If you look carefully, your superannuation fund results that should be in the mail soon will tell you that we are living in unprecedented times.
Normally, your choice of superannuation risk profile follows a well-trodden path.
If you have a large proportion of growth assets such as local and international shares and property, your returns over time will be higher but volatility – usually measured in super funds as the chance of recording a negative return over a year – will also be higher.
Indeed, that proved to be the case in the past couple of years, with the average growth superannuation fund delivering a stunning return of 18% in the year to June 2021 but an expected return of negative 5% for the year to June 2022.
So far, so good, with the average growth super fund doing better than the steeper falls on the local and offshore overall share markets due to its exposure to some alternative and unlisted assets such as private equity, direct property and infrastructure.
Even conservative super members are feeling the pain
The real aberration in the financial year just passed lies not in the performance of growth funds but in those classed as conservative, due to a high exposure to less volatile asset classes such as cash and bonds.
Usually, the past year would have been a rare chance for such funds to outperform their growth counterparts but a collapse in the value of bonds left even these funds struggling to make a positive return, with estimates by Chant West that they will record a negative return somewhere between negative 3.5% and negative 4%.
Most conservative funds only have somewhere between 21% and 40% exposure to growth assets like shares and that segment will have fallen like the growth funds.
Bonds falling in tandem with shares
However, the real sting in the tail for the conservative funds has been a really sharp downturn in returns from bonds.
Australian bonds fell by around 12% during the past financial year while international bonds were also down by double digits.
This is a very different result from the usual, when conservative funds normally shine in the wake of a falling share market as investors flee to the safety of bonds.
The reason for such an unusual result for superannuation lies in the unusual times we have lived through since the Global Financial Crisis.
That crisis sparked an unprecedented race to cut official interest rates to very low levels.
Covid sparks a continuation of very low interest rates
Then, just as rates would normally have been rising, along came the global COVID-19 pandemic which caused a massive financial shock as the movement of people was greatly slowed and production of many goods and services was severely curtailed.
Central banks around the world then redoubled their efforts to force interest rates lower, in some cases forcing bond yields down to zero and beyond, with the arrival of negative yields.
Normally you would expect such a prolonged period of ultra-low interest rates to provoke inflation and indeed, that eventually turned out to be the case, with price rises worsened by global shortages of products such as computer chips and severely disrupted supply chains.
Energy prices also rose sharply, not helped by the Russian invasion of Ukraine.
Perhaps surprisingly, in retrospect, this inflationary surge caught central banks by surprise as they were busily reassuring borrowers that low rates would continue for years to come.
There were some notable exceptions – such as New Zealand – but by the time that central banks realised these inflationary pressures were far from “transitory” and were on the increase rather than abating, the die was cast for bonds.
Bonds lose value as rates rise
As central banks started belatedly raising interest rates to try to catch up with galloping inflation, that meant the capital value of those very low interest bonds they had been selling for many years fell hard.
After all, why would you buy a government bond with a yield of 0.1% when the yields on offer for freshly issued bonds were rising fast?
The answer is that you wouldn’t buy that low interest yielding bond unless you got it really cheap, with the lower price paid making up for the low yield.
That is the reason why we have lived through – and continue to live through – the very rare economic event of falling share markets and falling bond markets.
How long will this situation last?
Well, the true answer is that nobody really knows but one other thing that your superannuation fund results can teach you is the value of investing for the long haul and resisting the rush to cash in to avoid losses.
Funds buying up cheaper assets
Over the long haul, superannuation returns are likely to return to historical means and in this context, it is worth noting that the 2021-22 financial year is only the fifth in which the average super fund has delivered a negative result since compulsory super was started in 1992.
Given that super funds buy new assets progressively as their members make contributions throughout the year, the period after a market fall – be it share or bond market – is often the time when some of the fund’s best long-term purchases are made.
For the new financial year this effect will be increased, with the rise in the superannuation guarantee by 0.5% to 10.5% helping to boost the spending power of super funds to buy up assets at discounted prices.