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08 July 2010

Dear Fellow Investor,



As this article is being written, news is starting to break across the wires of the release of the Cooper Review, more formally known as the ‘Review into the governance, efficiency, structure and operation of Australia’s superannuation system’. The review has been chaired by Jeremy Cooper, a former deputy commissioner of ASIC.

Two key reforms that have been recommended by the Review are the introduction of the MySuper default option for all employees and super fund back-office efficiency measures, based around the use of tax file numbers as a ‘key identifier’. These changes, and others discussed in the press over the last twelve months or so, are primarily targeted at reducing the fees and charges incurred by members of Australia’s super funds.

Asset allocation – the ‘elephant in the living room’

One issue that has not received the same attention in the mainstream press has been the asset allocation choices made by Australia’s super funds. This is a telling omission. There is no doubt that costs and fees can make a significant impact on a super fund’s total return over an extended period of time. However, there is also no doubt that an even more dramatic difference can be made by the investment choices made by the trustees.

In 2008-2009, the super fund industry data provider, Rainmaker Group, released its analysis of the Australian super fund industry. It revealed that the typical Australian super fund had about 50% of its funds invested in Australian or international shares. Some funds had a considerably higher proportion in these investments and self managed super funds are reportedly even more heavily exposed.

Shares and volatility

The problem with weighting a fund towards shares is that shares are a very volatile asset class – whether considered internationally or in Australia. For example, the US S&P 500 share index:

  • Dropped by 33% as a result of the 1987 crash.

  • Dropped by 49% as a result of the “tech wreck” at the turn of the century.

  • Dropped by 40-50% as a result of the global financial crisis.

Similarly, the Australian S&P 200 share index hit a high of 6852 in November 2007, before plummeting as low as 3120 in March 2009 – a drop of well over 50%. Further, although Australia escaped the worst of the “tech wreck”, our markets dropped by almost 42% in the wake of the 1987 crash.

This should add some perspective to recent market events and the inevitable talks of ‘asset bubbles’. The collapse in housing prices in the US (of perhaps 40%) in the wake of the subprime fiasco has rightly been regarded as virtually unprecedented. But in the much more volatile equities sector, falls of this magnitude are actually not uncommon. Yet can anyone recall hearing talk of an ‘asset bubble’ in the share market?

Aging of super fund membership

The most common refrain one hears in defence of funds heavily weighted towards shares is that they are suitable for younger investors, who can afford to ride the share market rollercoaster in the quest for higher returns. This ignores at least two important facts:

  • No matter how long the period one has to invest, being forced to draw funds in the aftermath of a 50% decrease in portfolio value is going to affect an investor’s investment outcomes substantially. This is doubly the case in the light of the extended periods it can take for the share market to recover after a collapse. We saw this following the 1987 crash, after which it took until late 1996 for the All Ordinaries Index to achieve consistently the heights it reached prior to the 1987 crash. If the commentariat is right in predicting an extended period of low growth globally, it appears that we will see at least a similar recovery period after the most recent crash.

  • Australia’s super fund members are rapidly ageing, in line with the rest of the population. Regardless of the merits of a higher risk strategy for younger investors, many super fund members simply do not have the same ‘luxury of time’ to risk massive losses on volatile asset classes. For these members, increased exposure to fixed income investments would certainly seem more suitable.


No doubt much good will come of the Cooper review. A focus on transparency and efficiency will certainly benefit investors. However, perhaps it is also time to look at the asset allocation decisions made by super funds. Such a significant weighting to Australian and international shares is certainly questionable in light of their track record of volatility.

With many now predicting an extended period of low growth for the world, fixed income investments might assume a much more significant role in the investment industry generally.

Best Regards
La Trobe Investment Team


La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer
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Research Ratings are subject to change. To view the latest research information please visit or Ratings issued by Adviser Edge Investment Research AFS Licence No. 236783 and Standard & Poors Information Services (Australia) Pty Ltd AFS Licence No. 258896 are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. The ratings are only one factor to be taken into account in deciding to invest. Research Houses receive a fee from La Trobe for rating the product. The Adviser Edge rating is generally a measure of the rated entity's capacity to meet its repayment obligations in all market circumstances. ** 3.5 star rating out of a possible 5 star rating indicates that Adviser Edge believes that La Trobe has performed in line with its peers and exceeded its peers on some fronts.*** S&P rating of 3 out of a possible 5 stars indicates that Standards & Poor's has conviction that La Trobe can generate risk adjusted product returns in line with relevant investment objectives and relative to peers.

# As at 28/02/10 the La Trobe Australian Mortgage Fund had received a Morningstar RatingTM of 5 stars. The Morningstar Rating is an assessment of a fund's past performance - based on both return and risk - which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision.
© 2010 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at

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La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.

* The award was given to the La Trobe Australian Mortgage Fund, Pooled Mortgages Option.

(1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Investors risk losing some or all of their principal investment.

(2) The rating report is available on the La Trobe website or upon request. The rating is only one factor to be taken into account in deciding to invest.

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