Fresh from delivering a staggering 18% return for the 2020/21 financial year, super funds got off to a bright start to the new financial year with the median growth fund (61 to 80% in growth assets) up 1.1% in July.
Chant West Senior Investment Research Manager, Mano Mohankumar says funds have picked up from where they left off last financial year. "It's a solid start, and a continuation of the remarkable bounce-back we've seen over the past 16 months. The cumulative return since the COVID low point at end-March last year is now about 27%, which is astonishing given the ongoing disruptions caused by the pandemic. Not only have we recovered all the losses incurred in the early COVID period, but we're now sitting about 12% above the pre-COVID crisis high that was reached at the end of January 2020.
"July was another positive month for share markets, with Australian shares rising 1.1%. International shares were up 1.7% in hedged terms, but that was boosted to 4% in unhedged terms because of the depreciation of the Australian dollar over the month (down from US$0.75 to UD$0.73). Notably, while most developed markets rose, emerging markets shares were down 4.7% in unhedged terms over the month, led by the falls in the Chinese market. That sell-off in China was sparked by the government's regulatory crackdown on the technology and private education sectors. Bonds had a very strong month with domestic and global bonds up 1.8% and 1.3%, respectively.
"In the US, a strong company earnings reporting season overshadowed concerns about rising COVID case numbers, the sustainability of economic momentum and the recent developments in China. In the eurozone, vaccine rollouts accelerated in Germany, Italy and Spain which provided hope that further lockdowns might be avoided despite increasing cases of the Delta variant. In the UK, most remaining restrictions were lifted and new COVID case rates actually slowed as the month progressed despite the economy opening right up.
"Back at home, more than half the population is now in some form of lockdown, with NSW in particular struggling to contain the spread of the Delta variant. While the vaccine rollout has lagged other developed nations it is now accelerating, with younger people in particular coming forward to be vaccinated. Additional supplies are on their way, including 1 million doses of the Pfizer vaccine acquired from Poland. In addition, the first million doses of the Moderna vaccine are scheduled to arrive in September with further batches of 3 million doses due to arrive in October, November and December. Importantly, National Cabinet has now endorsed a four-step plan for the easing of restrictions as successive vaccination milestones are reached."
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."
As a result of the strong recovery since the end of March last year, the options that have higher allocations to growth assets have now done better over all periods shown. Younger members of retail lifecycle products – those born in the 1970s, 1980s and 1990s – have outperformed the MySuper Growth median over all periods shown. 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 older cohorts (those born in the 1960s 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 a market downturn.
Long-term performance remains above target
MySuper products have only been operating for just over seven 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% pa. The annual CPI increase over the same period is 2.4%, giving a real return of 5.8% pa – well above the typical 3.5% target. Even looking at the past 20 years, which now includes three share major 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% pa, 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.