Superannuation funds are in the black for a record 10-year period with research group Chant West estimating returns for the June year in the ‘growth’ category, where 80 per cent of Australians have their accounts, as coming in at 7.1 per cent.
That would push a fund worth $50,000 up to a value of $53,550 without extra contributions. Once employer contributions of 9.5 per cent are added in, the fund would be worth at least $59,500 by June 30 for a worker earning $60,000.
That return is below the 9 per cent average of the last nine years achieved in the recovery from the global financial crisis.
However, it is still above the target level envisaged when compulsory super was designed in 1992.
Super outdoing expectations
“Fund members should be very pleased with a return in the order of 7.1 per cent,” said Chant West investment research chief Mano Mohankumar.
“That’s more than 5.5 per cent above the current rate of inflation – well above the typical long-term objective which is to beat inflation by 3.5 per cent,” he said.
The chart below demonstrates just how well members have been doing in the superannuation system.
But, the reality is that there have only been three negative return years over the past 26 years. And only in another three years did super returns undershoot their target.
“So funds are growing their members’ savings well above the increase in the cost of living, and they’ve been doing that for a long time. That’s a tremendous run, but we should remember that it really represents the recovery from the setback of the GFC, so it would be a mistake to assume it’s sustainable,” Mr Mohankumar said.
“Indeed, with many asset sectors looking to be fully valued or close to it, we’re expecting some challenging times ahead,” he said.
The picture will be even better for some members with the top funds expected to return 10 per cent which is about 8.5 per cent above the inflation rate.
“Even funds at the bottom end of the range are likely to deliver respectable positive returns,” Mr Mohankumar said.
Shares are drivers of growth
The typical growth [sometimes called balanced] fund has an allocation of around 53 per cent invested in Australian and international shares.
With only two days remaining in the financial year, Australian shares are up a solid 11.5 per cent and international shares are up 5.6 per cent where their exposures to the Australian dollar have been hedged.
For unhedged international funds, a weaker Australian dollar has pushed their value up 11.5 per cent in unhedged terms.
“That’s important because, on average, growth funds have about 70 per cent of their international shares exposure unhedged,” Mr Mohankumar said.
Unlisted assets have also performed well with Chant West expecting unlisted property to return between 5 per cent and 8 per cent.
Unlisted infrastructure and private equity will likely range between about 8 per cent and 11 per cent.