Superannuation funds have just managed to produce positive investment returns for the 2018 calendar year, after fears that losses late in the year would push them into negative territory.
The ‘median growth fund’ (61-80% growth assets) returned 0.8% in 2018, according to Chant West, which is the lowest since 2011. But it also makes the seventh consequtive year of positive investment returns.
“The 2018 result doesn’t come as a surprise given the stellar run funds had experienced since early 2009,” said Chant West senior investment manager Mano Mohankumar.
“Leading in to 2018, the median growth fund had averaged close to 9% over the previous nine years and asset managers were saying that most asset sectors were fully priced or close to it, so a flat or negative year was certainly on the cards.”
“The important thing for members to remember is that growth funds are generally designed to beat inflation by 3.5% a year, which translates to about 6% per annum over the long term, and they’ve succeeded in achieving that objective over the medium and long term.”
“The power of diversification was clearly evident in 2018. When you consider that the Australian share market fell 3.1% and international shares 7.5%, the median growth fund was still able to eke out a positive return. That’s because, while these funds do invest substantially in shares they also invest in a wide range of other asset sectors including unlisted assets and traditional defensive assets such as bonds and cash, all of which produced positive
returns for the year.”
While the median ‘Growth’ fund was up ‘High growth’ and ‘All growth’ were both down – by -0.2% and -1.8% respectively. But ‘Balanced’ and ‘Conservative’ funds performed better, up 1.0% and 1.6% respectively.
“The better performing funds in 2018 were those that had relatively higher allocations to unlisted assets – infrastructure, property and private equity – and to bonds at the expense of shares. Having a higher proportion of your international shares unhedged would have also helped, because the depreciation of the Australian dollar turned the unhedged loss of 7.5% for that sector into a 1.5% gain in unhedged terms,” said Mohankumar.
While acknowledging that 2018 was disappointing, he encouraged super fund members to not panic and to think long-term.
“Firstly, they should check that the investment option they’re in is suitable for them and, if so, remain patient and not get distracted by short-term noise. If you try to time the market by moving into a more conservative option after sharp share market falls, not only do you crystallise your losses but you also risk missing out on all or part of the subsequent rebound when markets recover.”
“So be aware of how your fund has performed over the past year, but remember that what’s more important is whether it’s achieving its long-term objectives.”
As is often said, past performance is not an indicator of future performance.