Diversification helps super returns stay afloat

Superannuation fund returns have dropped alongside tense investment markets grappling with the possibility of higher interest rates for longer than expected, according to data from Chant West.

The median growth fund with 61 to 80 per cent in growth assets recorded a 1.9 per cent drop during the month of September, despite the 2023 calendar year seeing 5.2 per cent returns over the first nine months.

“Developed market international shares fell 3.7% and 4% in hedged and unhedged terms, respectively,” Senior Investment Research Manager, Mano Mohankumar, said.

“Emerging markets shares were down 2.3%, Australian bonds fell 1.5% while international bonds fell 1.8% as bond yields rose materially over the month. However, it’s important for super fund members to remember that the majority are invested in portfolios that are diversified well beyond those asset classes, with exposures to cash and meaningful allocations to alternatives and unlisted assets.

“That diversification helped limit the median growth fund’s loss to 1.9% over the month. Given market volatility and the uncertain economic and geopolitical backdrop, it’s a good time to remind super fund members that super is a long-term investment.

“Despite the challenging backdrop over the past three-and-a-half years, the median growth fund is about 17% above the pre-COVID high that was reached at the end of January 2020. More importantly, funds are continuing to meet their long-term return and risk objectives.”

The struggle for super returns mounted as US inflation remains high despite its general downward trend, the Bank of England paused its tightening cycle after 14 rises since the end of 2021, and the European Central Bank signalled its latest 25-basis-point increase could be its last. The Reserve Bank of Australia also decided to keep interest rates on hold at 4.1 per cent for the fourth month in a row.

Mohankumar said the long-term performance of super paints a better picture, since it is “a much longer-term proposition”.

“Since the introduction of compulsory super in July 1992, the median growth fund has returned 7.7% p.a. The annual CPI increase over the same period is 2.6%, giving a real return of 5.1% p.a. – well above the typical 3.5% target,” he said.

“Even looking at the past 20 years, which includes three major share market downturns – the GFC in 2007-2009, COVID-19 in 2020, and the high inflation and rising interest rates in 2022 – super funds have returned 7.2% p.a., which is still comfortably ahead of the typical objective.

“For most of the time, the median growth fund has exceeded its return objective over rolling 10-year periods, which is a commonly used timeframe consistent with the long-term focus of super. The exceptions are two periods between mid-2008 and late-2017, when it fell behind.

“This is because of the devastating impact of the 16-month GFC period (end-October 2007 to end-February 2009) during which growth funds lost about 26% on average.”