About this time last year you would have received annual statements from your super funds. With rare exceptions, they weren’t pretty - just like the previous year’s. A fleeting glance confirmed what you already knew - that you lost serious money in 2008/9, in spite of a late rally.
What many of you wanted to know was why you lost so much. (We know this because several of you wrote to us.) To us, that seems a perfectly reasonable question. Well, search all you like, but most statements won’t give you the details. If you still don’t understand just where your money went and why, you can’t prepare for the next negative cycle (typically every 6 or 7 years). If you can’t prepare for the next crisis, there’s little chance of the result being much different the next time around.
So what do you know about why you lost money? There was a global financial crisis. You know world economies went backwards. But what’s missing is the vital link between that and your savings. How exactly did the GFC impact your super?
Why can a fund go from first place to oblivion on the performance charts? What are the investment strategies that led to the loss? And so on.
We received an email from a Savvy member recently who’d tried to get some answers from both of his funds. He called one of the funds six times to try to understand what has happened and as he wrote in his email “every person I’ve spoken to has been very pleasant but I’m sure they know no more than me”.
ASK THE RIGHT QUESTIONS
So who do you have to talk to and what do you need to ask to understand where your super savings went?
You could try your super fund. Many of you did just that - and got nowhere. But keep asking and maybe they’ll crack.
In the meantime, we’ve prepared a bit of a GFC primer. To have a better understanding of the reasons behind the late 2007 to early 2009 losses, you need to understand where and why your funds have made their investment decisions - and the direct link between the GFC and super.
There has been a bit in the news lately about Australian superannuation funds’ dependence on shares. A typical Balanced option will have around 70% of its investments in equities, both local and international. Obviously, with so much riding on the fortunes of stock values, anything that causes shock waves on stock exchanges is going to affect a typical Balanced fund.
THE GFC EXPLAINED
In essence, blame for the GFC rests equally on questionable, but common, accounting practises and slack government regulations that allowed them to exist.
Just like we humans, publicly traded companies like to make themselves as cosmetically attractive as possible. To seduce investors, companies look out for ways to enhance their profits. A common practise is to overestimate the value of their assets and to downplay their liabilities. A really popular way to achieve this has been a Credit Default Swap. Basically CDSes work like this - you bundle up the worst of your liabilities, put them in a nice package and sell the risk to an insurance company. This way, a bank, for example, can go on making loans (say as mortgages) to high risk customers with little apparent risk to itself. The loans are listed as assets and by bundling them with other risky, but now insured, loans in a CDS, they don’t show up as liabilities. The end result is that the bank’s balance sheet looks really much better than it is.
Meanwhile, over at the insurance company, these same risks show up as assets. The result is that, like the bank, its financial statement also looks a lot prettier than it is.
Investors, both private and institutional, look at this bank and this insurance company, see a lot of assets, not a lot of liabilities and a healthy profit and invest accordingly. Those investors include superannuation funds or companies in which your superannuation fund has invested.
Basically it’s a house of cards, and like all flimsy houses, eventually it collapses. What happened here is that the risky borrowers defaulted on these risky loans. The bank started to write-off their assets. As a result, they have a lot less money, which makes it hard for them to pay their own loans. They are at risk of insolvency.
What happens next? Share values plummet. Companies cut dividends. So investors stop buying or start selling shares. The paper value of companies shrinks. So the share price falls.
A crippled banking system leads to a radical drying up of investment money. Banks around the world have money invested in each other and make loans to each other. Similarly, most local insurance policies are underwritten by other insurance companies elsewhere in the world. With all this interdependence, once money starts to dry up in one place, it dries up fast everywhere.
When investment money disappears, companies go into shut-down mode. They cut overheads. People lose jobs and stop spending. The result is that your Balanced option with its heavy dependence on shares, falls as rapidly as the share markets plummet.
HOW CAN THE BEST FUND BECOME THE WORST?
Some funds have investment strategies that differ from the norm. MTAA, for example, has a large percentage of their investments in unlisted assets - major infrastructure like airports, highways, even London buses and a carp park in New York. For quite a few years MTAA has been amongst the best performing funds analysed by SuperRatings, emerging as a real star over ten years. As recently as March 2009, while most super funds were being savaged in the media for their losses, MTAA was coming under scrutiny because their performance looked too good for the market conditions.
Because of MTAA’s high proportion of unlisted versus listed assets (shares) - and because they value their assets every quarter (many funds do this monthly) - MTAA often lags behind other funds. They’ll often be the last to go down and the last to go up.
To the members who wrote to us for advice on what to do about funds that aren’t recovering as fast as they’d wish our advice has been simple. Do three things.
THE THREE RULES
First, satisfy yourself that you’re in the right option type. The monthly returns emails reveal that whilst the Index of Balanced options has recovered well since March 2009, there’s still an awfully wide gap between the best and worst funds. (which is there in the returns emails if you look closely). Use the calculators available on this Savvy website, talk to your adviser or talk to your fund (remember, they can give you general advice about the right option for you).
Then, if you’re satisfied you’ve got the right kind of option, check to see which funds offer the best mix of attributes (best performance, lowest fees, best insurance products). The SuperRatings ratings that we use here at Savvy are a reliable guide. The Fundamentals reports will also help you decide.
Finally, if you’re happy you’re in the right option from a good fund, stick with it. It will go up, it will go down, but at the end of the day you’ll usually be better off staying where you are than jumping from fund to fund as you try to anticipate trends or make up for losses.
Disclaimer: SuperRatings Pty Limited holds Australian Financial Services Licence No. 311880. This release has been prepared for the purpose of providing general advice only and has not considered the recipients objectives, financial situation or needs. The recipient should consider obtaining independent advice before making any decision about a financial product referred to in this report and should obtain and consider a copy of the relevant Product Disclosure Statement from the product issuer.