Super Funds Return To Earth As Inflation Spooks Markets

After delivering a lofty 13.5% return in 2021, super funds had a rough start to the new year with the median growth fund (61 to 80% in growth assets) down 2.2% in January. That fall, however, was far less than the fall in local and overseas share markets.

Chant West Senior Investment Research Manager, Mano Mohankumar, said that volatility returned to investment markets in January as inflation fears ramped up. “The US experienced its highest 12-month inflation rate in nearly 40 years and that fed into revised expectations of how quickly central banks may raise interest rates. That was enough to trigger the falls in listed share markets and the rise in government bond yields. In a matter of a few weeks, the number of interest rate hikes expected this calendar year from the US Federal Reserve has increased from three to six.

“To a lesser extent, tensions about the build-up of Russian forces on the borders of Ukraine also weighed on markets, as did the increasing show of political and economic solidarity between Russia and China.

“Over the month, Australian shares fell 6.5% while international shares slid 4.9% in hedged terms. The depreciation of the Australian dollar (down from US$0.73 to US$0.71) reduced that loss to 2.2% in unhedged terms. As government bond yields rose so bond markets fell, with Australian and international bonds retreating 1% and 1.6%, respectively. While these safe haven assets were in the red, they still fell far less than share markets.

“At times like this, it’s important to remind fund members of two keys lessons from the past two years, the first being the benefits of diversification. Most Australians have their super in well diversified growth options that have their investments spread across a wide range of growth and defensive assets, including alternative and unlisted assets. That diversification helps cushion the blow during periods of share market volatility. At the same time, with over 50% invested in share markets, growth options are able to capture a meaningful proportion of the gains when markets perform strongly.

“The second vital lesson is the importance of maintaining a long-term focus and remaining patient. We caution members who attempt to time the market during periods of volatility, as it almost invariably results in worse longer-term outcomes than if you remain patient and ride out the ups and downs. By switching to cash or a lower risk option after a period of share market weakness, you crystallise your losses and potentially miss out on some or all of the subsequent rebound. We would always encourage members to seek some financial advice - either from their fund or from an outside adviser - before switching investment options.”

Table 1 compares the median performance for each of the traditional diversified risk categories in Chant West’s Multi-Manager Survey, ranging from All Growth to Conservative. Over all periods shown, all risk categories have met their typical long-term return objectives, which range from CPI + 2% for Conservative funds to CPI + 4.25% for All Growth.


 

Lifecycle products behaving as expected

Mohankumar says that while the Growth category is still where most people have their super invested, a meaningful number are now in so-called ‘lifecycle’ products. “Most retail funds have adopted a lifecycle design for their MySuper defaults where members are allocated to an age-based option that’s progressively de-risked as that cohort gets older,” he said.

“It’s difficult to make direct comparisons of the performance of these age-based options with the traditional options that are based on a single risk category, and for that reason we report them separately. Table 2 shows the median performance for each of the retail age cohorts, together with their current median allocation to growth assets. For comparison purposes it also includes a row for traditional MySuper Growth options – nearly all of which are not-for-profit funds. Care should be taken when comparing the performance of the retail lifecycle cohorts with the median MySuper Growth option, however, as they’re managed differently so their level of risk varies over time.”



Despite the share market falls in January, options that have higher allocations to growth assets have done better over most periods shown. Younger members of retail lifecycle products – those born in the 1970s, 1980s and 1990s – have either outperformed or performed broadly in line with the MySuper Growth median over the one-year period and longer. However, they’ve done so by taking on significantly more share market risk. On average, these younger cohorts have at least 20% more invested in listed shares and listed real assets than the typical MySuper Growth option.

The 1960s cohort has generally underperformed the median MySuper Growth option. This is partly due to a lower allocation to growth assets up until more recently, as lifecycle product providers revised their glide paths with de-risking commencing at older ages. Another reason for this underperformance is a lower allocation to unlisted assets which have performed well and a higher allocation to traditional defensive asset sectors, such as bonds and cash, which have been the weakest performing asset sectors since the introduction of MySuper. The oldest cohorts (those born in the 1950s or earlier) are relatively less exposed to growth assets so you would expect them to underperform the MySuper Growth median over longer periods. Capital preservation is more important at those ages, so while they miss out on the full benefit in rising markets, older members in retail lifecycle options are better protected in the event of market weakness. However, in January, these older cohorts fell just as much as the median MySuper growth option. This was mainly due to their higher allocation to listed property and bonds, which were in negative territory over the month, and a much lower allocation to unlisted assets (unlisted property, unlisted infrastructure and private equity) which held up as they aren’t revalued as frequently.  

Long-term performance remains above target

MySuper products have been operating for just less than eight years, so when considering performance it’s important to remember that super is a much longer-term proposition. Since the introduction of compulsory super in 1992, the median growth fund has returned 8.2% p.a. The annual CPI increase over the same period is 2.4%, giving a real return of 5.8% p.a. – well above the typical 3.5% target. Even looking at the past 20 years, which now includes three major share market downturns – the ‘tech wreck’ in 2001–2003, the GFC in 2007–2009 and COVID-19 in 2020 – the median growth fund has returned 7.1% p.a, which is still well ahead of the typical return objective.

The chart below shows that, for the majority 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.








International share market returns in this media release are sourced from MSCI. This data is the property of MSCI. No use or distribution without written consent. Data provided “as is” without any warranties. MSCI assumes no liability for or in connection with the data. Product is not sponsored, endorsed, sold or promoted by MSCI. Please see complete MSCI disclaimer.