PORTFOLIO POINT: Super fund investors will happily ring in 2009. And they won’t be shedding a tear for the departure of 2008.
In the worst kind of way, 2008 will have been a life-changing year for many super fund members and trustees.
There are many investors who have lost so much money in the last 14 months that their lives will never be the same again.
There are people who were thinking just a year ago that retirement was looking sweet who are now struggling to sleep. Others have put off their planned retirement by several years (or simply shelved those plans). Some in retirement have realised their super won’t last them as long as they thought it would. Others will be remaking plans for how to make their super last longer – that is, dramatically cut their spending and quality of life.
Only those who’ve been sitting completely in cash will have smiled their way through 2008. I know a few. But they will have serious decisions to make in the coming year, as the rules for the ball game they’ve successfully played (this year) have now changed.
For those who would like to look ahead to next year, today we’ll have a look at the superannuation issues to consider in 2009.
Overall asset allocation
Your asset allocation for 2009 will (as it is every year) be the single biggest determinant of how your super fund performs. In 2008, all but the most conservative asset allocations have been smashed. For example, even if you had 80% of your money sitting in cash and just 20% in Australian shares, your entire portfolio would still have gone backwards to the tune of about 2-5% (to the end of November), such was the impact of the overall 50% fall in Australian shares.
In my first column for Supersecrets in January this year, I recommended investors not invest more aggressively than their risk tolerance suggests they should. (See below for a roundup of that column’s accuracy.)
Do you need to make changes to your asset allocation for 2009? If you dodged the bullet by being conservative, is it time to raise your allocation to the riskier assets of shares and property?
How comfortable were you with the performance of your super/investments this year? If you’re relatively young and aggressively invested, have watched your super fall by 30-40%, but aren’t concerned, then perhaps you should hold the line. Could 2009 really produce another year of a big negative return?
I tend to side with the recent survey by Eureka Report of investment managers (who predicted a positive return for the Australian market of about 26%) that the coming year will see a bounce, although I’m not joining their prediction with a particular number. But the theory of “reversion to mean” and a look at any long-term investment graph for the All Ordinaries or the ASX 200 suggests thatAustraliais now below fair value. If not for a short-term play, then Australian shares have got to be a good bet for medium term (2-4 years) outperformance.
The fantastic return of cash for calendar 2008 will not be repeated. Earlier this year, the Reserve Bank raised rates twice, from an already reasonably high base, and the banks were busy raising over and above that rate.
Now, following the equivalent of 12 interest rate cuts in just four months (3 percentage points being equal to 12 reductions of the more “normal” 0.25% each time) and with the possibility of more to come, cash returns are unlikely to keep pace with inflation, which is now running at 5%. Even the ever popular ING Direct is offering just 4.75%.
Further, the government’s bank deposit guarantee has also changed the playing field. Cash management trusts will struggle, while cash management accounts will grow like weeds. If you haven’t done a health check of your super fund’s cash box yet, then don’t put it off any longer.
Governments can’t help themselves. Their have less ability to control their urge to tinker with superannuation than a child with chicken pox has to stop themselves scratching. (“Jimmy, it will only get better if you stop playing with it!”)
It looks like Treasury secretary Ken Henry wants to put a stop to superannuants taking out tax-free lump sums from their super (as discussed by Robert Gottliebsen last Friday). One of the great advancements that came from the changes announced by formerTreasurerPeterCostelloin 2006 was that it successfully made super simpler. Now the warning is being put out that they want to turn back the clock and introduce restrictions that will, inevitably, reduce the attractiveness of superannuation.
We’ll keep an eye on this next year.
SimonEagleton, head of Mercer’s investment consulting business, has identified a number of key themes he believes will be important in 2009.
These include his belief that investors who are not feeling cash constraints will have an ability to take advantage of medium and longer-term opportunities and that active management styles will shrug their recent poor returns in relation to their benchmark indicators.
He believes that the number of hedge funds, many of which have been a good defensive investment this year, will be decimated next year.
Eagleton says that greater regulation, pressure on fees and continued deleveraging will wipe out some arbitrage opportunities. “Poor performance combined with 10-15 per cent net redemptions this year will see the industry shrink by one third to perhaps one half by the middle of next year.”
“Now is the time when hedge fund manager selection becomes crucial. With significant headwinds facing the industry, at this time Mercer prefers managers in the more liquid strategies using exchange traded instruments such as global macro strategies that have proven consistent performance, are less exposed to counterparty risk and can benefit even if markets do not recover. We recommend avoiding highly leveraged and less liquid strategies where securities are becoming increasingly difficult to value.
My first column for Eureka Report, earlier this year, was titled “Eight rules for 2008” (Jamie: Hyperlink please). The piece was published on January 18, in the middle of a very bad start to the year. But just before the real crunch happened early the following week.
Those eight rules were:
- I will not be afraid to hold cash (and lots of it).
- I will not invest more aggressively than my risk profile says I should.
- I will not panic when markets flinch.
- I will not scoff at the new super gearing rules
- I will not continue to run a dog shelter.
- I will not get sucked in by “cheap” listed property trusts
- I will not ignore international shares.
- I will not put blinkers on. (That is, never say never.)
These rules, general as they are, would have improved the performance of anyone who followed them.
Rule 1: Holding extra cash this year would have not only saved you from losing your capital, but (until the last few months) would have given you a decent return.
Rule 2: Being invested at or below your risk profile this year would certainly have paid off handsomely, as the more aggressive (the higher the percentage of shares and property) the portfolio this year, the worse the performance.
Rule 3: Super funds, more so than “ordinary” investors, are there for the long term. So don’t panic.
Rule 4: Simply a recommendation to learn about the new gearing rules. Those who did gear in 2008 would, largely, have paid a price for that. (However, there were some interesting anomalies, such as a DIY trustee favourite, the self-funding instalment warrant which has been protected by the rising cost of the associated put options.)
Rule 5: If you got rid of the dogs in your portfolio earlier, rather than later, this year, you most certainly would have saved yourself a fortune. AsAlanKohler pointed out recently, of the top 300 stocks, the largest 20 fell only 40% this year, while the bottom 200 of the 300 had fallen 60%.
Rule 6: Jury’s still out on LPTs (now known as Australian real estate investment trusts, or A-REITs). The A-REIT index (XPJ) has fallen from highs of nearly 2500 points have fallen to below 900 points, with no real sign of bottoming.
Rule 7: For the year to November 30,Australia’s ASX 300 provided a return of -40.5%, while the MSCI World ex-Australian finished at -22.4%.
Rule 8: All markets are cyclical. What looked awful last year could become attractive in 2009.
Bruce Brammall is a financial adviser and author of Debt Man Walking – A 10-Step Investment and Gearing Guide for Generation X.