Don't focus on the wrong superannuation number

At the end of each financial year, the top-performing super funds over the past 12 months are put in the spotlight, leading many people to question whether they should be rolling over into this 'top performing' fund.

I have noticed that monthly performance figures are now starting to pop up. However, I am not sure what to take out of a monthly report, and a 12 month performance number also should not be the period to judge performance of super.

While it is always encouraging to see people take an interest in their superannuation and seek to engage more with it, it is important not to focus on the wrong numbers.

When I look at performance of superannuation funds or other types of investments, the minimum time period I want to see is five years, and preferably the last 10 years' performance.

This provides me with long-term financial performance that doesn't exaggerate the one-off events that tend to occur each year, such as the COVID pandemic, the outbreak of the Ukraine conflict, and so on.

A 10-year performance figure will largely reflect the real drivers of investment returns: the income received, the growth of the income over the period, and the most important part - the value of the investment at the start of the period.

If the investment was expensive or overvalued at the start of the performance period, the next 10 years tends to be a period where it will underperform. The Japanese share market at the beginning of the 1990s is a great example of this.

However, if an investment was cheap or undervalued, the next 10 years will often be a period of higher returns.

A good example of this has been the 10 years from the end of the global financial crisis (GFC) around 2012 up until 2022.

This decade was relatively strong for share markets around the world but particularly the US share market led by the large tech stocks.

This is where a deeper understanding of the performance of a super fund is required, which can be difficult to obtain.

Chasing past returns usually points you in the wrong direction, because you are typically buying into expensive markets.

A super fund that maintains a large allocation to the US tech sector would have experienced very good returns over the past decade, however if they maintain this allocation there is a good chance the super fund will start to underperform other funds.

It is the funds that are focused on the next 10 years' expected returns for all the different asset classes and have the ability to make strategic asset allocation decisions that will perform well.

Super funds that have too much exposure to illiquid investments such as commercial property can get caught out as well, as they can be forced to hold poor-performing assets for long periods of time.

Overall our superannuation fund system is one of the best in the world and there is not all that much difference in performance of many of the large super funds.

There is little reason for many people to switch super funds based on performance of the fund.

Even more concerning is the number of people who change asset allocation to '100% cash' in times of a crises, such as the start of the pandemic. This resulted in a significant decline in the super balance that never recovered when markets bounced back, because people were still too worried about the world events.

The reality is they sold after their super had fallen 20% and have never recovered the loss because they remained in the cash option for far too long.

Often the best advice is not to touch anything.

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