Global market volatility set to trim Australian fund returns

After three boom years, super fund managers are now bracing for less spectacular returns as growing volatility in global financial markets prompts more defensive strategies.

Jonathan Armitage, chief investment officer at Colonial First State expects the super industry to post annual returns closer to 7 per cent going forward.

After three years of double-digit growth, super fund managers are now bracing for less spectacular returns in coming years as growing volatility in global financial markets prompts more defensive strategies.

“It seems prudent that you should be expecting returns move back to longer-term averages, and that they are lower than what we have seen for the last three years,” said Jonathan Armitage, chief investment officer at Colonial First State. “We have positioned our portfolios appropriately for that environment.”

Armitage expects the super industry to post annual returns closer to 7 per cent going forward, which is around the average of the last 25 years.

The outlook for further fiscal deterioration in both the US and Europe has already driven CFS to rebalance some of its portfolios away from growing trouble spots in global bonds and equities. CFS has been adding to its exposure to Australian government and corporate debt.

Part of that shift was “yield play,” but it was also driven by the weakening outlook for sovereign debt markets, with budget deficits in places like France blowing out, and the US on track to add $US3 trillion ($4.5 trillion) to government debt over the next decade.

CFS has close to $165bn in funds under management, with around 40 per cent of its portfolio committed to US markets. Armitage said that as fears about the US budget outlook have grown, CFS has kept its exposure to US bonds low.

CFS has also trimmed its holdings of global equities, shifting funds into emerging markets, attracted by valuations and by a desire for diversification.

But Armitage is fearful that the propensity for extreme volatility in markets could increase. Volatility has risen exponentially since the Global Financial Crisis. It increased even further at the start of the pandemic when share prices fell, and a sudden selloff in Japanese stocks in mid-2024 showed the volatility curve continues to steepen.

“We are starting to see a pattern emerge where markets are more volatile. The reaction function is becoming more severe,” he said. “We may well see a continuation of that.”

Beyond the prospect of budget blowouts, Armitage is also watchful of the drift toward populist governments.

“2024 was the largest exercise in global democracy ever,” he said. “For the first time ever, every single incumbent government either lost power, or lost a significant share of the vote.”

The comments come amid growing attacks on the Federal Reserve’s independence, with a cloud hanging over Jerome Powell’s term as chair. Any loss of Fed independence would come at a difficult time for financial markets, with the White House’s trade policies potentially stoking a fresh uptick in inflation.

Still, Armitage said despite uncertainties for markets, the principles of investing for the long term still hold.

The selloff in April that crushed US shares and prompted moments of dysfunction in debt markets, in the end, proved to be short-lived, Armitage said.

Within a relatively short period, the chaos that followed the White House’s announcement of far-reaching tariffs ended, with the updraft that had been lifting shares returning.

“It was a cautionary tale about not reacting to short-term data or news flow,” Armitage said.

CFS is staying focused on greater diversification of its portfolio, he added. That is driving increased exposure to private debt, private equity and asset-backed finance, he said.

“That’s all about diversifying returns, and looking at things that are perhaps less correlated with liquid equity markets and liquid bond markets,” he said.

The Wall Street Journal