Rough start to the year for superannuation funds with returns down in January

Super funds had a rough start to the year as jitters over surging inflation and rising interest rates weighed on shares according to superannuation research house SuperRatings.

After a partial recovery in share prices towards the end of the month, the median balanced fund option still returned minus 2.1 per cent in January, after a 13.4 per cent return in 2021.

Super funds had a rough start to the year as jitters over surging inflation and rising interest rates weighed on the share market according to superannuation research house SuperRatings.

After a partial recovery in share prices towards the end of the month, the median balanced fund option still returned minus 2.1 per cent in January, after a 13.4 per cent return in 2021.

It came as bond yields surged last month and US and Australian benchmarks endured official corrections of at least 10 per cent for the first time in the post-Covid bull markets, which began after an extremely brief bear market during the Covid-panic of early 2020.

Pandemic-related supply shortages are expected to ease as the global economy reopens, but US inflation data for January exceeded expectations amid broadening inflationary pressure, heightening expectations of rapid-fire US rate hikes starting next month, and crude oil prices hit fresh seven-year highs after the US warned that Russia was poised to invade Ukraine, boosting European gas prices.

SuperRatings executive director Kirby Rappell said that while falling interest rates have boosted asset prices, generating extremely strong returns for super funds over the past 5, 10 and 20 years, the current outbreak of inflation has implications for investment markets and super fund balances.

“Looking ahead, it’s likely that we will need to embrace the increased volatility that may come from an increase in rates,” Mr Rappell said. “This is a big shift given we have become used to the trend of falling rates over an extended period.”

Balanced funds and more conservative options should be less volatile with about 50 per cent of their investments in shares, but most still have some way to go to recover from the latest market drop.

The median growth option is down about 2.9 per cent, while the capital stable option, which includes defensive assets like bonds and cash, has fared relatively better, falling only 0.9 per cent.

Pension returns have also fallen in January, with the median balanced pension option down an estimated 2.3 per cent, compared to a fall of 3.2 per cent for the median growth option and 1.1 per cent for the capital stable option.

“While we have seen super fund performance take a hit this month, it is important that people remember that super is a long-term investment,” Mr Rappel said.

“Trying to time the market can see members end up in a worse position, so it’s best to talk to your fund or an adviser before making any changes.”

He noted that super funds delivered a return of 13.4 per cent in 2021 and over the long-term super returns have exceeded the typical objective of CPI plus 3 per cent.

“It’s about checking you are in the right long-term option and sticking to it,” he said.

“If you had switched to cash at the start of last year you would have seen a return of 0.1 per cent instead of 13.4 per cent for a balanced option.

“Thinking long-term when it comes to strategy and blocking out shorter-term noise remains the pragmatic approach and is aligned with funds’ approaches.”

Originally published as Rough start to the year for superannuation funds with returns down in January