HOW HAS SUPER PERFORMED OVER THE LONG TERM?

How has super performed over the long term?

Over the last four years, investment returns for superannuation funds have been particularly high.  These returns have been underpinned by factors such as a strong increase in global profits and the emergence of China as a key driver of global growth. 

Are returns likely to remain high over the medium term?  While it is difficult to determine precisely what may lie ahead, history provides a useful guide.  It suggests that returns over the four years to 30 June 2007 are much higher than would be expected over the long-term and extended periods of high returns are often followed by a period of below average returns. 

Superannuation return data from the Association of Superannuation Funds of Australia (ASFA) can be used to put the most recent period of strong returns in perspective.  Chart 1 provides the financial year return and the long-term return for the average superannuation fund, as identified by the ASFA.  The average fund has achieved a net return of 14.0% p.a. over the last four financial years, compared with an average return of 9.1% p.a. over the last 20 financial years.  This means that the average return during the past four years to 30 June 2007 was more than 50% higher than has occurred on average over the past 20 years. 

Chart 1:  Average superannuation fund returns 1988 - 2007*


Another way to examine the ASFA data is to rank the financial year returns over the past 20 years.  This is done in Chart 2.  As can be seen in the chart, each of the past four financial years (shown in red) have provided among the highest returns over the past 20 years. 

Chart 2:  Average superannuation fund returns ranked by return 1988 - 2007*

History suggests that stellar return periods, such as the four years to 30 June 2007, occur infrequently and are often followed by periods of below average returns.  The most recent example of this occurred when the technology bubble unwound a few years ago.  From a fundamental perspective, global profit growth is slowing, which is likely to limit the potential gains in share markets going forward.  Financial markets are also facing a headwind in the form of the US sub-prime crisis and the associated problems which exist in credit markets.  While the outcome of the current situation is difficult to predict, it is unlikely that the very strong superannuation return environment of recent years will continue over the medium term. 

Share markets

Another way of putting the recent returns of superannuation funds in perspective is to examine the performance of share markets, as shares have been a key driver of the strong returns achieved by superannuation funds.  Until recently share market returns have been strong since 2004, mainly reflecting strong earnings growth.  Chart 3 compares recent returns for the Australian, international and emerging share markets, with respective long-term averages.  In the four years to 30 June 2007, the returns from all three sectors have been two or three times higher than their respective long-run average.

Chart 3:  Average share market returns*

History shows that four consecutive years of strong gains in share markets is rare and that such periods have often been followed by a period of below average returns.  Given this, a reduction in share market returns toward or below the long-term average is likely to occur over the medium term. 

Share market returns have been exceptionally strong for a number of years and have driven an extended period of consecutively high returns to superannuation funds.  This could result in some people believing that returns of this magnitude are likely going forward.  However, as can been seen through the analysis presented above, returns during the recent period have been unusually high and looking forward, more subdued returns appear likely over the medium term.

My thanks to Access Capital Advisers for their assistance with preparing this document.

Howard Rosario
Chief Executive

7 March 2008

Previous articles from the Chief Executive are available via the links below:

The Positioning of Westscheme in meeting the Challenges of Market Turmoil

Investment Volatility