Superannuation funds head for double-digit return for 2019

The average super fund is heading for a double-digit return for 2019.

The estimated year-to-date return for 2019 is 12.5pc, according to SuperRatings.

Super funds have had a positive start to the December quarter.

After regaining momentum in October as global sharemarkets rebounded as geopolitical and economic worries receded, the average super fund is heading for a double-digit return for 2019.

While the median balanced option with 60-76 per cent invested in growth assets like shares returned a modest 0.3 per cent in October, the estimated year-to-date return for 2019 was a very healthy 12.5 per cent, based on the latest report from super research house, SuperRatings.

The median growth option fared even better, returning 14.4 per cent so far this year, while the median capital stable option returned a respectable 7.1 per cent to the end of October.

While global sharemarkets came under pressure in August and September, and the Australian underperformed last month — tracking sideways despite offshore gains — super funds have once again proved they are up to the task of navigating the significant uncertainty in markets, geopolitics, and the global economy, according to SuperRatings executive director Kirby Rappell.

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“Super fund returns held up well in October, despite weakness from Australian shares and signs of softer economic growth globally,” Mr Rappell said.

“The heavyweight financials sector has come under pressure due to constrained lending, lower net interest margins, and continued fallout from the royal commission, while information technology shares also suffered as investors questioned the lofty valuations of Australia’s local tech darlings.”

Over the past five years, the median balanced option has returned an estimated 7.6 per cent annum, compared to 8.3 per cent per annum from growth and 4.7 per cent per annum from capital stable.

“This year has provided further solid evidence of the ability of super funds to deliver for their members through a challenging market environment,” Mr Rappell said. “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. This has been a real test of their discipline and ability to manage risks on the downside.”

Broadening the base

In his view one of the most important trends in the superannuation industry is the broadening of members’ investments across different asset classes.

Over the past five years, super funds have shifted away from Australian shares and fixed income and moved a higher proportion of funds into international shares and alternatives.

“The shift to alternatives is significant and has been the subject of debate within the industry,” Mr Rappell said.

“Alternatives include private market assets and hedge funds, which despite the negative connotations can provide an important source of diversification and downside protection when markets take a turn for the worse.”

“These assets can 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, the assets tend to be less liquid, so funds should be clear about their alternatives strategy and the risks they could potentially add to members’ portfolios.”

This shift in asset allocation is being driven by the low interest rate environment prompting super funds to reach for yield by allocating to alternatives and other less liquid assets.

“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,” Mr Rappell said.

“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.”