Super funds on track to return less than two per cent this year after stocks carnage.
The news just keeps getting worse for superannuation savings with yesterday’s stock market slide taking an axe to company share prices and compounding October’s three per cent decline.
The Australian Financial Review reported that yesterday morning’s share market losses had stripped 23 months of gains. By the end of trading, however, the market had partly recovered from losing one per cent of its value to half a per cent fall.
The Australian Securities Exchange takes its main lead from US stocks. The ASX-200 index carnage follows days of bleeding on Wall Street, spurred by poorer-than-expected company profits, a falling oil price and a potentially deepening trade war between the US and China.
The downward trend in Australian and international shares has been playing out for a number of months, chipping away at the returns collected by super funds.
But even before the routs this month, superannuation research house Chant West warned that October’s share market falls meant super funds were “heading towards a more modest calendar year result than in recent years”.
The median growth fund, which has between 61 and 80 per cent invested in growth assets, slipped three per cent in October, pulling back the return for the first 10 months of 2018 to just 2.4 per cent, Chant West said.
“Midway through November, that figure has reduced further to an estimated 1.8 per cent.
“In October, Australian shares fell 6.2 per cent. International shares retreated 6.8 per cent in hedged terms, but the depreciation of the Australian dollar (down from $US0.72 to $US0.71) limited the loss in unhedged terms to -5.4 per cent.”
Chant West senior investment research manager Mano Mohankumar said this year’s super returns were certain to be well below the 10 per cent average of the previous six years.
“But members need to remember that an average of 10 per cent is not normal,” Mr Mohankumar said. “Growth funds are typically constructed to beat inflation by 3.5 per cent, which translates to about six per cent a year over the long term.
“A more modest return this year doesn’t come as a surprise. Asset managers have been saying for some time that, given the exceptional run investment markets have had since the end of the GFC, most asset sectors are now priced at the top of their valuations, or close to it,” he said.
SuperRatings executive director Kirby Rappell warned that the rest of the year would likely continue to see jittery share markets.
“The market rally gave way to a rolling bear market in October, and despite an attempted recovery, this month remains under significant pressure,” he said.
“Investors are concerned that earnings momentum is slowing and that valuations, especially in some growth sectors, are too high. Add to this significant uncertainty globally, whether it’s renewed trade tensions between China and the US or the continuing Brexit saga in the UK, and it looks like volatility will be a more permanent feature of markets heading into 2019.”
Meanwhile, Mr Mohankumar said that the October slide was a good example of the benefits of diversifying investments within a super account.
“On average, growth funds have about 55 per cent invested in stock markets, which leaves a substantial 45 per cent allocated across a wide range of other sectors, including unlisted infrastructure and property as well as traditional defensive sectors like bonds and cash.
“This helps cushion the blow when there are sharp market falls. So, while Australian shares and hedged international shares were down 6.2 per cent and 6.8 per cent respectively, the median growth fund was down less than half that at three per cent.
“Older members approaching retirement naturally have a lower tolerance for seeing their balances go down than younger members. However, they also tend to be more conservatively invested.
“Conservative funds (with between 21 and 40 per cent invested in growth assets) were only down one per cent in October.
“We encourage members to treat their superannuation as a long-term investment. 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.
“Trying to time the market by moving into a more conservative option after sharp share market falls can be detrimental because not only do you crystallise your losses, but you also risk missing out on all or part of the subsequent rebound when markets recover,” Mr Mohankumar said.
Are you considering switching into a more conservatively managed super fund? If you are about to retire, are you worried that your super nest egg has not grown much in value this year?