April bounce unlikely to see superannuation out of the woods

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May 19 2020
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New figures have revealed that a positive April has not been enough to get the superannuation industry into positive territory.

Figures released by Chant West have highlighted that superannuation funds received a respite as the median growth fund returned a positive 3.1 per cent growth, following a 12 per cent reduction over the previous two months.

However, the positive April result has not been enough to get the superannuation industry into positive territory, with a year-to-date result of minus 3.3 per cent.

Chant West senior investment research manager Mano Mohankumar said: “April saw sharemarkets rebound as investors grew more optimistic around coronavirus curves flattening around the world, the expectations of lockdowns easing and economies starting to reopen, partially at least.”

Australian shares returned 9 per cent in April. International shares were up 10.6 per cent in hedged terms, but the appreciation of the Australian dollar over the month (from US$0.61 to US$0.65) reduced that gain in unhedged terms to 3.6 per cent.

On average, funds currently have about 70 per cent of their international shares exposure unhedged. That foreign currency exposure typically provides a natural hedge against sharemarket falls, as we saw in February and March.

However, the research manager highlighted that superannuation was not out of the woods just yet as the economy continues to struggle through the COVID-19 pandemic.

“While this provided some relief after the pounding markets took in the previous two months, it’s still far too early to tell what the full impact of COVID-19 will be on individual companies, industries and the global economy,” Mr Mohankumar said.

While some countries are easing restrictions to varying degrees, the dire situation unfolding in the US remains a serious concern as the country’s total cases of COVID-19 surpass 1.5 million.

“We are heading towards a global recession, but we don’t know what the shape of that recession and the eventual recovery will be,” Mr Mohankumar continued.

“However, we do know that markets bounce back faster than economies. Regardless of the pace of any recovery, we should expect heightened volatility to continue as investors react sharply to news – good or bad.”

The researcher noted that members both young and old do not need to panic during this period as superannuation is a long-term asset, with the best strategy remaining patient and riding out the volatility.

“If anyone is thinking about switching to a less risky option, we strongly encourage them to seek financial advice before doing so,” Mr Mohankumar said.

The researcher reminds members that since the introduction of compulsory super in 1992, the median growth fund has returned 7.9 per cent per annum. The annual CPI increase over the same period is 2.4 per cent, giving a real return of 5.5 per cent per annum – well above the typical 3.5 per cent target.

Even looking at the past 20 years, super funds have returned 6.3 per cent per annum, which is ahead of the typical return objective.

With the median growth fund return sitting at -3.3 per cent for the first 10 months it seems probable, but not certain, that the current financial year will produce a negative return.

“If so, that would be the fourth negative year in 28, an average of one every seven years. The typical risk objective for growth funds is no more than one negative year in five, so even if this year is negative, it will still be well within the expected risk parameters,” Mr Mohankumar concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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