Previous years have been unusually strong for super returns. HESTA is proud to have delivered 20 years of positive returns in its default fund, Core Pool, including double-digit returns for the four years to 2006/2007.
After much share market volatility in the 2007/2008 financial year, HESTA’s Core Pool (in which 90% of members are invested) has posted its only negative annual return in its 21-year history.
Like all super funds, HESTA’s investments are impacted by what is happening in the share market and the wider world economy.
HESTA’s Executive Manager – Investments and Governance, Robert Fowler, answers some of the questions you may have about the negative return.
Why did HESTA’s default option, Core Pool, have a negative return this year?
There was a sizeable fall in share markets this year. As 60% of Core Pool is invested in shares, this had a significant impact on the return. HESTA’s strategy, however, has always been to focus on the long-term nature of super. HESTA Core Pool has returned 8.0% over three years, 10.5% over five years and 8.3% over ten years to 30 June 2008.
Why didn’t HESTA have a negative return last time share markets fell?
It was a combination of timing and our defensive investments delivering more strongly.
The share market had a chance to bounce back in 2001/2002 as the fall happened earlier in the financial year. The current fall has also been exacerbated by fixed interest markets (affected by the US credit crisis). Core Pool’s main defensive investment is its fixed interest portfolio, which has not performed as well as it did in 2002.
So this year we had the “triplewhammy” of a share market fall, the US credit crisis, and less time to bounce back.
Isn’t it too risky then for superannuation money to be invested in the share market?
The graph below shows $10,000 invested in Core Pool ten years ago and how it’s grown compared to the ASX cumulative index and the cash rate. It is a strong result and is mainly due to Core Pool’s long-term investment in share markets.
Markets will always go up and down. The fact share markets are down is not an unusual event. It happened in 2002 and 1987 – in fact, Core Pool’s above-average ten-year return figure includes the 2002 result. The difficulty is in predicting when it will happen next.
It still seems risky. I’d prefer to take my money out and put it in the bank.
Well, superannuation legislation won’t let you – unless you retire or meet conditions of release. Even if you could, it may not be a sensible approach to building your retirement dollars.
History shows that, over the long-term, shares have had a much better chance of delivering returns above the inflation rate. You have to earn more than the inflation rate over the long term so the value of your dollar does not go backwards. If you don’t, it doesn’t matter how much money you put in over time, you’ll be losing.
However, if you’d been watching your balance over the years, you’ll see your balance has most likely gone up by more than just your 9% Super Guarantee (SG) contributions.
So while Core Pool’s return was -5.4% this year, its return was 16.7% last year. On average over the two years, that’s 1.7% above inflation. Over five years, our annualised return was 10.5% – that’s 7.4% above inflation.
My balance has gone backwards. I don’t understand. I haven’t taken any money out.
Sometimes people think super is like a bank savings account. It’s not. Your money is actually invested according to the investment option you’ve chosen or in Core Pool as the default.
How it’s invested affects the return it earns and the risk of negative returns. This year the negative return may have been greater than your SG contributions and any positive returns from other options, which means your balance goes down.
You haven’t actually lost money unless you need to access it right away. If you don't change your current investment option then your balance may recover, along with the markets.
I just turned 60 and I can’t afford to retire this year as planned. I was counting on double-digit returns again.
A downturn in the market can have a big impact on people who are looking to retire soon.
Retirement is not a one-year prospect. Your nest egg has to last, and you’ve got to make sure you think hard about how you invest. But if you remain an investor, you should be positioned to benefit from a rebounding market in future years.
Even though you are no longer contributing to it, your super could be invested so you can aim to earn above the inflation rate, rather than just draw down on a sum of money until it runs out.
If you look at how much better your investment has done compared to inflation since you started, you may be less disappointed.
I’ve read HESTA won’t always be top of the charts when markets are strong, but that you expect to do well in the rough times.
Our measure is whether Core Pool is still in the top third of funds in Australia over the long-term – which it is. The fact that we are also an industry fund, run only to profit members, with low fees and no commissions paid to financial advisers, helps us achieve this position. We invite you to compare our results to those of the commercial/retail super funds.
For Core Pool, we predict a negative return once every ten years. We have gone far better than that by delivering a positive return in the 20 years from 1987 to 2007.
So is it safe to assume HESTA won’t deliver another negative return for 21 years?
Impossible to promise, but we can tell you HESTA’s investment team will be striving to achieve it.
I don’t think of myself as an investor, but I guess I am. Where can I get help figuring out my super investment strategy?
Through one of HESTA’s Superannuation Services Advisers (SSAs) free call 1800 813 327
Investments go up and down. Past performance is not always indicative of future performance.