The era of easy super returns is over

The Australian

James Kirby, Wealth Editor

18 December 2018

Big super funds which have been coasting on an extended post-GFC recovery are set
to be tested in the months ahead with much poorer returns looking likely this financial

As super fund members have come to expect returns of 9 per cent plus per annum, this
year looks very different. If the books for the financial year were ruled off just now the
average balanced super fund would present a lower-than-inflation return of 1.8 per
cent (annualised inflation is running at 1.9 per cent.

All superfund managers would be well aware the last few years have been
exceptionally strong — after all the long term average for super funds is a modest 5.6
per cent per annum. But that will not make it any easier for big funds when explaining
to fund members why their annual contributions have been made into a sinking

The poor numbers — which look like the worst since 2011 — will create different
tests for different fund formats. Industry funds, which have more unlisted assets, will
have new liquidity strains if members seek to take money out. Retail funds, from
banks and insurers, will be particularly exposed to an unfortunate combination of
losses in both the share market and the bond market. Separately, Self Managed
Superannuation Funds (SMSFs), which are traditionally overweight in cash and
Australian shares, will get support from cash holdings while share holdings will
almost certainly create a drag on returns.

The very poor first half of FY19 was confirmed by two leading researchers Chant West and SuperRatings. Ominously the SuperRatings report for November suggested:
“Ongoing market weakness in December is likely to eat away at what is left of super’s
gains through 2018”. While Chant West research manager Mano Mohankumar warned
“the flat result doesn’t come as a surprise given the stellar run super funds have
experienced since 2009.”

The most recent losses among super funds has been driven primarily by sinking share
markets. Though returns on Wall Street have regularly been better than the ASX, a
rising Australian dollar in the month of November created a negative result for
Australian investors in unhedged terms. Listed property investments, which can
smooth out broader share market volatility, did not help much either over the last few
weeks — Chant West says Australian-based property trusts were down in the most
recent period.

The majority of workers in Australia are in balanced funds, while a smaller number of
younger or less conservative investors opt for so-called growth funds which take on
more risk with the promise of higher rewards. Mohankumar at Chant West suggests
“with just two weeks of the year remaining, growth funds still have a chance of
finishing in the black.”

Growth funds have seen asset prices sinking fast in recent weeks, but a very strong
performance from shares earlier in the year could buoy the final numbers. As
SuperRatings numbers show despite suffering heavy losses in October (-5.8 per cent)
and smaller losses in November (-0.4 per cent) members invested in the median
international equities option have experienced returns year to date of 2.1 per cent.

The last time super members were hit with a negative year — in 2011 — the median
balanced option returned -1.9 for the year, while growth options were hit hard, median
Australian equities option dropped 9.6 per cent and international equities option fell by
6.7 per cent over the full year.

James Kirby, Wealth Editor