2017/18 an “excellent” year for super fund investment returns

2017/18 was an “excellent” year for superannuation fund investment returns, with the ‘median growth fund’ up a “very healthy” 9.2%, according to firm Chant West.

These returns took super funds to a ninth consecutive year of positive returns – equalling the record – and was well ahead of performance targets.

“Growth funds have now delivered nine consecutive positive financial year returns, averaging about 9% a year,” said Chant West senior investment manager Mano Mohankumar.

“The only other time we’ve seen such a long sequence of positive returns was from 1992/93 to 2000/01. This year’s 9.2% is better than most experts, including ourselves, expected a year ago. It’s also well ahead of the typical long-term return objective for the growth category which is CPI + 3.5%. With inflation running at about 2%, that translates to a target of about 5.5%.”

Over the 2017/18 financial year Australian shares were up 13.2%, while international shares were up 10.8% hedged for currency or 15.4% unhedged.

“While shares are still the main drivers of performance, major super funds are well diversified across a wide range of other sectors including unlisted assets,” said Mohankumar.

“The better performing funds in 2017/18 were those that had higher allocations to listed shares and to unlisted assets – property, infrastructure and private equity. A lower exposure to traditional bonds and cash also greatly helped, given they were the worst performing sectors.”

But Mohankumar also reminded super fund members about the long term.

“By all means look at what your fund delivered over the year, but it’s even more important to know what its long- term objectives are and whether it’s achieving them. Most growth funds aim to beat inflation by 3% to 4% a year. We now have data going back 26 years to July 1992, the start of compulsory super. Over that period, the annualised return is 8.3% and the annual CPI increase is 2.5%, giving a real return of 5.8% per annum – well above that 3% to 4% target.”

Industry funds outperform retail funds by 1.3%

Industry funds outperformed retail funds 10.3% to 9.0% during the 2017/18 financial year. Industry funds are also ahead over 1, 3, 5, 7, 10 and 15 years, on the Chant West figures.

“Over the longer term industry funds, as a group, have outperformed retail funds largely because of the way they have allocated their investments and their preparedness to vary those allocations to suit changing market conditions,” said Mohankumar.

“Specifically, they have always tended to have higher allocations to unlisted assets such as private equity, unlisted property and unlisted infrastructure (currently 21% versus 5%), which have performed well for them. This means they have less invested in traditional asset classes such as listed shares, REITs and bonds. Those allocations to unlisted assets have meant slightly higher investment costs, but those extra costs have been more than justified by the better performance and lower volatility.”

“Historically, industry funds have also been more prepared to shift away from their longer-term target asset allocations to take advantage of mispricing or to preserve capital, and those medium-term shifts have had a positive effect on their performance.”

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