Market fragility reminds us why risk is so important in super

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The key take-away for all Australians is to be aware of the risk their super fund is taking.

History has taught us that share market falls are inevitable. What is harder to predict is when they’ll occur.

9/11, the dot-com bubble and, more recently, the GFC, triggered significant declines. Just like Coronavirus, few, if any, saw those events coming and their impact on global markets.

The full impact of Coronavirus remains to be seen, but most Australians’ super funds will be able to ride through the current market malaise. A chart of the All Ordinaries equity index over the past 100 years, is one of steady upward progression, interspersed with relatively small ups and downs along the way. With every year, the GFC becomes a smaller and smaller kink in the upward trend, particularly when dividends – or total shareholder returns – are taken into account.

Younger Australians with growth-oriented superannuation portfolios, including those with a heavy weighting to shares, should keep the current volatility in perspective. They will see their super balances recover and grow in time.

The situation is more uncomfortable for those planning to retire in the next few years who continue to hold a high weighting of growth assets in their super.  Now, more than ever, they’ll be acutely aware that it’s the balance you end up with at retirement that counts, not the balance three months, or three years before.

The good news is that many Australians are in default super funds which progressively de-risk as retirement nears. That is, their super provider rebalances away from assets, such as equities, into bonds and fixed interest assets as members age.

While their portfolios will still be impacted, these asset classes provide diversification and a ‘hedge’ against significant equity market downturns.

This is well illustrated by comparing the recent performance of different market indices. The S&P Global 1200 – an equity index made of 1200 of the world’s largest companies, is down 24.5%* since the start of the year to 17 March. Over the same period, the S&P Global Developed Sovereign Bond Index is up 1.9%*.

Indices shouldn’t be used as a direct indicator of super fund performance, but they are indicative of how different asset classes respond in times of market volatility.

The key take-away for all Australians is to be aware of the risk their super fund is taking, and how it changes risk weightings over time, if at all.

Equally important is the take-away for the superannuation industry – that is, what more can we do to help Australians understand risk?

Central to this is providing a means by which Australians can make accurate and simple comparisons when assessing super fund performance in the context of risk.

An increasing number of industry and retail funds, for example, are investing in unlisted property and infrastructure labelling the investments as defensive. While some of these assets may share characteristics with traditional defensive assets, such as an income stream, the more important issue is how they behave during periods of market stress.

These assets are less liquid and valued more infrequently than other assets, so time will tell how they come through the current market falls. However, contrasting the performance of the S&P Global Infrastructure Index, which has declined 31.7%* since the start of the year, with the positive returns of the bond index – an asset traditionally classified as defensive – shows that a closer look at creating common classification standards is needed to help Australians make informed decisions.

Clear and calm heads are needed in times of market volatility. And, importantly, recognition that super is a long-term investment – there is plenty of time for the balances of younger Australians to grow before retirement.

But let’s also use this experience as an opportunity to put risk at the forefront of the conversation on super.

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