Are Your Retirement Fund Returns for 2008 as bad as this?

A friend of mine has emailed me his WRAP account Mutual Fund returns for 2008.

My friend had all his retirement nest egg in a WRAP account until recently. It is one of the top fund mangers in Australia. When the market started going crazy in January he became very risk averse as he watched his money disappear. It affected all assets in his WRAP account.

So in February he decided to redeem what he could for minimum loss and ride out the stock market volatility with the rest and hoped to reduce his exposure to equities if the market bounced.

He had a 50/50 balanced portfolio and so pulled out the 50% of his nest egg he had in fixed interest and cash. This is now safely earning 8% interest in term deposits. He’s thankful for that as he now has $21,343.05 in 5 months worth of interest on that money. The rest has been left to the ravages of the markets.

He just got his end of financial year report to June 2008 and it makes interesting reading. He has given me permission to post his result here.

I have taken the June 2007 figure as the base for comparing the returns to June 2008. In June 2007 he had a fully diversified properly asset allocated portfolio in a WRAP Account. This was split as follows:

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As you can see the asset allocation really didn’t matter. Diversification as defined by the Mutual Funds industry is being diversified in mutual funds only. This is not diversification.

The words “Asset Allocation and Diversification” have been high-jacked by the Fund Management industry and misused by them to imply safety through diversification in mutual funds. These words mean nothing here.

I hope you can see now why you need to separate your risk-based assets from your safe assets. Poor returns cannot be hidden in averaging out the returns between risk-based assets and safe assets. This gives you a false sense of security in my view. Risk-based assets must be watched and closely managed at all times.

What happened to diversifying into gold, real estate, commodities, art and antiques? These may have provided better diversification and asset allocation. Unfortunately these will not provide recurring income for the fund managers and so are not offered to the public.

What’s even more interesting is our Australian newspapers report that “most funds” expect to report average losses for balance funds of about 6.4% and for more aggressive funds 10%.

I’m no mathematician but how do they get to that figure? My friend had a 50/50 balanced WRAP account. He took 50% of the money out and invested it elsewhere.

He asked that the balance be left in the funds as it was. No re-balancing was to take place. You can see the results. (There were some small changes in some fund allocations but not so much as to make a major difference).

The average losses for all balanced funds in Australia is 6.4%. My friend lost 22.8% on the part of his portfolio that was invested in risk-based assets like property and equity funds. So what would the Fixed Interest and Cash part of the portfolio have to achieve to give an average loss of 6.4% on his portfolio?

Let Total Average Annual Returns for my friend = Reported Average Annual Returns = 6.4%

((Property + Shares Returns)% + (Fixed Interest + Cash Returns)%)/2 = Total Average Annual Returns %

Therefore:

(Fixed Interest + Cash Returns)% = (2 x Total Average Annual Returns %) – (Property + Shares Returns)%

(Fixed Interest + Cash Returns)% = (2 x -6.4) – (-22.8) = 10%

So if he had left his money in Fixed Interest and Cash in the WRAP Account these assets would have had to give him a 10% return on his money in order to give him a 6.4% loss for the year overall.

I think I did that right. If not can someone put me straight on this please?

Unfortunately I don’t have his actual returns at the point he exited the Fixed Interest and Cash at the end of February. But it still raises a big question mark.

Would Fixed Interest and Cash give him a return of 10% for the year to give him the industry average return of a 6.4% loss? I do not think so. We know in the US interest rates went down not up.

Where do I sign to get 10% return investing in Mutual Funds in Fixed Interest and Cash? I want to buy now.

Does anyone want to share their returns for this year, even anonymously? Remember if you are in retirement negative returns in the early years can have a serious affect on the long term survival of your nest egg.

Please add your comments below.

6 Responses to “Are Your Retirement Fund Returns for 2008 as bad as this?”

  1. Peter says:

    Hi David,

    I too am amazed at the newspaper reports that “most Super funds will have lost 6.4% for the 07/08 financial year”. However, when they say a “balanced” fund I think it must mean about 80% cash and 20% at risk and “agressive” is 60% cash and 40% at risk! I have never been able to reconcile the Super fund stated gains/losses against the actual so I have long since given up and just use my own actual figures. I think it is a bit like a statistician can prove anything with statistics! Your friend’s figures look far more like the real situation than any quoted 6.4% loss. A lot of Super funds send out 6 monthly reports and it would be interesting to see their claimed loss for the 6 months to June 30, 2008!

    Cheers… Peter

  2. admin says:

    Hi Peter,

    I’m glad you agree.
    I do believe the Funds must squirrel some profits away for a bad winter like now and pump them back into the fund just before posting the results. The aim is to try and stay in the Fund Pack and in the middle for safety. If they can do that and beat an index by being less negative then it is more likely they will retain their funds.
    Fund Managers are paid on the size of the funds under management so their number one task is to try to convince us not to redeem our money.
    By the way I always thought a balanced fund was just that a 50/50 balance between risk based assets and safe assets. But according to a newspaper article I read a couple of days ago it can be 60/40 or up to 70/30 in favor of risk based assets. That seems odd to me.
    If anyone has a 70/30 “balanced” fund in favor of risk based assets they are in for a shock.

    David

  3. […] equity funds, property funds, fixed interest funds and cash. As I have shown in the post “Are Your Retirement Fund Returns for 2008 as bad as this“, this is not proper diversification. This year all asset classes are down it […]

  4. […] I do want to talk with you on this. But at present my thinking is that I would be better off in cash because I do believe that a down-turn will come and it will be 30-40% when it happens. (The Aussie Index has been down 29% this year and No, I don’t have a crystal ball) I do not believe any of the large Wrap Account managers have anything in place to protect the capital of retirees who are now relying on that money for their retirement. Nor do I believe they will be in a position to get my portfolio into cash quickly when everyone else is rushing for the same exit. Plus with the “Long Term” mindset they are more likely to decide to keep me fully invested and ride out the down-turn. (This is exactly what they did to my friend and look at his results) […]

  5. […] we are told the average loss on a Balanced Portfolio is only -6.4%. But I have shown that my friend’s portfolio is down 22.9% on his risk-based assets. This is what you need to find out about your […]

  6. […] I first wrote a post on my friend’s WRAP account Mutual Fund Returns for June 2008. You can review the results at, “Are Your Retirement Fund Returns for 2008 as bad as this?“. […]

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