Super funds retreat in August as international sharemarkets drag: Chant West

Hawkish central banks and stubbornly high inflation hurt sharemarkets and super funds last month, but experts say diversification prevented major losses.

Superannuation balances went backwards in August as efforts by central banks to get inflation under control resulted in mixed performances by global equity markets.

The median growth fund with 61 to 80 per cent in growth assets retreated 0.4 per cent for the month, driven by losses in developed markets, according to Chant West.

Developed international shares markets dragged returns lower after a 3.6 per cent drop was recorded in hedged terms, but a weakened Australian dollar reduced that loss to 2.5 per cent in unhedged terms. In contrast, the Australian share market was up 1.2 per cent in August on the back of strong returns from resources companies.

Chant West senior investment research manager Mano Mohankumar said that diversification again came to the fore in August and helped to limit losses to 0.4 per cent for the month.

“If super funds only invested in these traditional listed assets we’d have seen a more substantial fall over the month,” he said.

“But these days they are much more diversified, with most of them having meaningful allocations to unlisted assets such as unlisted property, unlisted infrastructure and private equity which help provide a smoother ride during periods of market volatility.”

However, returns in the first two months of the 2023 financial year was 2.6 per cent higher as a rebound in equity markets boosted returns in July after sharp falls in June.

Despite volatile market conditions this year as a result of tightening monetary policies by central banks and stubborn inflation, Mr Mohankumar said the median growth fund was more than 10 per cent ahead of pre-pandemic highs reached in January 2020.

“This should be comforting for fund members. More importantly, funds are continuing to meet their long-term return and risk objectives,” he said.

Diversification helped kept falls to a minimum.

Mr Mohankumar said since the introduction of compulsory super in 1992, the median growth fund had returned 7.9 per cent per annum, or 5.4 per cent once the average consumer price index increase of 2.5 per cent is factored in.

Global equity markets are facing a barrage of headwinds, heightened in recent weeks by a blowout in US inflation data, which had led to economists to revise their interest rate expectations higher.

Investors are braced for the US Federal Reserve to lift rates by 75 basis point later this week, but a 100 basis point rise remained on the table after stronger than expected inflation data last week.

In Australia, the Reserve Bank has lifted the official cash rate by 2.25 percentage points since May as it works to bring inflation back to its 2 to 3 per cent target.

National Australia Bank and ANZ expect the RBA to raise the cash rate by 50 basis point in October for an unprecedented fifth consecutive month, with the official interest rate to surpass 3 per cent in November.

The negative return in August comes after four MySuper products were ordered to close to new members after failing a key performance test for a second straight year.

The Australian Prudential Regulation Authority annual performance test recently found that the Australian Catholic Superannuation fund, Westpac’s BT Super MySuper, Energy Industries Superannuation Scheme and AMG Super failed for a second consecutive year.