Superannuation funds eye best annual return since 2013

The Australian Business Review

18 May 2021

Cliona O’Dowd

Super funds are on track for their best annual return in close to a decade as markets straddle record highs, with the March 2020 meltdown now a distant memory.

The median growth fund grew 2.2 per cent over April, bringing the return for the first 10 months of the financial year to 14.7 per cent, according to research house Chant West.

If super funds can hold on to that return for the next six weeks, it will be the highest annual return since financial year 2013, when growth funds surged 15.6 per cent over the year.

“They’ve shown their resilience – as we saw last financial year when they limited the COVID-induced damage to post a small loss of 0.6 per cent – and now they’ve shown their powers of recovery,” Chant West’s senior investment research manager, Mano Mohankumar, said.

“The cumulative return since the end of March last year is about 22 per cent, which is astonishing given the health concerns, disruptions and economic damage caused by COVID-19.”

The median growth fund is also now more than 7 per cent above its pre-COVID crisis high set in January 2020.

Since the introduction of compulsory super in 1992, the median growth fund has returned 8.1 per cent per annum, well above the annual CPI increase over the same period of 2.4 per cent. This means funds have delivered a real return of 5.7 per cent, well above the typical 3.5 per cent target.

“Even looking at the past 20 years, which now includes three major sharemarket downturns – the ‘tech wreck’ in 2001–2003, the GFC in 2007–2009 and now COVID-19 – the median growth fund has returned 6.8 per cent per annum, which is still well ahead of the typical return objective,” Mr Mohankumar said.

Source: ChantWest
Source: ChantWest

Share markets were the main drivers of the fund performance over April, according to Mr Mohankumar.

Australian shares were up 3.7 per cent for the month, while international shares gained 4.1 per cent in hedged terms. The appreciation of the Australian dollar over the period pared the gain back to 3.2 per cent in unhedged terms.

The vaccine rollout in the US, where 70 per cent of the population has now had at least one dose, has been a market confidence booster of late.

“Markets were also boosted by some improving economic data and by President Biden following up his $1.9 trillion fiscal stimulus package with a proposed $2 trillion in infrastructure and manufacturing subsidies. In addition, US companies had a strong quarterly earnings season,” Mr Mohankumar said.

Source: ChantWest
Source: ChantWest

But as funds march toward the end of the financial year, increased volatility and the threat of a correction are never far away.

Last week, a surprise spike in US inflation sent jitters through markets as investors mulled sooner-than-expected interest rate rises in the world’s biggest economy.

Consumer prices rose 4.2 per cent over the 12 months through to April, up from 2.6 per cent in March and well above the 3.6 per cent the market had been expecting. The shock print helped push Wall Street to its steepest three-day decline in seven months.

US stocks started this week on a sour note, ending Monday’s session in the red on continued inflation concerns, but the local market has taken it in its stride, rising in both Monday and Tuesday’s trade as it pushes to get back to its recent record high.

While inflationary pressures build in the US, the Reserve Bank sees only muted inflation risks for Australia in the coming years, allowing it to hold its line on not raising interest rates until 2024 “at the earliest”.

In minutes of its May 4 policy meeting published on Tuesday, the central bank said there was little risk of a wages breakout on the horizon, with plenty of spare capacity in the labour market and firms focused on cost control.

But the inflation jitters that have hit stocks of late pose a risk to the funds invested heavily in the so-called Covid winners.

“The COVID winners and the stocks that have been the best performing in the prior 12 months…there has been a fairly meaningful selloff in them,” Forager Funds’ chief investment officer and founder, Steve Johnson, said.

Afterpay and Xero are among Australia’s large COVID winners that have come unstuck this year amid inflation concerns and the outlook for interest rates and central bank liquidity from bond buying that boosted the valuations of growth stocks in the past year.

Afterpay has nearly halved from its February peak of $158 and is currently trading at around $86.50. That’s still a big jump on the $8.90 it hit in the March market meltdown last year.

Xero, meanwhile, has slumped by 25 per cent from its all-time highs and is currently trading at $118.

In the US, Bell Asset Management’s chief investment officer Ned Bell sees big risks for the “hot” concept stocks that rocketed in the post-Covid environment.

“The big stocks like Tesla, Nvidia, Netflix, Salesforce, these types of names, they’re so overowned, and they trade on these nosebleed earnings multiples. And frankly, I don’t see who the marginal buyer is,” Mr Bell said.

“So those are the names, those extremely expensive names, are the ones that typically derate the most in a rising interest rate environment. And that’s what we’re expecting to see.”

Additional reporting: David Rogers