Could it be that the past few months of furious market activity signified nothing? With only weeks to go until the end of the financial year, super funds look set to finish little changed over the year.
Super funds rose for the second consecutive month in May, with the median growth fund up 2.2% following the 3.1% rise in April. With positive momentum continuing into June, Chant West estimates a flat or mildly positive year is a real possibility. Longer term though, super members should strap themselves in for further volatility.
Chant West senior investment research manager, Mano Mohankumar said: “The surprising share market rally that began in late March came as investors grew more optimistic around coronavirus infection curves flattening around the world, the gradual easing of restrictions and economies tentatively starting to reopen.
“The rally continued into June but has shown some signs of wavering following the US Federal Reserve’s grim outlook for the US economy and concern about a possible second wave of COVID-19 infections.
“From a health perspective we’ve been particularly fortunate in Australia but nevertheless we – along with the global economy – are heading into a recession of unknown depth and duration.
“Given the ongoing economic damage, health concerns and the absence of a vaccine, we should expect market volatility to continue, and fund members will need to remain patient and focus on the long-term prospects for their super.”
Mohankumar says one reason for super funds better-than-expected performance is the diversification of their portfolios. While growth funds have 61% to 80% growth assets, mostly listed shares and property, many also have a meaningful allocation to unlisted and alternative assets to cushion share market weakness.
The experience of COVID-related market volatility in recent months is another reminder of the importance of keeping your eyes on the prize.
“While this financial year’s result may still finish in the red, it’s important to remember that funds have had an unprecedented run since the GFC, returning an impressive 8.4% per annum since the GFC low point in early 2009,” says Mohankumar.
The following table shows the super performance across various timeframes for five investment categories.
Super fund performance (Results to 30 April 2020)
| Fund Category|
(% Growth Assets)
| 1 mth|
| 3 mths|
| 1 yr|
| 3 yrs|
| 5 yrs|
| 7 yrs|
| 10 yrs|
| 15 yrs|
Note: Performance is shown net of investment fees and tax, before administration fees and adviser commissions.
Source: Chant West
To put the recent market volatility into perspective, it’s worth reflecting on the long-term objectives and performance of super.
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% a year. The annual CPI increase (a measure of inflation) over the same period is 2.4%, giving a real return of 5.6% 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 6.5% a year, well ahead of the typical return objective.
Even if this year does turn out to be negative, Mohankumar says it would be 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.
Source: Chant West
If you’re interested in the monthly performance for super funds over 5 investment options going back to January 2016, see the SuperGuide monthly super fund performance Reckoner.
If you’re interested in the performance of lifecycle super funds (including their latest returns), see the SuperGuide article What are lifecycle super funds, and how do they perform?