Superannuation returns ‘might not be negative’ this financial year despite market turmoil

Even if the markets do not hold up and super funds slip into the red for the year to June, the broader picture remains encouraging.

It might sound unbelievable, but your superannuation just might make money this financial year. As we stand right now in the financial year to the end of June 2020, it’s a line ball call.

As superannuation research group, Chant West, put it in its latest bulletin: “Remarkably a positive year remains a real possibility.”

Who would have thought in the depths of the pandemic back in March, the fund managers could manage yet another positive year - or even a year where total returns are little changed?

As institutional investors fall over one another arguing against the flawed logic of a rising market set against a slowing real economy, the latest returns on super suggest traditional diversification remains the bedrock of successful investment portfolios - even against the backdrop of what might be the fastest bear market in history.

For super investors in “growth” funds - the most commonly held funds - the month of May offered a 2.2 per cent improvement.

On a three-month basis, funds are down 4.3 per cent - but Chant West estimates the financial year to date return sitting at the middle of June is zero.’

With ample warning that markets remain highly volatile, despite huge efforts by the US Federal Reserve to bolster confidence on Wall Street, Mano Mohankumar, a senior investment research manager at Chant West has suggested Australia’s largest funds’ ability to diversify out of listed markets has been crucial.

“One key reason that funds appear headed for a better than expected result is that they manage well-diversified portfolios invested across a wide range of growth and defensive asset sectors including, for many, a meaningful allocation to unlisted and alternative assets. That diversification works to cushion the impact during periods of sharemarket weakness,’ he suggests.

The report says that in relation to newer-style lifecycle funds where a “younger cohort” are concerned, the larger allocation among industry funds in unlisted assets is the reason for better performances.

“This is mainly due to the not-for-profit funds’ higher allocations to unlisted assets (unlisted property, unlisted infrastructure and private equity) – about 21 per cent on average. This compares with the retail lifecycle fund average of 5 per cent.

“These (unlisted assets have been proven to add value over the longterm, not just for their diversification qualities but also because they generate an illiquidity premium in their returns relative to listed markets,” the report says.

For major non-profit funds such as union-linked industry funds, the endorsement of a “meaningful allocation to unlisted assets” will be a welcome relief.

The exposure of top industry funds, such as HostPlus, to lucrative unlisted assets - and the potential liquidity issues that might have formed due to this allocation - were in the spotlight when the government unexpectedly announced an early super release package at the height of the pandemic.

Even if the markets do not hold up and super funds slip into the red for the year to June, the broader picture remains encouraging.

It would represent only the fourth time in 28 years that super funds have lost money.

Since the GFC, major funds have managed a remarkable average of 8.4 per cent a year against a long-term average closer to 6 per cent.

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Wealth editor James Kirby will present Financial Advice - Where to start? as a one-time only Facebook live event on Wednesday 24 June at 7.30pm.