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Superannuation is a marathon not a sprint

15 January 2020
Jeremy Wilmot, Head of Advisory Consulting

In the first edition of Money for this decade JANA’s very own Jeremy Wilmot, Head of Advisory, discusses Superannuation performance noting that Superannuation is a marathon and not a sprint. “People invest in Super over a lifetime and not over a year so it is really long term results that matter”. Jeremys’ insightful article discusses this statement in detail.

Our world is accelerating, results are demanded and measured in close to real time, thanks to the availability of data and the technology to analyse it.

Across the superannuation sector we are seeing an increased focus on short-term performance. Data can be broken down month-by-month and year-by-year, with the ranking of funds widely reported and top-rated funds trumpeting their performance.

Transparency of performance – and the calling out of funds who do not deliver for members – should be encouraged, but this short-term focus can be detrimental to superannuation investors in the longer-term. Superannuation is a marathon, not a sprint. People invest in super not over a year, but a lifetime, and it’s long-term results that matter.

If you take a detailed look at long-term performance data, the correlation between 1 year performance and 20 year performance is strongly negative – the likelihood is that a good performing fund over one year will not perform well over 20. In simplistic terms, there is no link between short-term and long-term performance.

Positive long-term performance is the more important guide, and strong long-term performance of a super fund can be lost in single-year data.

The focus on short-term results is potentially creating a riskier environment for the member who needs strong long-term returns to ensure they have a suitable retirement. When chasing immediate returns at the expense of future growth, too often people switch to high-performing funds, or high-performance options within funds, without comprehending the downside. Strong short-term performance is often unsustainable and linked to a specific cycle – it is difficult to position portfolios based on short-term events.

Investors who generate strong long-term returns generally have the same key underpinning: a consistent philosophy and process which they apply through time. This enables them to drive performance through multiple cycles and have proven longevity – they stick to what works.

At JANA, we believe the best superannuation funds adopt an approach to investing that reflects the market environment. It is not a set and forget approach. Simply put, funds will look to reduce risk when markets are expensive and increase risk when markets are cheap. Funds which follow this type of approach do so on the understanding they may sacrifice some shorter-term return, but they will be rewarded in the long-term as history has shown us that it is better to be early, rather than late, when de-risking a portfolio.

If there was a strong connection between short-term performance and long-term performance, then we should focus on short-term performance. However, close analysis of the data reveals the opposite – most good short-term performers don’t deliver better results in the long term.

Looking at the SuperRatings Balanced Fund Survey to the end of October 2019, of the top 10 funds on performance over the past 10 years, only two also achieved top 10 performance over the past year; the remainder didn’t make the list.

All of the top long-term performers have had extended periods of time delivering below median performance. Even the best investors have extended periods of underperformance, highlighting the importance of focusing on a longer-term horizon and a consistent investment approach.

Another way to look at this is the correlation between short-term performance and longer-term performance. As the table below shows, based on the same SuperRatings Survey, the correlation between 1 year and 10 year performance is low at 0.25. Unsurprisingly, as the measurement period of performance increases, the correlation with longer term performance also increases.

If we extend the measurement time period to 20 years, the analysis suggests we should pay even less attention to short-term performance, and even medium-term performance. The correlation between 1 year performance and 20 year performance is actually negative. What the data says is there is no connection between short-term and long-term performance.

Short-term performance should not be ignored, but it also should not be used as a guide to the success over the long-term horizon of superannuation. It is much more important to focus on the drivers of performance and ensuring they are consistent with the objectives of the individual fund. One year returns may create some short-term buzz, but we should be rewarding those funds below that have delivered over the long-term.

Furthermore, spruiking short-term performance is potentially detrimental to long-term retirement incomes. While many strong short-term performers also have solid longer-term track records, there is always the chance that a longer-term laggard has a performance aberration in any one year. If individuals switch to these longer-term laggards based on a single year outcome, then the system is not working. As an industry we should be highlighting strong long term performance as shown in the table below.

The ongoing focus on short-term performance is potentially detrimental to what the superannuation system is trying to achieve. If the key objective of Australia’s superannuation system is delivering retirement income for individuals, why would we focus on 1 year performance? We need to invest our precious superannuation funds for the long-term marathon, not the short-term sprint.

Jeremy Wilmot, Head of Advisory Consulting