Super funds are off to a positive start in the December quarter, regaining momentum following a rocky September and paving the way for double-digit returns for the 2019 calendar year.
While markets have come under pressure in recent months, super funds have once again proved they are up to the task of navigating the significant uncertainty in markets, geopolitics and the global economy.
Super fund returns held up well in October, despite weakness from Australian shares and signs of softer economic growth globally.
The major financials sector has come under pressure due to constrained lending, lower net interest margins and continued fallout from the financial services royal commission.
IT shares also suffered a dip as investors questioned the lofty valuations of Australia’s local tech darlings.
According to SuperRatings’ estimates, the median balanced option returned a modest 0.3 per cent in October, but the year-to-date return for 2019 is sitting at a very healthy 12.5 per cent.
The median growth option has fared even better, returning 14.4 per cent, while the median capital stable option has delivered a respectable 7.1 per cent to the end of October.
Over the past five years, the median balanced option has returned an estimated 7.6 per cent p.a., compared to 8.3 per cent p.a. from growth and 4.7 per cent p.a. from capital stable.
Pensions have similarly performed well over the course of 2019, with the balanced pension option returning an estimated 13.8 per cent to the end of October, compared to 16.4 per cent for growth and 8.3 per cent for capital stable.
SuperRatings director Kirby Rappell said the results showed the ability of funds to deliver despite a challenging environment.
“Whether it’s the US-China trade conflict, the weaker economic outlook, falling interest rates or the rolling Brexit saga, there’s been a lot for funds to take in,” Mr Rappell said.
“This has been a real test of their discipline and ability to manage risks on the downside. Growing wealth in this environment while protecting members’ capital is a tall order, but they have managed it well.”
One of the most important trends in the superannuation industry was the broadening of members’ investments across different asset classes, said Mr Rappell.
Over the past five years, super funds had shifted away from Australian shares and fixed income and moved a higher proportion of funds into international shares and alternatives.
The shift to alternatives was significant and had been the subject of debate within the industry. Alternatives include private market assets and hedge funds, which despite the negative connotations could provide an important source of diversification and downside protection when markets took a turn for the worse.
These assets tended to be less liquid, he said. They could play an important role for funds looking to generate income while managing risks for their members in a world characterised by low yields and growing uncertainty.
However, Mr Rappell said funds should be clear about their alternatives strategy and the potential risks to members’ portfolios.
“This shift in asset allocation is in part being driven by the low interest rate environment, which has prompted super funds to reach for yield by allocating to alternatives and other less liquid assets,” said Mr Rappell.
“This isn’t necessarily a bad thing, and it may, in fact, result in a more robust asset allocation. But it’s something members should be aware of.
“Alternatives can help protect capital under certain market conditions, but they can also be used to boost returns by taking on some additional risk. We generally think the shift to a broader asset allocation is positive, but funds should not be complacent in ensuring risk is appropriately managed.”
The 2019 Ethics Index was also released this week, showing that industry super funds were at the top of the tree when it came to Australia’s most ethical financial institutions.
More than half of Australians (52 per cent) view industry funds as ethical businesses, according to the Governance Institute of Australia’s 2019 Ethics Index.
Independent super funds and stock exchanges came in second and third place.
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