Investment report

Another financial year has just ended. Indeed, depending on how you look at		Share |
it, so has the last financial year of the first decade of the new millennium. This is not a bad time to step back from the short term gyrations of investment markets (which have certainly been in plentiful supply over the last few years) and examine the longer term picture.

Catholic Super has now been established for nearly 40 years. Up until 1997, the Fund was invested as a single portfolio. That single portfolio was effectively the forerunner of the Balanced Option now offered under the Fund’s Managed Choice program.

The annualised returns recorded on this Fund/option over each decade of its existence, and the return for the full period, are shown in the table below, together with the inflation rate in Australia over the corresponding period.

% per annum (pa)	1970s	1980s	1990s	2000s	Overall Period
Average Annual Return (a)	11.1	16.5	8.9	5.4	10.4
Average Inflation (b)	10.5	8.1	2.0	3.1	5.9
Real Return	0.6	8.4	6.9	2.3	4.5

• (a) Prior to 1991, the Fund had a January year end. Also, prior to 1997, returns were allocated to members’ accounts on a crediting rate basis and the year-by-year crediting rate did not precisely match the investment return. Accordingly, the returns shown are indicative.
  
  
• (b) Because the Fund had a January year end prior to 1991, the periods to which the inflation numbers relate do not coincide precisely with the investment return periods.

Of course, many things have changed over this time. For starters, the make-up of the Fund’s portfolio has evolved in response to market developments and to changes to the regulations governing superannuation fund investment including the taxation arrangements.

Nevertheless, the broad risk profile and investment objectives have not altered markedly. In particular, throughout the 40 year period, the Fund/Option has been invested to generate an attractive real return over the longer term but without taking on excessive risk. This profile has been similar to that according to which most Australian superannuation funds have been invested over the period. With this in mind, some interesting points arise from examination of the long term results:

• Nominal returns achieved in the most recent decade have been well below those recorded in earlier decades, especially the 1970s and 1980s.
  
  
• Inflation during the 2000s has also been well below that experienced in the 1970s and 1980s, so the 2000s look considerably better in real terms (i.e. net of inflation).
  
  
• Even so, the most recent decade has been somewhat disappointing with real returns below the long term average and below those which most balanced or growth funds seek to achieve over the long term. As an aside however, it is worth noting that things could have been much worse. The performance of Australian portfolios over the last decade has been boosted by the relatively strong performance of the domestic sharemarket. Our market rose by approximately 7% pa over the 10 years to June 2010. By way of contrast, the US market has been essentially flat for the last decade whilst the Japanese market is still 70% below the level reached in the early 1990s. It is also noteworthy that the 7% pa return from the Australian sharemarket over the decade ended June 2010 was only slightly better than the return from Australian bonds over the same period (6.4% p.a.). Indeed, Australian cash delivered a return of 5.6% p.a. over this period, not sharply below the return from shares and bonds.
  
  
• Interestingly, the 4.5% p.a. real return over the full 40 year period has been slightly ahead of the Fund’s current long term CPI-based performance objective for the Balanced Option which is 3.5% p.a. in real terms.

Perhaps the most important observation from the table is that even over quite long term periods such as a decade, the real return which will be generated by a well-diversified portfolio with a balanced or growth orientation, or any investment portfolio for that matter, must be expected to vary substantially. Outcomes will depend on the economic and market conditions experienced over the period, and these are highly uncertain at the outset of any period.

Catholic Super offers other Managed Choice and Build Your Own options under our member investment choice program. Some have a lower risk/return profile than the Balanced Option, and others have a higher risk/return profile. Two of these options were introduced in 1997 whilst the range of options was expanded in 2003. Accordingly, they do not have the same performance history as the Balanced Option. Indeed, the options introduced in 2003 must still be seen as relative newcomers and their performance histories do not even span the full 2000s decade.

These options have had most or all of their respective lives through the 2000s decade which, as illustrated above, has not been a particularly favourable period for investment returns generally. Nevertheless, the broad pattern of returns between the options has been:

• The options with a more aggressive risk profile have recorded returns exceeding those of the Balanced Option.
• The options with a more conservative risk profile have delivered returns which are lower than those of the Balanced Option.

In short, by and large, members who have elected to take additional risk have been rewarded for doing so. Nevertheless, consistent with the generally modest real returns over the period since these options have existed, the margin of additional return has been more modest than was probably expected at the outset.

We expect that the broad pattern of outperformance by riskier portfolios will be repeated over long periods into the future. However, it is by no means certain that this will be the case…..almost nothing is certain in the world of investments. And, as alluded to above, the margin of additional return that riskier portfolios may deliver is highly unpredictable.

Garrie Lette Chief Investment Officer Published August 2010