According to data compiled by SuperRatings, those who placed their retirement funds in a conventional balanced investment choice saw returns of -5.7% over the past year and -3.1% in September alone.
“This is foreign territory for a lot of people,” said Camille Schmidt, market insights manager at SuperRatings. “I think that’s what’s adding to the anxiety around the drops in their balance because it’s just not something that you would expect to see based on the bull market that we’ve had to date.”
The combined whammy of falling sharemarkets and bad bond market performance has had a devastating effect on funds, defying the historical trend of bonds doing better when equities are failing. How are funds reacting to this unpredictable environment, and what are the potential consequences for members?
Australia’s $3.3 trillion super system, one of the world’s largest retirement savings pools, is not immune to the global market decline brought on by rampant inflation, rising interest rates, and the conflict in Ukraine. This week, new data revealed that inflation had reached its highest level in 32 years, and the federal budget warned of soaring electricity prices, declining household expenditure, and rising unemployment.
Super funds endured their worst fiscal year since the global financial crisis of 2008-2009 in the twelve months leading up to June, and the turbulent ride has continued as investors cope with the possibility of a worldwide recession.
In light of the precarious state of the economy, investment executives at funds say they are taking strategic measures, such as keeping more cash and aiming to acquire assets at a discount.
John Pearce, chief investment officer of the over $110 billion fund UniSuper, gave a somewhat more optimistic view of the next possible global market comeback.
Pearce stated, “We’re holding record levels of cash and we’re seeing some interesting opportunities,” He anticipated that the next market upswing would have stronger underpinnings since excesses such as the cryptocurrency bubble and high Australian home prices were being addressed.
“We believe the next rally will be on much more solid footing than previous rallies, because we’re seeing obvious excesses in the market being eliminated.”
In a report to investors this month, Pearce stated that stock markets were trading “at levels that historically have proven to be pretty good entry points for long-term investors” and that the fund was utilising part of its liquidity to capitalise on this.
Damian Graham, the chief investment officer of the $150 billion Aware Super fund, stated that the volatility could present investment possibilities after the fund revealed last week that it was investing in the Mexican food chain Guzman y Gomez.
“These types of periods of heightened volatility can deliver some new opportunities both across listed markets, so equity listed shares but also the unlisted assets,” he explained.
Despite the fact that money managers may be on the lookout for possibilities in dropping markets, members have generally been more anxious during periods of volatility.
During previous market collapses, funds reported an increase in members switching to lower-risk investing options, and AMP CEO Alexis George recently acknowledged that this trend has continued in recent months. “Discretionary contributions are certainly a bit lower, and you do see a movement, especially from the advised clients, into more conservative options,” George said.
However, despite the concerns of some members, experts maintained that Australia’s superannuation funds have historically handled market downturns relatively effectively. SuperRatings noted the average returns for a balanced fund over the past decade were still 7.6 per cent a year, for example.
Linda Elkins, the head of asset and wealth management at KPMG, opined that MySuper’s assets were mostly well-managed during market turbulence.
Elkins, a former executive general manager at super-giant Colonial First State, stated, “I think the concept of MySuper in Australia, for our accumulation system, is really powerful and has served us really well, and it means that people can rest assured that those chief investment officers are making that consideration for them right now.”
In addition, experts stated that U.S. funds were not exposed to the same risks that recently necessitated an emergency bailout of the British pension system following last month’s huge increase in the yield on British government bonds (known as gilts). The market disorder was precipitated by the UK government’s poor mini-budget, which finally led to the departure of prime minister Liz Truss last week.
Asset allocation of a typical super fund
- 25% Australian shares
- 28% International shares
- 8% Property
- 17% Alternative assets – e.g. private equity, infrastructure and hedge funds
- 14% Fixed interest
- 5% Cash
- 3% Other
AMP chief economist Shane Oliver said a similar shock in Australia’s superannuation system was unlikely for a handful of reasons.
First, he stated that the Albanian government was not proposing tax cuts comparable to those proposed by Truss. Second, he pointed to fundamental contrasts in the two countries’ retirement savings regimes. The majority of pension funds in the United Kingdom are “defined benefit,” meaning they pay members a specific amount upon retirement, often a proportion of the member’s salary. As a result, the funds have fixed liabilities and may be forced to liquidate assets quickly to fulfil these obligations. Oliver claimed this was essentially what happened in the UK bond market.
The great majority of funds in Australia, however, are “defined contribution” plans. This means that companies must contribute a specific amount on behalf of employees while they are working, but the amount that members receive in retirement is contingent on the returns of their fund, which are subject to market fluctuations.
Oliver stated, “It’s a very different situation.” “In the United States, the member bears the risk, as opposed to the United Kingdom, where the pension plan sponsor bears the risk.”
While the nature of Australia’s superannuation system makes it unlikely that the country will experience a crisis similar to the one in the United Kingdom, it also implies that members will undoubtedly experience volatility in returns when markets fall precipitously.
Oliver stated that such market declines might be advantageous for younger members, as mandatory contributions to their fund allowed them to purchase more shares for the same amount of money. However, older members who are approaching or are already in retirement may not be able to wait for the market to recover before beginning to use their wealth.
Funds aim to diversify risk by investing in a variety of assets, such as Australian and international stocks, bonds, and, increasingly, “alternative” assets including infrastructure and private equity investments.
Thanks to a new “agreement” between the government, institutional investors, such as pension funds, and the construction industry, this week’s budget also revealed plans to have funds invest more of their holdings in housing. While the plan’s specifics are not yet apparent, the government has stated that it will provide $350 million in funding for 10,000 affordable homes beginning in 2024, which will create an additional incentive for funds to invest in “social and affordable housing.” Long-term, the accord aims to construct 1 million additional dwellings within five years beginning in 2024.
Diversification of this type is expected to benefit funds during periods of volatility, and it is worth noting that the average balanced fund returned -5.7% in the year leading up to September, compared to -8% for the ASX 300.
Despite this, there is little doubt that the markets have a tough outlook due to the increasingly uncertain global environment.
As stated by Treasurer Jim Chalmers in this week’s budget speech: “The world economy again teeters on the brink, with a conflict that isn’t ending, a global oil crisis that is worsening, persistent inflationary pressures, and economies faltering – with some already in reverse.”
In light of these dangers, Oliver of AMP anticipated that the turbulent ride on markets will continue in the coming months.
“For the next little while I would say that volatility will remain pretty high,” he said.
Super funds falling down as global recession gets closer to reality.