Super funds are on track to return to positive territory in 2020 on the back of strong returns from Australian shares and optimism about progress towards a COVID vaccine.
The median growth fund (61% to 80% in growth assets) was up 0.5% in October, the sixth positive return in seven months after a brief stumble in September. Chant West senior investment research manager, Mano Mohankumar estimates that the median growth fund is up over 4.5% for November to date and up a remarkable 14% since the end of March, more than erasing the 12% loss experienced in February and March.
“With just over six weeks of 2020 remaining, we estimate that the median growth fund is up over 2% for the calendar year to date,” he says.
While Australian shares underpinned super’s solid performance in October, international shares fell 3.2% in hedged terms on uncertainty over the US election results and surging COVID cases in the US and Europe. However, the depreciation of the Aussie dollar (down from US72c to US70c) limited that fall to 1.1% in unhedged terms. Mohankumar says funds currently have about 70% of their exposure to international shares unhedged, which provides a natural buffer against sharemarket falls.
“November has been extremely positive for markets so far. Joe Biden’s election victory has removed much of the uncertainty that was weighing on sharemarkets, although President Trump seems set on making the transition a difficult one. Additionally, last week pharmaceutical company Pfizer, and biotechnology company BioNTech, announced that they have developed vaccines that in testing was more than 90% effective in preventing COVID-19. While there is still a way to go before the trial is complete, sharemarkets around the world have reacted euphorically,” says Mohankumar.
In Australia, COVID cases are under control albeit with occasional outbreaks to be expected. Mohankumar says this has supported local shares, as did the Reserve Bank’s decision earlier this month to lower the official cash rate to a new historic low of 0.1%. The Reserve also unveiled measures to support the post-COVID economic recovery, including a quantitative easing program whereby the Bank will purchase $100 million in government bonds over the next six months.
The following table shows the median super performance for five investment risk categories across various timeframes.
Super fund performance (Results to 30 October 2020)
Note: Performance is shown net of investment fees and tax, before administration fees and adviser commissions.
Source: Chant West
As you can see in the table above, all five risk categories, ranging from All Growth to Conservative, have met their typical long-term objectives over 3, 5, 7, 10 and 15 years. These objectives range from CPI + 2% for Conservative funds to CPI + 4.25% for All Growth. While past performance is no guarantee of future returns, Mohankumar says members can take comfort in the fact that their funds run generally well-diversified portfolios that have proved to be resilient in the face of external shocks.
The chart below shows the year by year performance of the median growth fund since the introduction of compulsory super in 1992. Since then, the median growth fund has returned 8.1% a year. The annual CPI increase (a measure of inflation) over the same period is 2.3%, giving a real return of 5.8% a year. This is well above the typical 3.5% target set by funds.
Even looking at the past 20 years, which includes three major market downturns – the tech wreck, the GFC and now COVID – super funds have returned 6.4% per year, well ahead of the typical return objective.
Despite the latest year’s negative return, this was only the fourth negative year in 28, or one every seven years. The typical risk objective for Growth funds is no more than one negative year in five, so super is more than delivering on its long-term objectives.
Source: Chant West