The nation's largest super fund has warned members to prepare for lower or even negative returns in the future, despite posting stellar investment performance for the recently ended financial year.
AustralianSuper returned 8.67 per cent for its most popular 'Balanced' option in the 2018-19 financial year, which compares favourably with forecasts for a median fund return of about 7.1 per cent. It cited a switch away from shares and into bonds for the strong result.
Chief investment officer Mark Delaney described the result as "outstanding," given recent market volatility that saw the benchmark S&P/ASX 200 Index lose more than 11 per cent from its highs last year, before bouncing back to recover all its losses over the past six months.
But he cautioned investors that returns may be harder to come by as the economic cycle winds down. "Members need to temper their expectations of ongoing big returns," he said. "We know that at some point the fund will experience very low or even negative returns."
Underlying global, political and economic uncertainty created a complex investment environment last year, he said.
In AustralianSuper's asset allocation review a year ago, the fund identified increased risk of a downturn in equity markets, and responded by lifting its fixed-income investments significantly.
"We saw US interest rates, the Trump trade war with China and the local housing market downturn as significant threats," Mr Delaney said. "We have reduced our asset allocation of equities from the mid-60s in percentage terms to mid 50s, while our bond exposure has grown from 3 per cent to more than 13 per cent," he said.
"There were some tough months and, at times, it looked like we would see relatively subdued returns. However, there was resilience in infrastructure and property markets while falling interest rates also meant fixed interest did well."
Mr Delaney said he sees the fund boosting its allocation to offshore markets moving forward.
After research into large, global, best-practice funds, AustralianSuper found most had more assets invested in international markets than local and had more global private market opportunities.
"We see this as a likely future direction," Mr Delaney said.
He added that most best-practice funds had about about 85 per cent of their investments managed in house, which also is a long-term aspiration for AustralianSuper.
"We have about 42 per cent of our investments managed in house and it is growing. We want to see this increase to 50 per cent over the next 12 months," Mr Delaney said.
"The in-house management increase realised about $150 million in ongoing cost savings last year, he said.
Mr Delaney also sees possible mergers with other super funds on the horizon.
"AustralianSuper is a combination of more than a dozen funds," he said.
"We see being bigger as an advantage."
Record funds inflow
"We are a $160 billion fund in a $3 trillion superannuation industry and have room to grow."
AustralianSuper experienced a record $16 billion in net funds inflow in 2018-19, including more than $5 billion from large retail funds, as the Banking Royal Commission highlighted scandals and fee rorts in the sector.
The Australian Prudential and Regulation Authority reported negative flows across the for-profit retail fund sector in 2018. They peaked in the September and December quarters, when outflows in both periods outstripped the entire outflows for the full 2017 year.
Mr Delaney said AustralianSuper had suffered a modest outflow of about $400 million resulting from the Federal govenment's Protecting Your Super package, which required it to transfer inactive accounts with a balance of less than $6000 to the Australian Taxation Office.
AustralianSuper's Balanced option has provided strong returns of 10.72 per cent a year over three years, 9.76 per cent a year over 10 years and 8.25 per cent a year over 15 years.
SuperRatings executive director Kirby Rappell said the average super fund this financial year is expected to deliver a return in excess of longer-term objectives of the Consumer Price Index plus 3-3.5 per cent.
“The median balanced option return over the past 10 years is around 8.5 per cent, indicating that super has delivered solid returns even in a low-interest-rate environment.”
"While the global market outlook remains uncertain, it should not be dismissed that super fund balanced style strategies have delivered 7 per cent per annum since their introduction in 1992."
Stephen Miles - Stephen is Investment Editor at The Age and Sydney Morning Herald. He writes about personal finance issues and markets as well as editing Money.
The Sydney Morning Herald
4 July 2019