Superannuation funds have kicked off promisingly in the 2016-17 financial year despite the extreme market volatility experienced since last November.
In the September quarter, the median growth fund with a 61 per cent to 80 per cent allocation to growth assets turned in a solid performance, growing 3.1 per cent, according to research by super consultancy Chant West. That equates to 7.2 per cent for the year to September.
Balanced funds, where most people invest, were up 2.4 per cent for the quarter and 6.1 per cent for the year to September. On those figures, the average fund balance for a male would have grown from $98,555 to $100,920 in the quarter, while the average female fund would be up to $56,229 from $54,917.
The industry fund sector once again outperformed the for-profit sector, returning 3.2 per cent compared to 2.9 per cent for retail funds. Industry funds also continue to hold the advantage over the longer term, having returned 5.8 per cent per annum against 5.1 per cent for retail funds over the 10 years to September 2016, Chant West found.
The stronger super performance was largely driven by share markets, which were strong over the period. Australian shares gained 5.2 per cent in the September quarter while international shares were up 4.8 per cent when hedged against a stronger Australian dollar.
The local currency was up from 74 US cents to 77 US cents and international shares valued without currency hedging, a form of insurance against currency movements, returned only two per cent. Property was mixed, with Australian property funds (REITs) down 1.9 per cent over the quarter while global REITs were up 1.3 per cent.
Chant West director Warren Chant described the quarter as “solid overall, but the performance was far from consistent”.
July was strong
Of the 3.1 per cent gain for the quarter, 2.7 per cent came from stronger markets in July. “Since then we’ve had two months of fairly flat returns, and that’s mainly because investors are preoccupied about US interest rates and when the next rate hike will be,” Mr Chant said.
“This nervous mood is likely to continue while there’s so much uncertainty about global interest rates, the outcome of the US election and the downstream consequences of Brexit. Funds are finding it hard to identify undervalued assets that will deliver real returns, and this is compounded by the pressure they’re under to reduce investment fees,” he said.
Despite the September quarter returns, low interest rates mean growth for super funds will not return to the double figure experience of some recent years. “They’re going to find it tough to meet their long-term objectives, and members need to remain patient in the face of returns that are likely to be lower than what they’re used to,” Mr Chant said.
Global markets have been focused on the likelihood of a US rate rise with US Federal Reserve Chair Janet Yellen saying in the last two months that the arguments for an interest rate hike have strengthened.
“However, after the ‘no change’ decision in September, markets still aren’t convinced that a rise in December is a certainty. While this timing issue is dominating market sentiment, far more important will be the pace at which rates are increased over the next few years,” Mr Chant said.
Cash is king
Meanwhile, research by Deutsche Bank has found that super funds were pulling back from the share market and building up cash balances.
Cash and deposits made up 17 per cent of total super assets in the June half, up from the long-run average of 12 per cent, Deutsche’s Australian research chief Tim Baker found.
Inflows to super funds are growing strongly, with Mr Baker estimating mandatory contributions will top $65 billion in the 2016 financial year. Discretionary contributions, he says, will top $15 billion, below the average of recent years of $20 billion.
That fall in voluntary contributions is likely driven by confusion around future legislative super caps triggered by the Turnbull government’s May super reforms. These have been subject to controversy and ultimately changed after threats from Coalition parliamentarians to cross the floor and vote against them.
The New Daily is owned by industry super funds.