Super funds return strong results despite falling property values

Five of the nation’s biggest funds have reported strong results, overcoming bad news in the office towers and shopping centres sectors.

AustralianSuper is keeping 10 per cent of its more than $300bn in funds aside for opportunistic investments.

If you are a member of Aware Super or Australian Retirement Trust, two of the nation’s top three pension funds, you must be pleased to have some of the best gains posted by industry super for the past financial year.

Super is most people’s largest asset after their home and, with 11 per cent of a year’s earnings going into super, people should care how their fund performs.

The flagship funds from Aware and ART delivered 10.7 per cent and 10 per cent gains respectively during the year, the highest double-digit gains reported out of the five big industry super funds that released their MySuper returns this week.

Those were above than HESTA’s 9.59 per cent return for the equivalent balanced option, AustralianSuper’s 8.22 per cent return and the 8.95 per cent return posted by Cbus.

The main driver of the returns so far has been the artificial intelligence-fuelled rally in equity markets, particularly in the past six months, despite rapidly rising interest rates.

Higher rates typically hurt asset valuations as the price of debt rises and future cashflows have to be adjusted with higher discount rates, but in the past few months technology-related stocks have refocused equity investors’ minds.

“It’s been a terrific year for super funds, well above the typical long-term return objective,” Chant West senior investment ­research manager Mano Mohankumar said.

“The funds that did better had the higher exposure to shares.”

The Australian benchmark for equities – the ASX 300 total return index – was up 14.4 per cent for the year, while the total return for the US benchmark was 19.6 per cent, according to S&P Global.

The MSCI World Index rose 16.5 per cent over the period.

According to ChantWest’s early analysis of the nine funds that have submitted their results with the researcher so far this week, the median return for the balanced option is sitting at about 8.9 per cent for the past year.

The strong result for shares on both the home index and across several offshore markets was unexpected by many.

“If you thought interest rates were going to go up 300 basis points, would you still expect the balance plan to do 8 per cent per year? Probably not,” AustralianSuper chief investment officer Mark Delaney said. “I was pleasantly surprised.”

Australia’s largest pension fund is keeping 10 per cent of its more than $300bn in funds aside for opportunistic investments as it expects a challenging environment in the next year, which would nonetheless be “opportunity rich” for those who kept their powder dry.

But big super funds have also been taking substantial haircuts to the values of their investments in office buildings and shopping centres.

Downgrades in commercial property resulted in a flat result in ART’s property portfolio, as double-digit falls in commercial property valuations were offset by gains in its industrial property holdings and other types of real estate investments.

ART super’s balanced option has 8.5 per cent in property.

At AustralianSuper, the largest of all super funds where property exposures on the balanced fund account for 5.9 per cent of exposures, downgrades to office buildings – where fewer workers want to be – and shopping centres – in which fewer consumers want to shop – were big enough to lead to a 7.8 per cent loss in its unlisted portfolio.

Listed property exposures were down 5 per cent.

Building industry-backed fund Cbus, one of the most exposed to property with 13.6 per cent invested in the sector, saw material downgrades in individual assets in the office sector too.

Better performance from industrial assets and residential projects helped balance the overall outcome from the sector to post a single-digit loss, a spokesman for the $83bn fund said.

HESTA did not provide the return of its property portfolio beyond saying it had taken “single-digit” writedowns on some office properties.

Overall, the funds are positioning themselves more defensively, reducing their exposures to equities and increasing their investments in fixed income, as they expect interest rates might soon reach their peak.

AustralianSuper increased its exposure to fixed income over the year by 6.2 percentage points to 16.9 per cent.

ART is also relying more on bonds as a defensive strategy, increasing its allocation to 18.5 per cent, from 12 per cent.