Hang on for the ride

Q WHAT CAN AUSSIES EXPECT FROM THEIR SUPER FUNDS NEXT YEAR IN TERMS OF VOLATILITY AND RETURNS?

The past year has seen further growth in account balances. We have talked about the “lower for longer” outlook for investment returns in recent years and we continue to await its arrival. Nonetheless, we continue to believe the year ahead will see a softening in returns, as well as rising levels of volatility, representing a more challenging investment environment.

The median balanced fund – those with a long-term allocation of 60%-76% to growth assets – achieved a return of 10.7% over the 12 months to August 31, 2018. Strong Australian and international share performance over the year has been the main driver of returns, with both Australian and international shares having a strong finish to the year. However, we saw increasing volatility in September and October, with super funds expecting this to continue for the rest of 2018. Alternatives, encompassing infrastructure, private equity and alternative credit, have also driven strong outcomes, while property has performed reasonably but is expected to be more muted.

Since the depths of the GFC, super funds have now recorded their ninth year of positive returns for the median balanced option. In the year ahead, key areas of focus will be economic factors both locally and overseas, geopolitical risks and the impact of any structural and regulatory changes based on the royal commission into financial services.

The Australian economy has recorded healthy GDP growth and improving labour market conditions; however, the outlook for the year ahead is more subdued, while global conditions remain mixed. The US Federal Reserve seems committed to a path of increasing interest rates while the outlook for Australia and New Zealand is relatively stable, whereas supportive monetary policy is expected from the European Central Bank. The escalating trade war between the US and China poses a risk to global markets, while potential sanctions on Saudi Arabia could see retaliatory impacts push oil prices higher around the world.

We are currently positioned late in the market cycle. As such it is important to consider how much risk is sitting in portfolios and how comfortable you are with it, given the lower return outlooks across major asset classes. Review the long-term return your super is expected to deliver and monitor your projected retirement balance to see whether you are on track to achieve your desired lifestyle.