After a slight stumble in September, super funds were back in positive territory in October with the median growth fund (61 to 80% in growth assets) up 0.6% for the month. With nine positive monthly returns out of 10 so far, growth funds are up 11.2% for the year to date. With just over six weeks remaining, and with share markets up so far in November, the median growth fund has a good chance of finishing 2021 in double digit territory.
Chant West Senior Investment Research Manager, Mano Mohankumar, says that the strong return this year comes on the back of a better-than-expected result in 2020. "Despite the severe downturn in February and March 2020, when markets first reacted to the COVID crisis, the median growth fund finished last calendar year up 3.6%. A positive result for 2021 – which now looks pretty certain – would represent the tenth positive calendar year in succession. We're now 19 months on from the COVID-induced low point at end-March 2020. Growth funds have returned an astonishing 29% from then, and now sit about 14% above the pre-COVID crisis high that was reached at the end of January 2020.
"Listed share markets remain the main drivers of growth fund performance. Australian shares were virtually flat in October with a return of just 0.1%. International shares were up 5.6% in hedged terms, but the appreciation of the Australian dollar over the month (from US$0.72 to US$0.75) pared that back to 1.7% unhedged.
"US share markets rose in October, mainly on the back of strong company earnings. Economic data indicated a slowdown in GDP growth due to supply chain disruptions and the effects of Hurricane Ida, but at the same time they suggested that consumer confidence is high. However, the US Federal Reserve is set to start tapering its quantitative easing program soon, by slowing the pace of asset purchases with a view to ending the program by mid-2022.
"Share markets were also up in the eurozone on the back of healthy corporate earnings reports, but supply chain issues are also starting to be felt there. October also saw surging energy prices, although Russia's announcement of its intention to increase gas supply in Europe saw prices drift back down. Share markets in the UK were up on the back of a strong start to the corporate earnings reporting season. It appears that the Bank of England will be the first major central bank to start raising interest rates in response to emerging inflationary pressures.
"Closer to home, concerns around the Chinese property sector and potential spill-over effects eased slightly after Evergrande avoided default on its debts for now. In Australia the RBA continued to hold the official cash rate at the historic low of 0.1%. The month also saw NSW and Victoria coming out of lockdown as vaccination targets were reached."
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 all 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 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 share major market downturns – the 'tech wreck' in 2001–2003, the GFC in 2007–2009 and COVID-19 in 2020 – the median growth fund has returned 7.2% 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 MSCI disclaimer.
