Having just delivered a 10th consecutive positive financial year return, super funds have had a mixed start to 2019/20 with markets responding to the escalating tariff feud between the US and China. The median growth fund (61 to 80% in growth assets) was up 1.4% in July. However, with markets down in the first half of August those gains have been reversed and the median fund is in the red for the new financial year so far.
Share markets, which are the main drivers of growth fund performance, were up in July. Australian shares gained a healthy 3% while hedged international shares were up 1.2%. The depreciation of the Australian dollar over the month (down from US$0.70 to US$0.69) pushed that return higher to 2.3% in unhedged terms. Listed property was also in positive territory, with Australian and global REITs up 2.6% and 1%, respectively.
Chant West senior investment research manager Mano Mohankumar says: "Super funds had a good start to the new financial year before trade tensions flared up again earlier this month and sparked anxiety among investors. Markets have become more volatile and are down over August to date, with the latest sharp sell-off sparked by fears of a possible recession in the US.
"It's at times like this that the benefits of diversification are most evident. Growth fund performance isn’t dependent on share markets alone. On average, growth funds have about 55% invested in listed shares and listed property so that leaves a substantial 45% allocated across a wide range of other sectors, including unlisted property and infrastructure as well as traditional defensive sectors like bonds and cash. This helps cushion the blow when there are market falls like those we've seen this month. So while Australian shares and hedged international shares are down 5.5% and 4.7% respectively in August so far, we estimate that the median growth fund is only down 2.2%.
"How fund members react to the negative headlines is important. Older people approaching retirement are naturally more likely to be concerned about seeing their balances go down than people in their 20s or 30s. However, they also tend to be more conservatively invested. We estimate that conservative funds (21 to 40% in growth assets) are only down 0.4% over August to date.
"Members should never forget that superannuation is a long-term game and that funds have a great track record of delivering on their long-term risk and return objectives. So as long as you're in a suitable investment option you should remain patient and not get distracted by the short-term noise. Reacting to bad news and moving into a more conservative option because share markets have fallen can be detrimental. Not only do you crystallise your losses, but you also risk missing out on all or part of the subsequent rebound when markets recover."
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. All risk categories are now ahead of their long-term return objectives over 1, 3, 5, 7, 10 and 15 years.
Source: Chant West
Notes: Performance is shown net of investment fees and tax. It is before administration fees and adviser commissions.
Lifecycle products behaving as expected
Mohankumar says, "While our Growth category is still where most people have their super, 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 is 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."
Source: Chant West
Note: Performance is shown net of investment fees and tax. It is before administration fees and adviser commissions.
While lifecycle is the most common MySuper default in the retail sector, most not-for-profit funds still use their traditional growth options for that default role. A few have gone down the lifecycle path, however, and while the general premise is the same the way it is implemented is different. Rather than allocating members to age-based cohorts as retail funds do, in the not-for-profit lifecycle model members typically 'switch' from one traditional risk category to another at particular ages. The diversified options that underlie these strategies are included in Table 1.
To help illustrate the early results of the retail lifecycle model, Table 2 includes a row for traditional MySuper Growth options – mainly, but not all, 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 are managed differently so their level of risk varies over time.
We have generally seen strong performance from growth assets in recent years so, as we would expect, the options that have higher allocations to growth assets have generally done best. Younger members of retail lifecycle products – those born in the 1970s, 1980s and 1990s – have held their own against the MySuper Growth median since the introduction of MySuper and are actually ahead over one and three years. However, they have done so by taking on more share market risk.
The older age cohorts (those born in the 1960s or earlier) are less exposed to share market risk. 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 will be better protected in the event of a market downturn.
Long-term performance remains above target
MySuper products have only been operating for just over five-and-a-half years, so when considering performance it is important to remember that super is a much longer-term proposition. The Chart below compares the performance since July 1992 – the start of compulsory superannuation – of the traditional Growth category median with the typical return objective for that category (CPI plus 3.5% per annum after investment fees and tax over rolling five-year periods). The healthy returns since the end of the GFC in early 2009 have seen the longer-term performance tracking well above that CPI plus 3.5% target for the past six years.
Source: Chant West
Note: The CPI figure for July is an estimate.