It’s been a bumpy ride for superannuation investors over the course of 2015, and expectations are that market conditions will remain volatile over the remainder of the year and, quite likely, into 2016.
But superannuation experts say the best strategy for super fund members is not to panic and make any rash changes to one’s investment allocation.
“Increased volatility means people just need to get used to their superannuation balance bouncing around a little bit more,” SuperRatings general manager research Kirby Rappell said.
“Consumers should make sure any decision is very considered, as super is a long-term proposition.”
Separate superannuation performance reports released this week by SuperRatings and Chant West show that average super fund returns will end the year in positive territory, but will be well down on the returns achieved over the past three calendar years.
Their latest data to the end of November shows average super returns of 5.2 per cent to 5.7 per cent for the year to date, compared with an average three-year return of around 12 per cent per annum.
“With only two weeks of the year left, and despite increasingly shaky investment markets, it’s still likely that the median growth fund will produce another positive calendar year return,” said Chant West director, Warren Chant.
“While it won’t reach the heights of the past three years (12.8 per cent in 2012, 17.2 per cent in 2013 and 8.5 per cent in 2014), it would still represent the sixth positive return in the past seven years and the 11th in the past 13.
“A more subdued return this year isn’t really a surprise. For some time, asset managers have been commenting that we’re heading into a lower return, higher volatility environment. They believe that many asset sectors are now close to being fully valued, and say they’re finding it harder to identify future sources of growth.”
Why is this happening?
Mr Chant said the key themes that have affected global investment markets in 2015 include uncertainty over the timing of the US Federal Reserve’s long-awaited first interest rate hike, slowing economic growth in China, falling commodity prices and monetary easing in Europe, Japan and China in response to concerns over deflation.
“Back at home in Australia, we’ve seen muted growth as the mining sector slumped further. In an attempt to boost our sluggish economy, the Reserve Bank lowered interest rates to a record low of 2 per cent,” he said.
“The main things to keep an eye on over the next year will be the rate at which the Fed raises rates, and whether China is able to avoid a hard landing. Domestically, the extent to which non-mining sectors pick up will determine the degree to which the RBA might cut interest rates even further.”
Chant West’s data shows industry super funds have outperformed retail funds over the year to date, with average returns of 6.3 per cent versus 5.3 per cent.
What can you do?
SuperRatings chairman Jeff Bresnahan added that persistent market volatility had made 2015 a challenging year for most superannuation funds, with negative returns recorded in five months of the year so far and further losses expected in December.
But investors are advised to hold on for the ride, and to remain diversified across different asset classes over the long term to reduce overall risk.
“While the median Balanced Option recorded a 0.3 per cent fall for the month, this is less than the losses seen across key growth asset classes, once again highlighting the benefits of diversification,” Mr Bresnahan said.
“While falling short of the 8.1 per cent return seen in 2014 and 16.3 per cent recorded in 2013, superannuation funds are well positioned to deliver their fourth consecutive positive calendar year return.”
Since the year 2000, the median Balanced Option (usually the default option for most super funds) has only experienced negative calendar year returns in 2002, 2008 and 2011, while providing an estimated average return of 5.9 per cent per annum over this 16-year period.