Super funds experienced their first negative month in a year with the median growth fund (61 to 80% in growth assets) losing 1% in September as share markets retreated. Despite this setback, growth funds still posted a solid 2% over the September quarter.
Chant West Senior Investment Research Manager, Mano Mohankumar, says that growth funds have over 50% allocated to listed shares on average, so shares remain the main drivers of performance. "Over the quarter, Australian shares were up 1.8%. International shares were up a modest 0.6% in hedged terms but the depreciation of the Australian dollar (down from US$0.75 to $0.72) propelled the return in unhedged terms to 4%.
"Global share markets retreated in September, mainly due to a spike in interest rates prompted by growing concern about emerging inflation. Despite this setback, growth funds have returned a stunning 28% over the 18 months since the COVID-induced low point at end-March 2020, and we're now sitting about 13% above the pre-COVID crisis high that was reached at the end of January 2020.
"In September, the US Federal Reserve announced that it will likely start tapering its quantitative easing program by slowing down the pace of asset purchases, and that the program will finish by mid-2022. This led to bond yields rising. Despite the negative sentiment in September, strong company earnings results saw the US share market slightly up for the quarter. In the eurozone, share markets were flat over the quarter with a healthy earnings season and ongoing recovery from the pandemic being offset later in the quarter by concerns about inflation. In Germany, talks are underway about the formation of a new government after the Social Democrats, led by Olaf Scholz, won the general election edging out Angela Merkel's Christian Democratic Union. In the UK, the share market gained ground over the quarter as the economy opened up with the last COVID restrictions lifted. The Chinese market was down, meanwhile, due mainly to the government’s regulatory crackdown on the technology and private education sectors and concerns about property market debt, highlighted by the Evergrande crisis.
"Back at home, the RBA continued to hold the official cash rate at the historic low of 0.1%. Additionally, in contrast to central banks overseas, it announced it would extend its bond purchase program until at least February 2022. In response to the Delta variant of COVID-19, vaccine rollouts across the country gained significant momentum over the past two months with NSW coming out of lockdown last week and a further easing of restrictions coming into effect yesterday. Victoria's lockdown is set to end on Thursday night with the state due to hit its 70% double dose target earlier than expected."
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 done best over all periods shown with the exception of the past month. Younger members of retail lifecycle products – those born in the 1970s, 1980s and 1990s – have either outperformed or matched the MySuper Growth median over periods longer than three months. 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. However, we note that in the month of September, as bonds were also down, the MySuper Growth median actually outperformed these older cohorts, benefitting from a higher allocation to unlisted assets which generally either held their value or made gains.
Long-term performance remains above target
MySuper products have been operating for 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 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 7.5% 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.