Super funds returns rebound in solid start to the year

Super funds have regained two-thirds of last year’s losses, in just one month.

Super funds kicked off the new year in style, as a simultaneous rebound in shares and bonds made up much of the losses experienced in 2022.

The median super fund in the growth category – including funds with between 61 and 80 per cent in growth assets – surged by an impressive 3 per cent in January as global shares and bonds recorded a very strong start to the year. The median balanced fund returned 2.4 per cent. `

Australian shares surged 6.3 per cent last month.

International developed market shares added 6.5 per cent in hedged terms, but a stronger Australian dollar limited that gain to 3 per cent for unhedged funds. Australian bonds rose 2.8 per cent. International bonds rose 2.1 per cent.

“In just one month, funds have regained two-thirds of the last year’s 4.6 per cent loss,” said Chant West Senior Investment Research Manager, Mano Mohankumar.

Three years on from the start of the pandemic, the median growth fund is up nearly 14 per cent despite a challenging economic backdrop.

“Most importantly, funds are continuing to meet their long-term return and risk objectives,” Mr Mohankumar said.

“That should provide important context and comfort for fund members at a time when we continue to see market volatility as investors react sharply to news – good or bad.”

January’s rise in shares and bonds came as inflation in the US finally showed signs of cooling after reaching uncomfortably high levels.

“This, coupled with better than anticipated GDP data, gave rise to expectations that the Federal Reserve would slow its program of interest rate rises,” Mr Mohankumar noted.

Those expectations were correct, as the Fed increased interest rates by only 0.25 per cent in January – down from 0.5 per cent in December and 0.75 per cent in November.

There was also improved sentiment in Europe on the back of government economic support, a mild winter which helped defuse the energy crisis and the reopening of China which benefited certain key industry sectors.

Inflation in Europe and the UK, while showing signs of slowing, still remained at elevated levels, prompting both the European Central Bank and the Bank of England to raise rates by 0.5 per cent in early February.

Closer to home, China’s loosening of its Covid-19 restrictions and government support for its struggling property sector bolstered sentiment.

In Australia, January’s 6.3 per cent sharemarket return more than offset the 2022 loss of 1.8 per cent, but inflation remained higher than expected, prompting the RBA to deliver another 0.25 per cent rate increase this month.”

Others cautioned that January’s stronger investment returns were simply driven by rebounds in many of last year’s poorest performing asset classes and sub-asset classes.

“We do not see this pattern as a perfect guide to performance over the coming year, although we do see a broadly better environment for equities and bonds, notwithstanding our expectation for continued volatility,” said Wilsons Advisory strategist David Cassidy.

Despite the improving performance trend, he said investors still appear “skittish” as uncertainty oscillates between fears of a “too hot” and “too, too cold” macro backdrop.

“Equity and bond markets have softened since the end of January as global markets swing back toward a ‘too hot’ scenario, following the recent stronger US jobs and inflation prints,” he added.

But Mr Cassidy expects lower inflation and “not disastrous” economic growth this year.

“While acknowledging that the strong start to the year for equities has crimped near-term return prospects, we think 12-month prospects for equities remain respectable with at least ‘fair’ returns on offer,” he said. “Active asset class tilts and manager selection will be potentially important to add to moderate base case benchmark returns.”

For each of the traditional diversified risk categories in Chant West’s Multi-Manager Survey – ranging from All Growth to Conservative – most have met their typical long-term return objectives.

What while the Growth category is still where most people have their super invested, a meaningful number are now in so-called “lifecycle” products.

“Most retail funds have adopted a lifecycle design for their MySuper defaults where members are allocated to an age-based option that’s progressively de-risked as that cohort gets older,” Mr Mohankumar said.

Despite the pullback in calendar year 2022, options that have higher allocations to growth assets have done better over most periods.

Younger members of retail lifecycle products – those born in the 1970s, 1980s and 1990s – have either outperformed or held their own against the MySuper Growth median over the three-year period and longer.

However, they’ve done so by taking on significantly more share market risk. On average, these younger cohorts have at least 20 per cent more invested in listed shares and listed real assets than the typical MySuper Growth option.