Share returns diving to 30-year low

While global efforts to stem a further market meltdown have lifted hopes, fund managers remain caught out by the slump, with most facing double-digit losses for the year with the global credit crisis spilling into the broader sharemarket.

Significantly, hedge funds which thrive on volatility and often charge clients higher fees for the promise of higher returns, were worse performers than the lower-cost, long-term fund managers.

The median Australian share fund last month fell 9.9% and is down 25.5% for the year to September 30, according to Mercer, an investment consultancy.

"It's on track to be the worst annual performance since 1974," said Mercer principal, David Carruthers.

At that time, a surge in oil prices caused Australian shares to slump 32%.

Returns from Australian-focused hedge funds were down 27.2% over the year to September 30, while one-month returns of -12.3% underperformed long-only funds.

The institutional and hedge fund managers have mandates that cover hundreds of billions of dollars worth of superannuation funds.

Performance by the managers ultimately affects retirement savings returns. None of the 100 funds tracked by Mercer delivered a positive return for September, when the collapse of Wall Street investment bank Lehman Brothers triggered a broader market collapse.

The best performer - Lazard Select Australian equity fund - contained losses to just 0.9%.

Fund managers chose to look through the extreme volatility of September, but even on an annual basis, returns are deep in the red.

The best performer on a one-year and three-year horizon - the time frame commonly used by fund managers - was the $300million SGH20 fund operated by Melbourne-based boutique manager SG Hiscock.

Until August, the SGH20 fund had the distinction of being the only Australian share fund to achieve positive returns for the year, but could not sustain this during September as the market fell away.

The return on the SGH20 fund is down 6.6% on the annual basis, but it has the best three-year performance, with returns up 16.8%.

This compares with the average Australian share fund returns of 5% over three.

SGH20 manager Robert Hook believes it is important to keep sight of the valuation and fundamentals of a stock despite the market chaos.

"Unless you believe it's the end of the world, these prices are just falling to excess," Mr Hook said.

The fund holds a maximum of 20 stocks and has been underweight in the Australian financial sector, which has helped its performance relative to the index over the year.

Resource sectors were hardest hit during September as chaos in credit markets dimmed the outlook for global growth and commodities prices.

Energy stocks fell 13% and materials stocks such as BHP Billiton and Rio Tinto on average were off 22.5%. Financial stocks outperformed all other sectors, falling just 1.6%.

Among those caught up in the market rout was the Alpha Value fund.

It began winding back its holdings of diversified financial stocks at the start of the year and is down 27.3% on an annual basis, but has outperformed most peers with a 7% return on a three-year horizon.

Alpha fund manager Victor de Lorenzo has stuck by his holdings of key banking stocks.

"If there's nothing wrong with the story and its not greatly overvalued, we'll sit in the stock and ride out the relative fluctuations of the sharemarket," Mr de Lorenzo said.

Yesterday, former Reserve Bank governor Bernie Fraser called for calm amid world financial turmoil and urged Australians to view superannuation as a long term investment.

"In the longer term, share markets have followed an upward trend and have out-performed most otherasset categories," Mr Fraser said.