Stormy weather

Superannuation funds have posted negative returns as at 30 June 2022 after a long run of positive returns since the global financial crisis in 2008.

The two principal asset classes that contributed to the negative return were shares and bonds. Both asset classes suffered sharp declines during the past financial year. All in all, it is only the fifth year of negative returns since the introduction of compulsory super in 1992 – 30 years ago. This comes after an average positive return of 18 percent for growth funds for the financial year 2020-2021.

So, although diversified super funds have returned to the red they have significantly outperformed both the share and bond markets.

One of the reasons super funds can outperform share markets in times of a downturn is that they are able to diversify their investments so that part of their asset allocation does not have a direct correlation with these markets.

Chant West researcher Mano Mohankumar said: “The story for the year was that diversification beyond traditional asset classes was the driver of performance.” Super funds can invest in long-term investments such as private equity, infrastructure and property, which can provide a buffer against sharp sharemarket declines.

Super funds are also able to invest in markets that are not open to individuals and they do this under the advice of investment professionals. Again, this increases diversification, so all members’ eggs are not in one basket.

And if you wonder whether superannuation is a good investment, consider that the median return for growth funds over the past 10 years was 8.1 percent. The inflation rate (worked out on a monthly basis) over the same period, according to independent economist Saul Eslake, was 2.3 percent. So, the actual return for members post-inflation was 5.8 percent, which is well above the target set by funds of 3.5 percent.

Over the long-term, super has been doing its job of providing better retirements by adding to members’ financial security.

Rising inflation, global supply-chain shortages, COVID, rising interest rates, Russia’s illegal invasion of Ukraine and energy shortages have all contributed to the uncertainty of investment markets. Storm clouds have truly gathered and are still with us.

NGS Super’s Diversified (My Super) investment option returned 3.55 percent for the financial year ending 30 June 2022. The five-year and 10-year average returns for the same option to the same date were 5.92 percent and 7.82 percent respectively. The worst-performing investment for past financial year was International Shares which returned minus 17.43 percent. The equivalent returns for the Income Stream (Pension) Diversified option were minus 3.94 percent last year with an average of 6.16 percent (five years) and 8.51 percent (10 years).

Superannuation is a long-term investment and financial downturns are to be expected. Members should be aware of their risk tolerance and adjust their investments accordingly when setting long-term goals.

Advisers like to remind members that switching to a less risky option such as Cash during a market decline can have the effect of consolidating the loss as history has shown that markets usually improve after market slumps. And those invested in Cash may miss the market gains. Even the experts cannot time the markets.

And now for some good news – a 10.5% percent employer superannuation guarantee contribution rate now applies which will eventually rise to 12 percent in 2025. That should help! And the horrible $450 cap, which allowed employers not to pay super to part-time workers earning less than that amount, has been removed.

So, steady as she goes and, as the American folk song says, ‘Keep your eye on the prize, hold on!’

Bernard O’Connor
(former NGS Super Company Secretary)
(Important information: the information in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances, read the Product Disclosure Statement for any product you may be thinking of acquiring and consider seeking professional advice. Past performance is not a reliable indicator of future performance. Any opinions are those of the author and do not necessarily reflect the view of NGS Super.)