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Super funds’ strong 2021 leaves COVID Crash in the rearview mirror
Australia’s super funds have posted a remarkable tenth consecutive calendar-year gain, with the median growth fund (having 61 per cent-80 per cent in growth assets) returning an impressive 13.4 per cent, according to the Zenith-owned research, data and analytics firm Chant West.
The category is used as a proxy for the performance of super funds because it is where most Australians have their super invested.
On top of the 3.7 per cent rise achieved in 2020, the performance shows the impressive manner in which super funds’ portfolios have handled the COVID-19 pandemic. Like all other investors, they were badly hammered by the February-March 2020 “COVID Crash” – over that period, the median growth fund plummeted by 12 per cent – but since that low point, growth funds have ridden the broader market rally and surged by an astonishing 31 per cent, which now sees them sitting 16 per cent higher than the pre-COVID crisis peak that was reached at the end of January 2020.
Mano Mohankumar, senior investment research manager at Chant West, describes the 2021 result as “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,” says Mohankumar. “We said then that 2021 may prove challenging, but funds have again exceeded expectations in delivering a tenth consecutive positive return – and this time, a substantial one at 13.4 per cent.”
“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.”
Of course, while fund members who sat tight have seen their patience rewarded, many did not, and switched their investments to cash or a more conservative option in March 2020, at precisely the wrong time. Such investors not only crystallised their losses, but they would also have missed out on some or all of the subsequent rebound.
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 per cent a year, which translates at present to about 5.5 per cent-6 per cent a year.”
The long-term data shows super funds tracking well above their CPI-plus target, says Mohankumar.
“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 per cent, and the annual CPI increase is 2.4 per cent, giving a real return of 5.8 per cent per year – well above that 3.5 per cent 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 per cent a year, which is still comfortably ahead of the typical objective.”
For most 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,” says Mohankumar. “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 per cent, on average.”
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, Chant West says.
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%.
The research firm says 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).
