Mano Mohankumar and Ian Fryer
Having navigated a testing 2023, super funds kicked off the new year in style with the median growth fund (61 to 80% in growth assets) surging an impressive 3% in January. In just one month, funds have regained two-thirds of the last year’s 4.6% loss.
Chant West Senior Investment Research Manager, Mano Mohankumar, says January was a strong month for both share and bond markets. “Over the month, Australian shares surged 6.3%. International developed market shares were even stronger gaining 6.5% in hedged terms, although the stronger Australian dollar limited the gain to 3% in unhedged terms. And with bond yields falling over the month, Australian and international bonds gained 2.8% and 2.1%, respectively.
“The end of January marks exactly three years since the pre-COVID high reached in 2020. Despite the challenging economic backdrop over that period, the median growth fund is up nearly 14%. Most importantly, funds are continuing to meet their long-term return and risk objectives. That should provide important context and comfort for fund members at a time when we continue to see market volatility as investors react sharply to news – good or bad.
“In January, inflation in the US finally showed signs of cooling after reaching uncomfortably high levels. This, coupled with better than anticipated GDP data, gave rise to expectations that the Federal Reserve would slow its program of interest rate rises. Indeed the Fed only increased rates by 0.25% in January – down from the previous month’s 0.50% rise. There was also improved sentiment in Europe on the back of government economic support, a mild winter which helped defuse the energy crisis and the reopening of China which benefitted certain key industry sectors. Inflation in the region, while showing signs of slowing, still remains at elevated levels prompting both the European Central Bank and the Bank of England to raise rates by 0.5% in early February.
“Closer to home, China’s loosening of its COVID-restrictions and government support for its struggling property sector bolstered sentiment. In Australia, the 6.3% share market return more than offset the 2022 loss of 1.8%. However, inflation remains higher than expected, prompting the RBA to respond with another 0.25% rate increase earlier this month.
Table 1 compares the median performance to the end of January 2023 for each of the traditional diversified risk categories in Chant West’s Multi-Manager Survey, ranging from All Growth to Conservative. All risk categories have generally met their typical long-term return objectives, which range from CPI + 1.75% 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 says.
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.
Despite the pullback in calendar year 2022, options that have higher allocations to growth assets have done better over most periods shown. Younger members of retail lifecycle products – those born in the 1970s, 1980s and 1990s – have either outperformed or held their own against the MySuper Growth median over the three-year period and longer. 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 1960s cohort has generally underperformed the median MySuper Growth option. This is partly due to a lower allocation to growth assets up until about two years ago, when lifecycle product providers revised their glide paths to delay the de-risking process until older ages. Another reason for this underperformance is a lower allocation to unlisted assets, which have performed well, and a higher allocation to traditional defensive asset sectors, such as bonds and cash, which have been the weakest performing sectors since the introduction of MySuper.
The oldest cohorts (those born in the 1950s 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 generally better protected in the event of market weakness.
Long-term performance remains above target
MySuper products have only been operating for 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 July 1992, the median growth fund has returned 7.9% p.a. The annual CPI increase over the same period is 2.6%, giving a real return of 5.3% p.a. – well above the typical 3.5% target. Even looking at the past 20 years, which includes four major share market downturns – the ‘tech wreck’ in 2002-2003, the GFC in 2007-2009, COVID-19 in 2020 and the 2022 calendar year driven by high inflation and rising interest rates to combat it – super funds have returned 7.4 % p.a., which is still comfortably ahead of the typical 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.
By Mano Mohankumar, Senior Investment Research Manager and Ian Fryer, General Manager
