Not So Super Outlook

Dear Reader,

What a difference a few months make.

As reported in Money Management on 15 January 2020:

The latest SuperRatings data found 2019 was the best year for super funds since 2013, with the median balanced option returning 13.8%.

On the strength of that stellar performance, what was the outlook for 2020? (Emphasis added):

SuperRatings executive director, Kirby Rappell, said: ‘We’re anticipating a solid year for super in 2020, but the key challenge for funds will be the low return environment.

Fast forward to the latest industry update — from Super Guide on 30 April 2020 — and solid has turned a little flimsy (emphasis added):

It will come as no surprise that super funds are cruising towards negative returns this financial year, but the damage from the COVID-19 iceberg may not be as bad as many feared.

A bit of rough and tumble in the markets has dinted the performance of the average ‘balanced’ fund…

The Rum Rebellion

Source: Super Guide

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Let’s put the three-month and one-year performance numbers to one side.

Look at the three- and five-year returns of 3.6 % and 4.1% respectively.

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These are — at best — only slightly better than the much lampooned term deposit.

But, as we are told, super is for the longer term.

In theory that is true. Unless of course you’re within striking distance of retirement. Then that long-term horizon suddenly looks a lot closer.

The latest superannuation performance data gave me a flashback to the 3 February 2020 issue of The Gowdie Letter:

In late January, a reader of The Gowdie Letter sent me this email.

Hi Vern

Happy New Year.

I read with interest an article in the Melbourne Sun on Thursday 16 January 2020. It was headed “Nest eggs reap super returns”.

In the article which you may care to read, states the following points; Super funds have enjoyed their best returns since 2013, the medium balanced super fund returned 13.8 per cent for 2019. best gains in 5 years. Returns on balanced funds have average 7.7 per cent over the past decade. The article anticipates strong growth for the coming year.

Super ratings said the medium growth super funds returned 16% for 2019. Balanced funds for 5 years returned 8 per cent. Even the steep losses recorded through the global financial crisis over a 15 year period the medium balanced fund with a starting balance of $100,000 would be worth $259,000.

Vern, those figures are unbelievable it makes me wonder if I have made a big mistake listening to your advice or writings over the last 4 years. 15 years is a long time, sitting in low paying interest is a big cost to pay on the assumption that the great depression is going to hit our shores and all will be wiped out. I would appreciate your comment on this article.

Cheers Brent

Look at the difference between a few months ago and now.

Performance Time Frame Then Now
5 years 8.0% 4.1%
10 years 7.7% 5.9%

That’s a bit more than a rounding error.

At present, Wall Street has done an excellent job of lulling investors into a false sense of security.

What happens when the volatility resumes in earnest?

The longer-term performance figures are going to be subjected to even more compression.

This is an edited extract from the 3 February 2020 issue of The Gowdie Letter:

The observations and comments expressed by Brent are entirely understandable.

Watching your portfolio make pedestrian progress, while others are running — even, sprinting — ahead, is not easy.

However, to assist us in making rational choices, we have to remove the emotion and weigh the published facts against historical evidence.

Hiding in plain sight

Sometimes the knowledge we seek is hiding in plain sight.

Let’s start with this statement…

“…the medium balanced super fund returned 13.8 per cent for 2019. best gains in 5 years. Returns on balanced funds have average 7.7 per cent over the past decade. The article anticipates strong growth for the coming year.”

The 10-year average (January 2010 to December 2019) for balanced funds was 7.7 per cent per annum.

The start date for calculating the average return is AFTER the GFC.

This was the best possible time to commence the performance meter…starting from a low point and finishing on a high point.

During this “best of times” performance period, the average — the smoothing out of best and worst years ‚ was 7.7%.

However, in 2019, the medium balanced super fund returned 13.8%…almost double the 10-year average.

That burst of superior out performance should be a warning sign.


Because everything reverts to the mean. Out-performance has to be countered by under-performance.

The reality of how markets function is hiding in plain sight in the data, yet, people don’t see it.

They see high past returns — emphasis is on, past — and interpret this as a signal to proceed rather than to act with caution.

And then there’s this old industry chestnut…

The article anticipates strong growth for the coming year.

Of course it does. What has been, will continue to be so.

Extrapolation of past returns is a trap most investors/analysts/commentators fall into…time and time again.

Does longer-term data bring greater clarity?

To further validate the argument, the Melbourne Sun article makes reference to longer term performance…

Even the steep losses recorded through the global financial crisis over a 15-year period, the medium balanced fund with a starting balance of $100,000 would be worth $259,000.

Let’s look at the maths behind those numbers.

Turning $100k into $259k over a 15-year period (January 2005 to December 2019) requires a 6.55 per cent per annum return.

The Rum Rebellion

Source: Money Chimp

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So, this is what we know so far from the article …

Time frame Performance
1-year 13.8% p.a.
10-year 7.7% p.a.
15-year 6.55% p.a.

When you include a market downturn (2008/09) in the data, the performance figures start to come into better focus.

NOTE: these numbers also highlight that the one-year and 10-year figures are ABOVE the 15-year average…which means…there has to be a below average period somewhere in our future.

I said “start to”…because this factual data doesn’t give us the complete picture.

How so?

We know from history that market cycles consist of two phases — up AND down.

Assuming market cycles have not been repealed by the Fed, then we can confidently state that, sooner or later, the cycle will rotate.

In going back to 2005, we’re only looking at performance data from one and a half cycles.

2005 to 2007 — up

2008 to 2009 — down

2010 to 2019 — up

While 15 years qualifies — in most people’s thinking — as long term, the timeframe has to be seen in the context of market cycles.

To reverse engineer this, let’s look at the performance distortion that comes from measuring the opposite…two down and one up phases. 

2000 to 2003 — down

2004 to 2007 — up

2008 to 2010 — down

The Rum Rebellion

Source: Macro Trends

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Based on this 10-year period (which, again, most people think is long term), the US share market returned MINUS 30%.

Without the inclusion of complete market cycles in the performance data, you are being denied the opportunity to formulate a balanced (no pun intended) opinion. 

A more accurate assessment on the average performance of balanced funds won’t be available until after the current cycle is complete…at the bottom of the next down phase.

When that rotation does occur, those 15-year, 10-year and one-year averages are destined to be a whole lot lower…which will further underline just how exceptional the past 12-month and 10-year figures really have been.

Comparative performance

We know that…over a 15-year period the medium balanced fund with a starting balance of $100,000 would be worth $259,000.

So, how have term deposits performed over the past 15 years?

The following chart was published by the RBA in March 2019. 

The Rum Rebellion

Source: RBA

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For the purpose of the exercise — based on the data and allowing for unders and overs — the average of the term deposit rates can be divided into two periods.

Jan 2005 to Dec 2012 (eight years) at 5.75%

Jan 2013 to Dec 2019 (seven years) at 3.5%

These rates could have been higher or lower depending on the institution and/or term, but they serve as a reasonable guide.

Here’s the calculations…

The Rum Rebellion

Source: Money Chimp

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The Rum Rebellion

Source: Money Chimp

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Over the same 15-year period, $100,000 invested in term deposits would be worth around $199k.

On face value, the case against term deposits has been proven. The balanced super funds have outperformed term deposits by $60,000.

That’s a lot of money.

However, as I’ve said many times before, all is not what it seems in the investing world.

While this may appear to be an “apples with apples” comparison. It isn’t. Balanced funds are “apples” and term deposits are “pears”.

Compare the PEAR

Sorry, could resist the play on words with the Industry Super Fund ads…compare the pair.

As mentioned above, the 15-year performance data is based on one and a half phases…we are yet to see what the downside does to account balances.

How do we turn balanced funds from “apples” to “pears”?

We can make an assumption on what impact a possible downturn could have on balanced funds.

To do this we can use the Super Ratings performance table for the average balanced superannuation fund.

The Rum Rebellion

Source: Super Ratings

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For the purpose of highlighting the effect of full cycle rotation on account balances, we’ll use the returns from the previous market downturn…2007/08 and 2008/09.

Staring balance Annual Return End Balance
$259,000 MINUS 6.95% $242,000
$242,000 MINUS 12.9% $214,500

For comparison purposes, let’s say we lock in a two-year term deposit with Judo Bank (an APRA approved deposit taking institution) for 2%.

And just to verify that rate is possible… 

The Rum Rebellion

Source: Judo Bank

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Here’s the numbers…

Staring balance for T/D Annual Return End Balance
$199,000 PLUS 2% $203,000
$203,000 PLUS 2% $207,000

The performance gap narrows considerably.

It’s as little as $7,000 after 17-years…an extra 3.5% return (in TOTAL) for all that additional risk.

Is that a fair risk versus reward trade-off?Not in my books.

And this comparison assumes we ONLY have a repeat of GFC-type performance.

If, as I suspect, markets — shares, bonds, property and private equity — all get hit much harder than the last downturn, the losses could be significantly higher…possibly taking the longer-term performance of balanced funds (well) below that of cash/term deposits.

Should that very real possibility eventuate, then it makes a mockery of the industry’s whole ‘cash is trash’ mantra.

The lessons are…

Don’t be seduced by periods of superior performance.

Everything — eventually — reverts to the MEAN.

Understand the conditions that produced the returns — positive and negative.

Ask yourself where are we in the cycle and can those conditions be repeated or is the cycle approaching a turning point?

These so-called balanced funds are at risk of becoming very much unbalanced in the coming months and years.

Which means a not so SUPER outlook awaits those who failed to rigourously question the industry’s spin.


Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion