around the world. Indeed from the high in November 2007 to the lows at year end listed markets globally shed as much as 28% of their value. In Australia despite the encouraging start to the year the All Ordinaries Index finished the year 16.95% down at 5,332.9 points. This was the worst performance for the index in 26 years and the worst June performance for 40 years.
In this environment most superannuation funds, but particularly those with larger exposures to listed equities, have declared significant negative returns for the first time in many years. For many new superannuation investors this is also the first time that they have experienced negative returns on their retirement savings, with the median balanced fund achieving negative 6.4% returns for the year (Balanced funds are defined as those that hold 60-70% of investments in growth assets).
Alternatives Soften the Blow—MilitarySuper Investment Overview
Because of its investment strategy, MilitarySuper’s asset allocation does not fit comfortably within the ranges used by rating agencies when comparing fund returns. For this reason MilitarySuper does not participate in rating surveys.
However, to provide members with some perspective on the returns achieved by MilitarySuper in the year to 30 June 2008, the following statistics are relevant in comparing the Fund’s returns against the median balanced fund returns. In comparison with the median return of -6.4%, MilitarySuper’s Balanced investment option (which has a 62% exposure to growth assets) achieved a return of -0.5 for the year. MilitarySuper’s Growth investment option (which has an 88% exposure to growth assets) achieved a return of -2.6%.
It is important to remember that for most members superannuation is a long term investment and a super fund’s investment performance will change from year to year. Over the long term your retirement savings will grow, but there will be years (such as the one just experienced) where there will be negative returns. This is a natural feature of investment markets. The returns of all super funds in Australia were negatively impacted by the extreme downturn in domestic and global markets during 07/08.
Past performance is not a reliable predictor of future performance, but long-term historical data can be useful in assessing the relevance of current year returns to your long-term retirement savings goals. The table below shows average and (in brackets) compound annual returns for each of MilitarySuper’s five investment options over three, five and 10 year periods.
| Option | 1 Year | 3 years | 5 years | 10 Years | Since Inception |
|---|---|---|---|---|---|
| Cash | 6.0% | 5.6% (5.7%) | 5.1% (5.1%) | N/A | 5.1% (5.1%) |
| Conservative | 2.7% | 7.2% (7.1%) | 7.5% (7.5%) | N/A | 7.5% (7.5%) |
| Balanced | -0.5% | 9.0% (8.8%) | 10.7% (10.6%) | N/A | 10.7% (10.6%) |
| Growth | -2.6% | 9.8% (9.3%) | 11.4% (11.1%) | 7.1% (6.7%) | 8.1% (7.7%) |
| High Growth | -3.9% | 10.2% (9.6%) | 12.7% (12.3%) | (N/A) | 12.7% (12.3%) |
(*Average returns represent a simple arithmetic average of a series of returns generated over a period of time. Compound annual return represents the cumulative effect that a series of gains or losses have on an original amount of capital over a period of time.)
Although it is of little comfort for Members to know that their Fund performed better than many of its peers, the fact remains that for 2007/08 the returns for three of the investment options were negative for the year.For MilitarySuper there were a number of factors which acted to soften the impact on the Fund’s investment performance. The first was the decision taken some four years ago to move the Fund away from the more traditional reliance on market generated returns. This was done by selling down exposure to listed assets and replacing that exposure with alternative investments in asset classes such as private equity, infrastructure and non-listed property. These assets have return characteristics which are not directly correlated to listed markets or which provide access to stable long-term cash flows.
In September 2007, the Board also took an active strategic decision to sell down International shares in order to reduce its exposure to this sector and to increase the Fund’s holding in cash.
Over the coming months you will receive your annual member statement and annual report to members. The latter will for the first time be made available on line but you may, if you wish request to receive a printed copy at no cost to you.