Super funds have continued their astonishing COVID bounce-back, with the median growth fund (61 to 80% in growth assets) up 1.9% for the month of March and 3.1% over the quarter. This brings the return for the first nine months of the financial year to an impressive 12.2%. With share markets up in April so far, there is a realistic chance that growth funds will finish FY21 in double-digit territory, which would have been inconceivable a year ago.
Chant West Senior Investment Research Manager, Mano Mohankumar says listed share markets, which are the main drivers of growth fund performance, had a strong March quarter. "Despite the brief volatility in late February on fears that a stronger than expected economic recovery may result in increased inflation, the March quarter was characterised by optimism around the global rollout of vaccines and a return to some economic normality. Australian shares were up 4.2% for the quarter, while international shares were up 6.2% and 6.3% in hedged and unhedged terms, respectively. Bond yields rose over the period –– again as a reaction to fears of rising inflation – and this was reflected in negative bond market returns with Australian and international bonds down 3.2% and 2.5%, respectively.
"Share markets are up again over the first half of April, and we estimate that the median growth fund has put on a further 2.2% so far this month. That brings the cumulative return since the end of March last year to about 22%, which is remarkable given the health concerns, disruptions and economic damage caused by COVID-19. It also means that we're more than 7% above the pre-COVID crisis high that was reached at the end of January 2020.
"In the US, vaccine rollouts gained momentum over the quarter and the number of new COVID-19 cases fell. Sharemarkets were also supported by President Biden's announcement of a fiscal stimulus package of $1.9 trillion as well as additional $2 trillion in infrastructure spending.
"The UK is also progressing well with its vaccine rollout and we've seen some easing of lockdown measures over the past month. In the Euro zone, however, the pace of vaccinations has lagged other developed regions and some countries experienced increases in new COVID-19 resulting in fresh lockdown measures.
"Back at home, all states now have COVID case numbers under control. Domestic borders are all open and just yesterday we saw the resumption of quarantine-free travel to and from New Zealand courtesy of the new trans-Tasman travel bubble. There have been reports of Australia and Singapore planning a travel bubble too, subject to progress on vaccinations. There was further positive news during the quarter with a better-than-expected company earnings reporting season.
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 3, 5, 7, 10 and 15 years, 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.
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 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.
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. It also includes a row for traditional MySuper Growth options for comparison – 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.
Notes:
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
As a result of the strong recovery since the end of March last year, the options that have higher allocations to growth assets have now done better over all periods shown. 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'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'd 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 only been operating for seven 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% p.a. The annual CPI increase over the same period is 2.4%, giving a real return of 5.6% p.a. – well above the typical 3.5% target. Even looking at the past 20 years, which now includes three share major market downturns – the 'tech wreck' in 2001–2003, the GFC in 2007–2009 and now COVID-19 – the median growth fund has returned 6.8% 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 ten-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.
Note: The CPI figure for the March 2021 quarter is an estimate.
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 MSCI disclaimer.
