Super funds have continued their impressive COVID bounce-back, with the median growth fund (61 to 80% in growth assets) up 2.2% for the month of April. This brings the return for the first 10 months of the financial year to a remarkable 14.7%. With less than two months of the year remaining, a final result in double-digit territory is looking increasingly likely.
Chant West Senior Investment Research Manager, Mano Mohankumar says that a double-digit return would have been inconceivable a year ago. “Should growth funds finish the year at or around the end-April level, it would represent the highest annual return since 2012/13 when they surged 15.6%. They’ve shown their resilience – as we saw last financial year when they limited the COVID-induced damage to post a small loss of 0.6% – and now they’ve shown their powers of recovery.
“The cumulative return since the end of March last year is about 22%, which is astonishing given the health concerns, disruptions and economic damage caused by COVID-19. It also means that we’re more than 7% above the pre-COVID crisis high that was reached at the end of January 2020.
“Share markets, which are the main drivers of growth fund performance, had a strong month in April. Australian shares were up 3.7% for the month. International shares were up 4.1% in hedged terms but the appreciation of the Australian dollar over the period pared the gain back to 3.2% in unhedged terms.
“In the US, the vaccine rollout gained further momentum with about 70% of Americans now having had at least one shot of the vaccine. Markets were also boosted by some improving economic data and by President Biden following up his $1.9 trillion fiscal stimulus package with a proposed $2 trillion in infrastructure and manufacturing subsidies. In addition, US companies had a strong quarterly earnings season.
“There was also some encouraging economic data coming out of the UK with the further easing of lockdown measures. In the eurozone, several countries including Germany continued to face rising COVID-19 cases but the pace of vaccine rollouts did pick up in many countries. However, the pandemic remains a major concern in several emerging market countries, most notably India.
“Back at home, all states now have the virus under control despite the odd scare. Domestic borders are all open, and in April we saw the opening of the new trans-Tasman travel bubble. There have been reports of Australia and Singapore planning a travel bubble too, subject to progress on vaccinations. In the past two months, we’ve also seen an increasing number of workers returning to their offices for at least some of the working week.”
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 3, 5, 7, 10 and 15 years, 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.
Note: Performance is shown net of investment fees and tax. It is before administration fees and adviser commissions.
Source: Chant West
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.
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.
1. Performance is shown net of investment fees and tax. It is before administration fees and adviser commissions.
2. January 2014 represents the introduction of MySuper.
Source: Chant West
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 8.1% pa. The annual CPI increase over the same period is 2.4%, giving a real return of 5.7% 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 now COVID-19 – the median growth fund has returned 6.8% 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.
Note: The CPI figure for April 2021 is an estimate.
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.