Super fund returns: The past can give you a hint of the future

The latest raft of super fund returns hold important pointers for investors in the coming year.

Australian one hundred dollar bills.

The latest batch of healthy returns from Australian super funds offer a string of key pointers for all investors in the year ahead.

Most obviously, the powerful 11.8 per cent return over the 12 months from Australian shares displays once again the resilience of the sharemarket — what might have been a miserable year was turned into an above-average year by the ‘Trump Trade’ which lifted the markets in the last three months to December 31.

Investing in shares in overseas markets also paid off generously with an 8.9 per cent return. For unhedged returns (where the fund does not pay for hedging facilities to protect from currency fluctuations) the returns were 7.9 per cent: (Interestingly this was due to the appreciation of the Aussie dollar against the euro and sterling, which goes to show the US exchange rate is not the only rate that matters).

But the most revealing element of the annual superannuation fund performance figures are the signals for the future.

For anyone choosing between super funds it is worth noting:

* Non-profit funds (primarily so-called industry funds which are linked with trade unions) have continued to dominate the superfund sector. Eight of the top ten performing funds over the last decade have been industry funds as opposed to retail funds provided by banks and insurers.

* Industry funds have higher allocations to unlisted infrastructure and other alternative investments: This allocation helped to cushion the funds against the worst of the GFC, but it has also appears to have sustained the funds during more recent times.

For anyone choosing an investment option within a single fund there are useful signals too:

* A balanced choice can be preferable to a ‘growth choice’ — this is because the heavy exposure to shares can leave such growth choices with few buffers in a sharp downturn: The only fund category not to meet its stated objectives over 15 years was “All Growth’ funds.

* Having some holdings in cash will always make sense — even more so in the coming years as rates are expected to ratchet higher — over a ten year period the return on cash at 4.1 per cent was little different from the considerably riskier option of Australian shares which returned 4.4 per cent.

* Inflation — which is expected to lift in the years ahead — is still very significant even at historically low levels. Overall annual inflation increases over the last 25 years have been 2.5 per cent — that means the net growth in typical super funds has been 2.5 per cent less than the headline figure of 8.2 per cent — in other words the real return has been 5.7 per cent.

* Last year Australian shares were boosted by particularly strong returns from A-REITs (property trusts) at 13.2 per cent which had everything in their favour over recent years, this is very unlikely to continue with higher interest rates.