The average growth superannuation account, used by the majority of Australians, slipped 0.5 per cent in August after trade tensions and recession fears caused the stock market to fall.

However that weaker month has so far been an outlier in a long term growth story for super fund members. For the first two months of the financial year the average growth fund rose 0.9 per cent, according to research house Chant West. Over a year growth funds are up 5.5 per cent and have been even stronger over longer time periods as the above chart shoes. Chant West research analyst Mano Mohankumar also said a market rebound has pushed returns up to date in September.

Share markets, which are the main contributors to growth fund performance, ended down in August amid volatility. Australian shares lost 2.3 per cent while hedged international shares fell 1.9 per cent.

However a weaker Australian dollar (down from $US0.69 to $US0.67) meant that unhedged international share portfolios were slightly positive at 0.3 per cent. That’s because the local currency fell harder than international sharemarkets.

Bonds boosted

While sharemarkets have been weaker, falling interest rates have seen bond investments gain ground. That is because as interest rates fall, existing bonds become more valuable as their yields are higher than new bonds issued at the latest low rates.

“International bonds rise 2 per cent and Australian bonds were up 1.5 per cent over August,” Mr Mohankumar said.

That meant that retail, or for-profit funds, who tend to have larger bond holdings than not-for-profit industry and public sector funds tended to to better over the month, Mr Mohankumar said. However in the longer term not-for-profits have outperformed retail funds.

Despite the August slippage the average growth fund where 80 per cent of Australians have their super, have outperformed their target returns for most of the last 20 years. The years of the global financial crisis saw returns dip below the target but since the recovery from the GFC the situation has reversed.

Some funds have reduced their investment target in recent years without changing their investment strategy which means they are performing well above their targets, Mr Mohankumar said.

Low rates aid returns

Lower for longer interest rates and the extra liquidity created by quantitate easing policies around the world appear to be keeping share markets strong which in turn keeps super performance higher than expected.

“The Reserve Bank kept the official cash rate on hold at 1 per cent earlier this month. It also stated that an extended period of low interest rates will be required to further reduce unemployment and achieve a more sustainable path towards its inflation target,” Mr Mohankumar said.

The weaker month for shares in August demonstrated that the lifecycle investing strategy that managers of around 33 per cent of default superannuation funds use is working as planned. 

As the above chart shows, August saw negative returns for the cohorts born between the 1960s and the 1990s. However returns were positive for the older cohorts.

Investing for age works

Lifecycle investing transitions members from higher risk/growth options towards low risk/growth options as they age. So younger cohorts are more exposed to shares and hence had negative returns in August while older cohorts who have a higher exposure to cash and bonds were positive.

“Lifecycle funds are performing as they should be,” Mr Mohankumar said.

Lifecycle options are largely retail funds but industry funds including QSuper, Sunsuper, FirstState and Telstra’s corporate fund have adopted the practice in recent times.

The New Daily is owned by Industry Super Holdings