Fresh from delivering a tenth consecutive positive financial year, super funds got off to a solid start to 2019/20 with the median growth fund (61 to 80% in growth assets) returning 2% for the September quarter.
Local and overseas share markets, the main drivers of growth fund performance, had a solid quarter despite a volatile August. Australian shares advanced 2.6% and hedged international shares were up 1.5%. However, the depreciation of the Australian dollar (down from US$0.70 to US$0.67) pushed that international shares return higher to an impressive 4.7% in unhedged terms. Among the defensive asset sectors, traditional bonds also had a strong quarter with domestic and international bonds up 2% and 2.3%, respectively on the back of falling long-term bond yields.
Chant West senior investment research manager Mano Mohankumar says: “Notwithstanding the healthy overall result over the September quarter, the volatility we encountered in August isn’t going away. We expect challenging times ahead as the global economy continues to be dogged by uncertainty. Share markets have proved resilient so far, but we anticipate more turbulence ahead in the current jittery climate.
“The trade tensions between the US and China are yet to be resolved and there is ongoing concern about the momentum of the global economy. Lacklustre growth prompted the US Federal Reserve to cut interest rates twice over the quarter, and in September the European Central Bank announced measures to stimulate a struggling economy including restarting quantitative easing. Additionally, the uncertainty surrounding Brexit remains high as prime minister Boris Johnson tries to conjure an exit deal in the run-up to the 31 October deadline.
“In Australia, the Reserve Bank cut the official cash rate to a new record low of 0.75% earlier this month – the third reduction in five months. It also stated that an extended period of low interest rates will be required to further reduce unemployment and achieve a more sustainable path towards its inflation target.
“While we expect some challenging times ahead, most Australians should take comfort that their superannuation is mostly invested in well-diversified portfolios with their investments spread across a wide range of asset sectors. The typical growth fund also has more resilience built-in than it did a decade ago, so it is better prepared in the event that investment markets falter.”
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. All risk categories are ahead of their long-term return objectives over 1, 3, 5, 7, 10 and 15 years. Those objectives range from inflation plus 2% for the Conservative category to inflation plus 4.75% for the All Growth category.
Note: Performance is shown net of investment fees and tax. It is before administration fees and adviser commissions.
Source: Chant West
Lifecycle products behaving as expected
Mohankumar says, “While our Growth category is still where most people have their super, 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 is progressively de-risked as that cohort gets older.”
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.
1. Performance is shown net of investment fees and tax. It is before administration fees and adviser commissions.
2. January 2014 represents the introduction of MySuper.
Source: Chant West
While lifecycle is the most common MySuper default in the retail sector, most not-for-profit funds still use their traditional growth options as their default investment option. A few not-for-profit funds have gone down the lifecycle path, however, and while the general premise is the same the way it is implemented is different. Rather than allocating members to age-based cohorts as retail funds do, in the not-for-profit lifecycle model members typically ‘switch’ from one traditional risk category to another at particular ages. The diversified options that underlie these strategies are included in Table 1.
To help illustrate the early results of the retail lifecycle model, Table 2 includes a row for traditional MySuper Growth options – mainly, but not all, 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 are managed differently so their level of risk varies over time.
We have mostly seen strong performance from growth assets in recent years so, as we would expect, the options that have higher allocations to growth assets have generally done best. Younger members of retail lifecycle products – those born in the 1970s, 1980s and 1990s – have outperformed the MySuper Growth median over most periods shown. However, they have done so by taking on more share market risk.
The older age cohorts (those born in the 1960s or earlier) are relatively less exposed to share market risk. 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 should be better protected in the event of a market downturn.
Long-term performance remains above target
MySuper products have only been operating for just over 5 ½ years, so when considering performance it is important to remember that super is a much longer-term proposition. The Chart below compares the performance since July 1992 – the start of compulsory superannuation – of the traditional Growth category median with the typical return objective for that category (CPI plus 3.5% per annum after investment fees and tax over rolling five-year periods). The healthy returns since the end of the GFC in early 2009 have seen the longer-term performance tracking well above that CPI plus 3.5% target for the past six years.
Note: The CPI figure for the September 2019 quarter is an estimate.