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Why super fund returns are going up when other things are falling

Superannuation has dealt some winning hands this year.

Superannuation has dealt some winning hands this year. Photo: Getty

It’s been a great year to be a member of a superannuation fund. In fact the last seven years have been kind to fund members with returns in positive territory.

Admittedly, back in 2011-12 they just got over the line, racking up only a 0.5 per cent gain gain. But if you look at super returns in comparison to other economic indicators they look even better, as the following graph demonstrates.

If you are a worker with some savings outside of super, the situation looks like this. The Reserve Bank of Australia’s official cash rate has fallen from a high of 4.75 per cent back in 2011 to a minuscule 1.5 per cent now.

That means the interest you earn on your savings outside super has shrunk dramatically while super has been far higher and is currently in double digits at 10.1 per cent between July and the end of April.

The real returns on your super are also growing because the inflation rate has fallen. Back in 2011 it was 3.5 per cent and now its 2.1 per cent, so there is less of your fund’s returns being swallowed up by rising prices.

And you probably don’t need to be reminded that wage growth is at an all-time low; 1.9 per cent currently and less than inflation, so it’s actually in negative territory. So super growth is especially welcome.

Lets take a closer look at the return picture.

The thing that has been driving returns of late has been the share market, with Australian and international shares both in double digits. Unlisted assets (which include direct property holdings, infrastructure and private equity) have also been strong.

This probably accounts for why the industry funds, with 8.8 per cent returns on the nine months to March, are outdoing their retail fund competitors, with 8.3 per cent. The industry fund model allows for higher exposures to unlisted assets.

Chant West research chief Mano Mohankumar noted something unusual. “The contributions from defensive assets like traditional bonds and cash over the 10 months to the end of April is almost nothing.”

The question for super fund members is how long the current returns can stay strong in the face of record low interest rates. In fact, some market watchers are tipping further rate cuts.

“The output gap is at levels historically consistent with another cash rate cut,” investment bank Credit Suisse has argued.

Well-known economist Stephen Koukoulas thinks the tide may be turning on strong share market performance given the likely peaking of the housing market and commodity prices.

“Share market returns are generally the same rate as the growth of nominal GDP. If real GDP is growing at 2.5 per cent or optimistically even 3 per cent and inflation is about 2.5 per cent that gives you around 5 per cent returns,” Dr Koukoulas said.

“Given that bonds might return 3 per cent or less then that means super returns might be 4 to 5 per cent.”

Another factor boosting returns for overseas shares in recent years has been the decline in the value of the Australian dollar from $US1 to US75c. If that doesn’t continue easy gains from foreign denominated assets will be over, he said.

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