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Super funds begin rebound, but recovery still a way off

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After losing 12 per cent over February and March during the COVID-19 induced market downfall, new Chant West data has shown super funds began to bounce back in April.

The median growth fund (61 per cent to 80 per cent in growth assets) rebounded by 3.1 per cent on the back of rallying share markets. High growth (81 per cent to 95 per cent in growth) was up by 3.9 per cent, all growth  (96 per cent to 100 per cent growth) saw a return of 5.7 per cent, while balanced (41 per cent to 60 per cent growth) saw a return of 2.3 per cent. 

The conservative option (21 per cent to 40 per cent growth) saw a return of 1.4 per cent.

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But the return for the 10 months of the financial year to date is in the red at -3.3 per cent.

International shares were up 10.6 per cent in hedged terms but the appreciation of the Australian dollar over the month (from US$0.61 to US$0.65) reduced that gain in unhedged terms to 3.6 per cent. 

On average, Chant West noted, funds currently have about 70 per cent of their international shares exposure unhedged – with the foreign currency exposure typically providing a natural hedge against share market falls, as we saw in February and March.

Chant West senior investment research manager Mano Mohankumar noted investors grew more optimistic during April as coronavirus curves flattened around the world and lockdown expectations eased and economies started to reopen. 

“While this provided some relief after the pounding markets took in the previous two months, it’s still far too early to tell what the full impact of COVID-19 will be on individual companies, industries and the global economy,” Mr Mohankumar said. 

“While some countries are easing restrictions to varying degrees, the dire situation unfolding in the US remains a serious concern.

“We are heading towards a global recession, but we don’t know what the shape of that recession and the eventual recovery will be. However, we do know that markets bounce back faster than economies.”

Regardless of the recovery pace, Chant West expects heightened volatility to continue as investors react sharply to news.

Despite the February and March losses, the researcher stated all risk categories met their typical return objectives over seven and 10 years. Over 15 years, only the highest risk all growth category fell short, at 6.9 per cent per annum, but the return also included the full global financial crisis period during which the option was worst affected, losing 40 per cent.  

Since the introduction of compulsory super in 1992, the median growth fund has returned 7.9 per cent per annum and the annual consumer price index (CPI) increase over the same period is 2.4 per cent, giving a real return of 5.5 per cent per annum – above the typical 3.5 per cent target.

“Even looking at the past 20 years, super funds have returned 6.3 per cent per annum, which is ahead of the typical return objective,” Chant West stated in its analysis. 

“Let’s not forget that the 20-year period now includes three share major market downturns – the ‘tech wreck’ in 2001-03, the GFC in 2007-09 and now COVID-19.

“With the median growth fund return sitting at -3.3 per cent for the first 10 months it seems probable, but not certain, that the current financial year will produce a negative return. 

“If so, that would be the fourth negative year in 28, an average of one every seven years. The typical risk objective for growth funds is no more than one negative year in five, so even if this year is negative it will still be well within the expected risk parameters.”

Lifestyle products, where members are allocated to an age-based option that is progressively de-risked as members become older, were reported to be behaving as expected. 

Despite a positive return in April, the setback in earlier months resulted in those options that have higher allocations to growth assets faring worse over all period up to one year. 

Younger cohorts in retail lifecycle funds were said to underperform the MySuper Growth option because they don’t have the same level of diversification as many of the not-for-profit funds. 

Chant West stated not-for-profit funds have higher allocations to unlisted assets (unlisted property, unlisted infrastructure and private equity) at about 21 per cent on average, compared to the retail lifecycle fund average of 5 per cent for the younger cohorts.

“These assets have been proven to add value over the long-term, not just for their diversification qualities but also because they generate an illiquidity premium in their returns relative to listed markets,” Chant West’s analysis said. 

“However, any performance comparison at the end of April is further complicated by the fact that some funds have devalued their unlisted assets more aggressively than others.”

 

Super funds begin rebound, but recovery still a way off
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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