Superannuation returns slipped in August as international share and money markets turned volatile, but overall returns were strong since pre-pandemic highs.

The standard growth or balanced fund with 61 to 80 per cent growth assets fell 0.4 per cent over August when inflation fears rattled world markets.

However, “the return over the first two months of the financial year still sits at a healthy 2.6 [per cent] for that category,” Chant West lead researcher Mano Mohankumar said.

“It’s important to keep in mind that we had a very good start to the financial year in July when funds grew at 3.2 per cent,” he said.

The returns for the first two months of the financial year mean that the average super fund value for a male would be up $4207.68 to $166,041.

A female with an average balance would have $132,873 in their account.

The performance of super funds in August “demonstrates the advantage of diversification through investment portfolios,” Mr Mohankumar said.

Sharemarket returns were varied, with Australian shares gaining 1.2 per cent in August on the back of strong prices for resources.

Meanwhile, international shares lost 3.6 per cent for the month.

Bonds, which tend to be seen as a countervailing force to shares, also lost ground in August.

International bonds lost 2.7 per cent while Australian bonds lost 2.5 per cent in value as rising interest rates forced down the capital value of bonds.

“If super funds only invested in traditional listed assets we’d have seen a more substantial fall over the month,” he said.

“But these days they are much more diversified, with most of them having meaningful allocations to unlisted assets such as unlisted property, unlisted infrastructure and private equity which help provide a smoother ride during periods of market volatility.”

That diversification helped to limit the overall downside to just 0.4 per cent for the month, he said.

Bonds weaken returns

Interestingly, more aggressive asset allocations did better over August, despite the weakness in international sharemarkets.

That is because they had relatively less exposure to bonds that under-performed in Australian and international markets.

All growth funds lost 0.3 per cent for the month while conservative allocations lost 0.6 per cent in August.

Although many people may be smarting with declines in super balances over August, superannuation has done remarkably well in recent years despite the pandemic.

“The average growth or balanced fund has increased in value by over 10 per cent since the end of January 2020, the pre-COVID market high,” Mr Mohankumar said.

“Members should take comfort in that performance.”

Looking back over the three years to the end of July, research by SuperRatings shows that top-performing funds have delivered solid returns despite the COVID-19 slump in early 2020.

The top-10 performing funds in the SuperRatings three-year performance table all exceeded the Chant West average balanced fund of 5.2 per cent for three years.

But remember the SuperRatings tables are to July while Chant West’s are to August, which would create a slight difference in outcomes.

The future of sharemarkets, and so superannuation returns, “lie in the hands of central banks,” said David Bassanese, chief economist with BetaShares.

“In the US the Federal Reserve is determined to get inflation under control even at the risk of causing a recession. The question is whether inflation will fall quickly enough to avoid that recession,” Mr Bassanese said.

The likely result would be a US recession that would push up unemployment by 1 per cent from the current rate of 3.7 per cent, Mr Bassanese said.

That would last three to six months and would dampen the world economy.

US would influence Australia

That in turn would affect the Australian economy, pushing down shares and superannuation returns to a degree.

However, the Reserve Bank of Australia is unlikely to push rates high enough to cause a recession here.

“The RBA doesn’t need a recession here because inflation is lower than it is in the US and Europe, and most of our inflation is imported,” Mr Bassanese said.

So, while the RBA raised the official cash rate by 0.5 per to 2.35 per cent earlier this month it is already telling markets future rises will be mooted.

Superannuation is performing remarkably well in the long term.

Since the introduction of compulsory super in 1992, the median growth fund has returned 7.9 per cent annually.

Mr Mohankumar said that figure has “delivered a real rate of return to members of 5.4 per cent per annum as the inflation rate over that period has been only 2.5 per cent”.

The target return when the super system was devised was 3.5 per cent, so members are doing far better than originally expected.

The New Daily is owned by Industry Super Holdings