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Super funds are on track to record their highest return in 24 years, massively rewarding members who held their nerve during the dark days of the coronavirus sell-off last year.
The median Growth fund (61–80% growth assets) returned 1.1% in May, bringing the return for the first 11 months of the financial year to 15.7%. The winning streak has continued into June, with the cumulative return sitting at 17.5% with just two weeks to go until the end of the year.
Should growth funds finish the year at or around this level, Chant West senior research manager, Mano Mohankumar says the last time we saw a higher annual result was in 1996/97 when growth funds returned 19.4%.
“The cumulative return since the COVID low point at end-March last year is now about 25%, which is amazing given the chaos the world was thrown into by COVID-19. We’re now sitting about 10% above the pre-COVID crisis high that was reached at the end of January 2020,” says Mohankumar.
The main driver of the stellar returns is shares, with Australian shares up another 2.3% in May and international shares up 1% (1.2% unhedged). Both markets reached all-time highs during the month.
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While diversification helped funds limit their losses to 0.6% in 2019/20, an allocation of around 50% to listed shares also helped them capture the stronger-than-expected market recovery.
While there is some nervousness on global markets about rising inflation in the US, where it is currently running at 5%, this has been offset by the pace of the vaccine rollout there as well as in the UK and Europe and strong company earnings in the US.
The vaccine rollout is slower in Australia, but cases remain low, and the economy continues to improve.
The following table shows the median super performance for five investment risk categories across various timeframes.
Super fund performance (results to 31 May 2021)
Source: Chant West. Performance is shown net of investment fees and tax, before administration fees and adviser commissions.
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As you can see in the table above, all five risk categories are performing strongly with positive returns across all time periods from one month to 15 years. All Growth funds with the highest allocation to shares surged 23.6% in the 11 months to May 31, while even the most conservative option (21–40% growth) was up 6.8%.
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 6.8% per year, well ahead of the typical return objective.
After last year’s heroic effort, Growth funds have produced positive returns in 16 of the past 20 calendar years. The typical risk objective for Growth funds is no more than one negative year in five, so super is delivering on its long-term objectives.
Source: Chant West