Are Australian Superannuation Funds benefitting from the mining boom?

The mining boom in this country has been going for over a decade, with data from the RBA highlighting that investment in this one sector has grown from two per cent to 10 per cent of Gross Domestic Product (GDP) since the turn of the century.

Speaking at the Broken Hill Resources and Energy Symposium in May 2012, Michael Blythe, chief economist for the Commonwealth Bank of Australia highlighted its importance to Australia’s future economic growth, with consensus expectations (based of CBA/RBA data at the time) that fully one-half to two thirds of Australia’s growth in the period ahead may come from this one sector.

Despite the decade long boom, one key component of the Australian economy that has not fully benefited is the Australian Superannuation Industry. According to Superannuation consultancy firm Chant West, the median return for 10 years for ‘balanced growth’ funds (the default option for most Australians) to end 2011 was circa 4.60 per cent, barely in line with the cash rate.

This figure is a result of the allocations to various asset classes that the funds adopt, and how those asset classes have performed.

The table below, which shows various asset class returns over the five and 10 year period  to end 2011, along with the end 2011 weightings within default funds, highlights why returns have been so poor.

Despite returning between -2.5 and -15 per cent over the past five years, funds have kept circa 60 per cent of their money in equities and REITS.

International shares, which have gone backwards in real terms over the decade, still comprise nearly 25 per cent of investor portfolios.

The table also highlights which assets superannuation funds have barely invested in, like commodities, which have been up over 10 per cent, and gold, which was up nearly 20 per cent (in US Dollar terms) between 2006 and 2011. Had superannuation funds devoted a larger portion of their capital into these markets, returns to members would have been significantly enhanced.

Australian Superannuation funds have also tended to steer clear of the junior mining sector, which whilst volatile, has provided some fantastic investment opportunities over the past decade.

Considering the disappointing returns investors have received, and the lack of targeted investment into commodities, precious metals and resource stocks, it’s perhaps not surprising the Australian public feel they are not benefitting from the mining boom.

 

There is also a risk that, given the uncertain economic outlook, balanced growth funds could continue to perform poorly for the foreseeable future.

With circa 90 per cent of their assets in large-cap equities, bonds (mostly government), cash and listed and unlisted property (based on data from Chant West) these funds are significantly exposed to many of the risks that face the global economy today.

These risks include:

–    The threat of sovereign debt default;

–    50 year lows in yields on US and Australian debt;

–    Inflation due to continued money printing;

–    An undercapitalized banking system in Europe;

–    Ageing demographics in the developed world; and

–    The exceptionally high level of Australian home prices.

The potential for further losses to Superannuation products in the period ahead will play an even greater role in the financial position Australians find themselves in going forward, given the increase in compulsory superannuation from 9 per cent to 12 per cent, which is being implemented in phases starting in the 2013/14 financial year.

Given high income paying Australians in their early 30’s could put up to three quarters of a million dollars into superannuation (and well over a million for a couple in the same demographic), getting the investment mix right will be critical for most Australians looking to secure their financial future and have a comfortable retirement.

Considering the risks (and opportunities) that exist in this environment, we believe it is a concern that most Australians lack a meaningful exposure to commodities, gold, and resource stocks in their portfolios, and that overlooking these investments could continue to have a drag on the returns their superannuation funds generate.

There are, however opportunities for Australians to mitigate some of the risks in their existing superannuation funds, as well as open their portfolios to the opportunity of participating more directly in the mining boom.

Some superannuation fund platforms enable direct share investments, or enable individuals to buy Exchange Traded Funds (ETFs), some of which are linked to the resources sector.

Whilst not necessarily appropriate for everyone, setting up a Self-Managed Superannuation Fund (SMSF), gives the individual complete control and flexibility to invest in physical metals and ETF’s, as well as resource stocks, including the juniors, which are not necessarily available through the traditional funds and platforms.

Setting up a SMSF has become cheaper, more efficient and more accessible as the size of the market has grown (it is now the largest component of the super industry with well over $400 billion under management).

With the right advice, and appropriate administration, it is now a relatively straightforward process setting up an SMSF, and it enables Australians to take complete control of this important asset.

There are other benefits around estate planning which are also worth considering.

Dissatisfaction with existing Superannuation funds, coupled with the control and flexibility an SMSF gives you in terms of where to put your money is the main reason why the SMSF sector is the fastest growing component of Australia’s superannuation landscape, with over 2,100 new funds being created every month according to the Australian Tax Office.

Investment opportunities individuals could access via an SMSF include assets like physical gold and silver, which have traditionally been ignored by large fund managers (and still are being ignored).

Investors could also choose to allocate a portion of their capital into commodities more directly, via an ETF.

Commodity ETFs issued by companies like Betashares and ETF Securities now cover specific products like wheat and oil, or one can choose to diversify across a basket of commodities, via products which have exposure to a combination of energy, agriculture, base and precious metals.

Australians could also invest some of their superannuation monies into specific mining companies they (or a broker they trust) are familiar with, or a broad range of junior resource companies.

A diversified exposure could be achieved via ETFs like the Digga Australian Mining ETF (ASX code DGA), or through the use of managed funds which specialize in the sector, like the LSC Australian Resources Hi-Alpha Fund, which as at 31 March 2012 had returned 37.4 per cent over 3 years, compared to only eight per cent for most Australian Super Funds.

In conclusion, there are many ways that every day Australians can invest in and benefit from the resources boom, and the current economic environment.

Returns equal to or below the cash rate should not be seen as acceptable. Whilst the Superannuation sector continues to innovate to reduce costs, there does not seem to be the same focus on reviewing investment strategies to capitalize on stronger performing assets.

Considering the return potential on offer in Australian mining and resources, as well as the inflationary protection commodities (especially gold) offer investors, now is the time for all Australians to review their current arrangements to ensure they are aware of the underlying investment strategy of their fund.

The emerging world will need natural resources, and the traditional asset allocations in larger funds are not necessarily best positioned to capture this. Australians are often not participating in this opportunity because of the lack of education and information, but this is becoming more readily available.

LJ Financial Group is partnering with the resources sector to increase awareness of the importance of investment in the current boom. The firm is independent (therefore not aligned to any of the larger funds or banks), and tailors advice which capitalizes on opportunities within the changing economic environment. The company conducts monthly seminars in its offices in Sydney, and produces a weekly publication, the ‘LJ News’, which people are welcome to subscribe too via the company website at www.ljfinancial.com.au