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One year on from the COVID lows of March last year, the median Growth fund (61% to 80% growth assets) has bounced back by nearly 20%. It’s a remarkable turnaround that few anticipated in the depths of last year’s gloom and a timely reminder of the importance of holding firm during periods of market volatility.
Growth funds edged up a further 0.9% in February and Chant West estimates they have risen another 2.3% so far this month on the back of strong sharemarket returns.
Chant West senior investment research manager, Mano Mohankumar says this means we are more than 5% above the pre-COVID crisis high that was reached at the end of January 2020.
“While there is great optimism around the rollout of vaccines and a return to some economic normality, there were some fears that a stronger than expected economic recovery may result in increased inflation and fast-tracked tightening of monetary policy (that is, higher interest rates).
“That caused investors to drive up bond yields in late February and that in turn had the effect of pulling back share markets,” says Mohankumar.
Even so, Australian shares were still up 1.5% in February. International shares rose 2.7% (hedged), but the stronger Aussie dollar reduced that gain to 1.6% in unhedged terms. As bond yields rose, Australian and international bonds were down 3.6% and 1.6% respectively. (Bond prices fall as yields rise and vice versa.)
The overarching theme on global financial markets is still on the pace of the vaccine rollout. In the US and UK, the rollout is progressing well, but the pace has been slower in the Eurozone while cases have spiked in several countries, including Italy.
In Australia, case numbers are under control and the corporate sector is doing better than expected. Mohankumar said the recent reporting seasons revealed company profits for the December half year were more likely to beat analysts’ expectations than miss them.
The following table shows the median super performance for five investment risk categories across various timeframes.
Super fund performance (Results to 28 February 2021)
Source: Chant West. Performance is shown net of investment fees and tax, before administration fees and adviser commissions.
As you can see in the table above, all five risk categories produced positive returns not just in February, but across all time periods from one month to 15 years.
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% per year. The annual CPI increase (a measure of inflation) over the same period is 2.4%, giving a real return of 5.7% per 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 – the median growth fund has returned 6.6% per year, well ahead of the typical return objective.
After last year’s heroic effort, the chart below shows the median Growth fund has exceeded its return objective over rolling 10-year periods. The exceptions are two periods when it fell behind, including the 16-month impact of the GFC between October 2007 and February 2009 when Growth funds lost around 26% on average.
Source: Chant West