Satisfactory returns, but superannuation facing further volatility

September quarter finished with a healthy overall result, but volatility isn’t going away, warns Chant West.

The ‘typical’ growth fund has more resilience built-in than it did a decade ago, says Chant West.

Super funds got off to a positive start to the financial year thanks to stronger local and global sharemarkets and a weaker exchange rate, although superannuation research firm Chant West is warning of “more turbulence ahead” amid trade tensions and fading global economic momentum.

Despite a volatile August, the median growth fund with 61-80 per cent in growth assets returned 2 per cent in the September quarter, according to the latest report from Chant West.

Local and overseas sharemarket gains were the main drivers of growth fund performance in the quarter, with Australian shares advancing 2.6 per cent and hedged international shares rising 1.5 per cent. But the depreciation of the Australian dollar versus foreign currencies added 3.2 per cent to the value of international shares, for an impressive total return of 4.7 per cent in unhedged terms.

The Australian dollar slipped 3.9 per cent against its US counterpart during the September quarter, falling from US70.20c to US67.50c, and has sustained that fall so far in October.

Also helping the return of growth funds — which typically invest 20-39 per cent of their funds in defensive assets — were solid gains in fixed income, with domestic bonds up 2 per cent and international bonds up 2.3 per cent in the quarter.

The 8 per cent annualised pace of returns for the median growth fund is in keeping with the decade-average return of 7.9 per cent and exceeds the 15-year average of 7.2 per cent.

But notwithstanding the healthy overall result over the September quarter, the volatility encountered in August — where domestic and international shares fell about 5-6 per cent — isn’t going away, warned Chant West senior investment research manager Mano Mohankumar.

“We expect challenging times ahead as the global economy continues to be dogged by uncertainty,” Mr Mohankumar said.

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“Share markets have proved resilient so far, but we anticipate more turbulence ahead in the current jittery climate.”

He cautioned that the trade tensions between the US and China are yet to be resolved and there is ongoing concern about themomentum of the global economy.

Additionally, the uncertainty surrounding Brexit remains high as Prime Minister Boris Johnson tries to conjure an exit deal in the run-up to the 31 October deadline.

Lacklustre economic growth prompted the US Federal Reserve to cut interest rates twice over the quarter, and in September the European Central Bank announced measures to stimulate a struggling economy, including by restarting controversial quantitative easing measures.

But while investors can expect some challenging times ahead, most Australians should take comfort that their superannuation is mostly invested in well-diversified portfolios with their investments spread across a wide range of asset sectors, Mr Mohankumar said.

“The typical growth fund also has more resilience built-in than it did a decade ago, so it is better prepared in the event that investment markets falter.”

While the growth category still accounts for most people’s super, a meaningful number are now in so-called “life cycle” products, according to Mr Mohankumar.

The bulk of retail super funds have adopted a life cycle design for their MySuper defaults, with members allocated to an age-based option that’s progressively de-risked as that cohort gets older, whereas most not-for-profits still use traditional growth options as their default investment option.