Aussie super funds expect lower returns

December’s late rally on global stock markets saw the average Australian balanced pension fund return 15.5% for 2013, making it the best performing year for superannuation funds since research house SuperRatings’ began tracking returns in 2000.

“Funds aim for a return of inflation plus 3%, so a double-digit return of this magnitude is a stellar performance and one that will be hard to beat in 2014,” says Nathan MacPhee, chief executive of the Sydney-based firm.

The 15.5% figure is an estimate based on data from SuperRatings’ index of 50 balanced super funds that typically hold 70% in growth assets and 30% in defensive assets. MacPhee says returns were boosted by a 0.9% gain in December. “This late Santa rally in listed equities was a key driver. Stock markets started December in a rut, but recovered strongly to finish positive for the month.”

MacPhee says the source of outperformance was domestic and international equities. “The average fund in our index has 28% invested in Australian shares and another 24% in international equities with a skew towards the US and Europe.

"Stock markets in these countries rose strongly last year, which was a blessing when returns from fixed interest and cash were flat," he adds. "Funds were also helped by a drop in the Australian dollar, which assisted international equity returns for those funds in an unhedged position.”

In addition to their equity holdings, funds in SuperRatings’ SR50 Balanced (60-76) Index typically invest about 10% in listed and unlisted property, 15-20% in fixed income, 5% in cash and the remaining 15-20% in alternative assets such as infrastructure, private equity and hedge funds.

A repeat of this performance will be hard to achieve in 2014, with many analysts predicting a mediocre year for equity markets, says MacPhee. “Shares globally have reached fair value and nobody is expecting a move in interest rates, so we expect a return to average returns of between 5.5% and 6% for the current year.”

Asset allocation will continue its evolution, shifting more towards international equities and alternatives. He notes the Australian superannuation industry is already bigger than the country’s economy, so funds have to look more broadly – at different asset classes and geographies – and reduce their focus on domestic equities. MacPhee expects funds to become increasingly interested in offshore physical assets such as property and infrastructure.

External managers will continue to manage the bulk of investments, but the building of internal teams will also remain a trend. “More than half of all superannuation funds already manage some assets internally, such as cash and/or property, but as they grow in size and reach critical mass, with say A$5 billion to A$10 billion ($4.5 billion to $8.9 billion) in assets, it makes sense to employ more investment resources in-house,” says MacPhee. “AustralianSuper is leading the way in this trend, but they are not alone.”

The coming year is also likely to see a focus on the structuring of portfolios aimed at post-retirement savings. “This means developing investment options for people in the drawdown phase rather than the accumulation phase – portfolios that promote capital preservation and liquidity, with a bias towards dividend capture, and the ability to sustain a normal pension drawdown of 5%."