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Market concerns about rising global inflation and interest rates and the ongoing war in Ukraine took their toll on super fund returns in May. The median Growth fund (61% to 80% in growth assets) fell 1% over the month, following a similar fall in April.
However, market conditions have deteriorated further in June with shares and bonds both being savaged. Chant West estimates the median growth fund return is down 5% for the financial year to date. Given the magnitude of recent market fluctuations, Chant West says the final result could be materially different – either for the worse or for the better.
Despite the current market uncertainty, Chant West senior research manager, Mano Mohankumar urges fund members to resist the urge to hit the panic button and focus on the long term. This is easier said than done, but history shows it is the best way to avoid crystallising short-term losses. Not only would this be only the fifth negative return in the 30 years since the introduction of compulsory super, but it comes on the back of the stellar 18% return last financial year.
“Fund members can also take comfort in the fact that, even after factoring in the large losses in June to date, the median growth fund is still 5% ahead of the pre-covid high at the end of January 2020,” says Mohankumar.
He also argues that even people close to retirement with the most to lose can afford to take a long-term view. “That’s because a lot of people most likely won’t take out all their super when they retire. A substantial amount is likely to stay in the super system in the pension phase, often for many years, which provides plenty of time for losses to be recovered,” he says.
The following table shows the median super performance for five investment risk categories across various timeframes.
Super fund performance (results to 31 May 2022)
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 risk categories fell in May and all but Growth funds are in negative territory for the year to the end of May. The median Growth fund was steady with a return of 0.1%. Importantly, returns for all periods from one to 15 years remain overwhelmingly positive. All risk categories have met their typical long-term return objectives which range from CPI (a measure of inflation) + 1.75% for Conservative funds to CPI + 4.25% for All Growth.
The chart below shows the year-by-year performance of the median Growth fund over the 29 and a half years since the introduction of compulsory super in July 1992. Since then, the median Growth fund has returned 8% per year. The annual CPI increase over the same period is 2.5%, giving a real return of 5.5% 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 7% per year, comfortably ahead of the typical return objective.
Growth funds have produced positive returns in 25 of the past 29 calendar years. Mohankumar says the typical risk objective for Growth funds would be no more than five negative returns during that period (there have been just four), so the risk objective has been met as well as the performance objective.
Source: Chant West