Super members’ patience rewarded with 10 straight gains

Super funds had a strong 2021 calendar year with the median growth fund (61 to 80% in growth assets) returning an impressive 13.4%. Our growth fund category is where the majority of Australians have their super invested. Hostplus was the top performer for the year with a standout return of 19.1%, while even the worst performer in the category delivered a respectable 10%.

Chant West Senior Investment Research Manager, Mano Mohankumar says the 2021 result is remarkable given the ongoing disruption and health concerns caused by COVID-19. “A year ago we were marvelling at how funds had managed to deliver a positive return despite the carnage in financial markets in February and March 2020 as the COVID crisis unfolded. We said then that 2021 may prove challenging, but funds have again exceeded expectations in delivering a 10th consecutive positive return – and this time a substantial one at 13.4%.

“The experience over the past two years highlights the resilience of super funds’ portfolios and their ability to limit the damage when markets are weak but still capture substantial upside when markets perform strongly. The 2021 result, in particular, is a continuing reward for those members who’ve remained patient throughout the COVID crisis. Since the market low-point at March 2020, growth funds have surged an astonishing 31%, which now sees them sitting 16% higher than the pre-COVID crisis peak that was reached at the end of January 2020.

“The better performing funds over the year were generally those that had higher allocations to listed shares, in particular international shares. Australian shares gained 17.5% while international shares surged 24.3% in hedged terms. The traditional defensive sectors such as bonds and cash were the weakest performers over the year, so keeping a low allocation to those would have helped performance. Cash had a return of zero while Australian and international bonds fell 2.9% and 1.5%, respectively. Of the unlisted asset sectors, private equity was the stand-out performer delivering over 40%, while unlisted infrastructure and unlisted property delivered returns in the low-teens on average. Listed real assets also had a strong year with Australian and international listed property surging 27% and 28.6%, respectively, while listed infrastructure returned 17%. Funds would also have benefited from maintaining a higher foreign currency exposure, given the depreciation of the Australian dollar over the year (down from US$0.77 to US$0.73).”

Chart 1 shows the top 10 performing growth options over the 2021 calendar year, together with the survey median.

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Other key content

  • Diversified fund performance by risk category

  • Top 10 performing growth funds over 10 years

  • Retail lifecycle product performance

  • Long-term performance including rolling 10 year returns chart

  • Risk objectives and financial year by year performance chart

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 from one year up, 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.

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Chart 2 shows the top 10 performing growth options over 10 years, together with the survey median.

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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.”

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As expected, the options that have higher allocations to growth assets have done better over all periods shown. Younger members of retail lifecycle products – those born in the 1970s, 1980s and 1990s – have either equalled or outperformed the MySuper Growth median over all periods shown. 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.

Funds still delivering on long-term targets

While much of the focus at this time of year is on calendar year performance, Mohankumar reminds fund members to think long term. “Super funds have had a tremendous year with a median return of 13.4% but returns at that level shouldn’t be thought of as normal. The typical long-term return objective for growth funds is to beat inflation by 3.5% p.a., which translates to about 5.5% to 6% p.a. We now have data going back 29½ years to July 1992, the start of compulsory super. Over that period, the annualised return is 8.2% and the annual CPI increase is 2.4%, giving a real return of 5.8% p.a. – well above that 3.5% target. Even looking at the past 20 years, which includes three major share market downturns –the ‘tech wreck’ in 2002-2003, the GFC in 2007-2009 and COVID-19 in 2020 – super funds have returned 7.1% p.a., which is still comfortably ahead of the typical objective.”

Chart 3 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.

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Returns are important but risk matters too

“Returns are important but so is risk, and most funds also set themselves a risk objective. Risk is normally expressed as the likelihood of a negative annual return, and typically a growth fund would aim to post no more than one negative return in five years on average. Chart 4 plots the year-by-year performance of the median growth fund over the 29 full calendar years since the introduction of compulsory super. The objective would be no more than five negative years in that time. As it turns out there have only been four, so the risk objective has also been comfortably met as well as the performance objective.” Mohankumar said.

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