Super funds are closing in on a double-digit result for the 2021 calendar year. The median growth fund (61 to 80% in growth assets) was up 0.3% in November which drove the return for the first 11 months of the year to 11.7%. Markets are up in December so far and we estimate that, with just two weeks remaining, the calendar year return is now sitting above 12%.
Chant West Senior Investment Research Manager, Mano Mohankumar, says the 2021 result will provide further proof of super’s resilience and its ability to grow fund members’ savings regardless of economic disruptions. “Barring a last-minute capitulation, we’re on track for yet another positive result for super fund members – the tenth in succession. That’s a remarkable achievement when you consider that the past two years have been fraught with social and economic disruption as a result of the COVID pandemic.
“This year’s result represents a continuing reward for those members who’ve remained patient and trusted their funds to weather the crisis. Who would have thought, at the low point in late March 2020, that growth funds would have surged a staggering 30% over the subsequent 20 months? That tremendous rally sees them sitting nearly 15% higher than the pre-COVID crisis peak that was reached at the end of January 2020.
“Growth funds nudged ahead in November despite falls in global share markets, prompted by the emergence of the new Omicron variant of COVID-19. Over the month, Australian shares gave up 0.5%. International shares fell 1.5% in hedged terms but the depreciation of the Australian dollar (down from US$0.75 to US$0.71) turned that loss into a healthy gain of 3.7% in unhedged terms. With a shift to safe assets during the month, government bond yields fell and, as a result, Australian and international bonds were up 2.1% and 0.7%, respectively.
“US share markets fell in November, but less than most other countries. The heaviest declines were in the tech sector, which is highly sensitive to any signs of increasing inflation. Economic data in the US was quite positive, but this was overshadowed by fears about the spread of the Omicron variant. In Europe, share markets were also down amid concerns about the emergence of Omicron and its potential to stall any economic recovery. A sharp rise in COVID case numbers resulted in several countries re-introducing restrictions.
“Back at home, economic activity picked up in November but, as we head towards Christmas, COVID case numbers have begun to rise sharply. There are fears that the Omicron variant, which appears to be more transmissible even if possibly less severe, will result in an exponential growth in cases. Despite that, most states are pressing ahead with plans to free up their communities and stimulate some economic revival. Queensland and South Australia have recently opened their borders to fully vaccinated travellers (with some conditions) while NSW and Victoria look set to go ahead with a further easing of restrictions.”
Table 1 compares the median performance for each of the traditional diversified risk categories in Chant West’s Multi-Manager Survey, ranging from All Growth to Conservative. Over all periods shown, all risk categories have met their typical long-term return objectives, which range from CPI + 2% for Conservative funds to CPI + 4.25% for All Growth.
Lifecycle products behaving as expected
Mohankumar says that while the Growth category is still where most people have their super invested, a meaningful number are now in so-called ‘lifecycle’ products. “Most retail funds have adopted a lifecycle design for their MySuper defaults where members are allocated to an age-based option that’s progressively de-risked as that cohort gets older,” he said.
“It’s difficult to make direct comparisons of the performance of these age-based options with the traditional options that are based on a single risk category, and for that reason we report them separately. Table 2 shows the median performance for each of the retail age cohorts, together with their current median allocation to growth assets. For comparison purposes it also includes a row for traditional MySuper Growth options – nearly all of which are not-for-profit funds. Care should be taken when comparing the performance of the retail lifecycle cohorts with the median MySuper Growth option, however, as they’re managed differently so their level of risk varies over time.”
Growth assets have experienced a strong recovery since the end of March last year, so the options that have higher allocations to growth assets have done better over most periods shown. Younger members of retail lifecycle products – those born in the 1970s, 1980s and 1990s – have either outperformed or performed broadly in line with the MySuper Growth median over periods longer than three months. However, they’ve done so by taking on significantly more share market risk. On average, these younger cohorts have at least 20% more invested in listed shares and listed real assets than the typical MySuper Growth option.
The older cohorts (those born in the 1960s or earlier) are relatively less exposed to growth assets so you would expect them to underperform the MySuper Growth median over longer periods. Capital preservation is more important at those ages, so while they miss out on the full benefit in rising markets, older members in retail lifecycle options are better protected in the event of a market downturn.
Long-term performance remains above target
MySuper products have been operating for just less than eight years, so when considering performance it’s important to remember that super is a much longer-term proposition. Since the introduction of compulsory super in 1992, the median growth fund has returned 8.2% p.a. The annual CPI increase over the same period is 2.4%, giving a real return of 5.8% p.a. – well above the typical 3.5% target. Even looking at the past 20 years, which now includes three major share market downturns – the ‘tech wreck’ in 2001–2003, the GFC in 2007–2009 and COVID-19 in 2020 – the median growth fund has returned 7.1% p.a, which is still well ahead of the typical return objective.
The chart below shows that, for the majority of the time, the median growth fund has exceeded its return objective over rolling 10-year periods, which is a commonly used timeframe consistent with the long-term focus of super. The exceptions are two periods between mid-2008 and late-2017, when it fell behind. This is because of the devastating impact of the 16-month GFC period (end-October 2007 to end-February 2009) during which growth funds lost about 26% on average.
International share market returns in this media release are sourced from MSCI. This data is the property of MSCI. No use or distribution without written consent. Data provided “as is” without any warranties. MSCI assumes no liability for or in connection with the data. Product is not sponsored, endorsed, sold or promoted by MSCI. Please see complete .
