Super funds continued their positive start to the new financial year in August on the back of surprisingly resilient global share markets. Not surprisingly, funds with high exposure to shares were the top performers.
The median growth fund (61% to 80% growth assets) returned 1.7% in August, taking the return for the first two months of 2020/21 to 2.7%.
Chant West senior investment manager, Mano Mohankumar says that after losing 12% over February and March when the impact of COVID hit hard, the median growth fund has since returned an impressive 9.5% on the back of a “surprising” share market rally.
“Listed share markets, which are the main drivers of growth fund performance, had a terrific month in August. Australian shares returned 3%, while international shares surged 5.8% in hedged terms,” he says. However, a stronger Aussie dollar (up from US$0.72 to US$0.74) trimmed that gain to 2.9% when no currency hedging is in place.
“In the US, share markets hit a new all-time high despite the US-China trade tensions worsening. Markets were driven instead by optimism about the development of COVID-19 vaccine, the Federal Reserve’s ongoing commitment to providing support measures and the release of economic data that showed some modest signs of recovery.”
In Australia, Mohankumar says the focus was on Victoria’s controversial but successful drive to lower COVID case numbers and the extension of the Federal Government’s JobKeeper and JobSeeker support measures.
There are signs though that the share rally may be running out of steam, along with increased volatility in September as economic and political uncertainties reassert themselves. “
“The global economy is in recession, but we don’t know what pattern the downturn and eventual recovery will take. Trade tensions between the US and China continue to escalate and of course we have the US election less than seven weeks away. Meanwhile in Europe the final Brexit arrangements are still up in the air,” he says.
The following table shows the median super performance across various timeframes for five investment categories.
Super fund performance (Results to 31 August 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 + 4.75% 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