Tracking real objectives
SuperRatings firmly believe that fund performance should be referenced against a ‘CPI+’ return objective over a specified timeframe, that is, a performance target expressed as a percentage above the Consumer Price Index (CPI). Since our last review of funds’ objectives in 2008, funds have improved their disclosure, with 40 per cent (up from just over 30 per cent) now stipulating a CPI+ objective over a specified timeframe. However, that means that 60 per cent of investment options still do not have clearly measurable long-term performance targets. Members have no way of measuring whether these funds have actually achieved their objective due to ill-defined terms.
CPI+ objectives are probably more important now than ever before, given funds are struggling to meet their long-term objectives. For funds that state a CPI+ target, the current picture doesn’t look good, with no balanced funds meeting their objective over three and five years, and very few meeting it over a seven or 10 year period.
Over the past 15 years, very few funds have altered their objectives. While performance targets in some cases of five per cent or more above CPI over five-year periods may have been appropriate during the heady days of the bull market prior to the GFC, the fact is that we are in a new paradigm. We have entered a lower return environment, with some calling it the new ‘normal’. There is now a greater focus on delivering “consistent” returns rather than aiming for maximum performance. As such, funds need to reassess their objectives and question their assumptions about expected returns and their appropriateness over different timeframes.
Although we see few funds have altered their objectives over the past 12 months, we think it’s more positive for members that an increasing number of super funds are currently reviewing or looking to review their investment objectives.
Looking into the crystal ball
If there is one thing we should expect in 2012, it is for levels of volatility to remain elevated. Beyond that, one would be brave indeed to predict super fund or share market performance. There is no doubt that European debt restructuring issues will continue to dominate financial headlines and weigh on investor sentiment; however, since the close of 2011 we have finally seen investors direct their attention to improving economic and corporate fundamentals in the US, which had previously been overshadowed by events in Europe. This improved sentiment has driven equity markets higher so far in 2012.
While we don’t expect markets to shoot the lights out in 2012, and members should moderate their expectations on returns, improving sentiment could be a catalyst for positive, albeit moderate, returns in 2012.
