Super funds suffering as global recession fears bite

“We’re holding record levels of cash and we’re seeing some interesting opportunities,” Pearce said. He predicted the next market rally would have better foundations because excesses such as the bubble in cryptocurrencies, or high Australian house prices, were being dealt with.

“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 an update to investors this month, Pearce said stock markets were trading “at levels that historically have proven to be pretty good entry points for long-term investors” and the fund was using some of its cash to take advantage of that.

The chief investment officer of $150 billion fund Aware Super, Damian Graham, also said the volatility could throw up opportunities to invest, after the fund last week announced it was taking a stake 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 said. “We want to make sure we’ve got enough liquidity in our portfolio and cash to be able to take advantage of those.”

But while money managers may be scouring for opportunities in falling markets, members have traditionally been more nervous during bouts of volatility.

In past market corrections, funds have reported an increase in members switching to lower-risk investment options, and AMP chief Alexis George recently confirmed this had been happening lately. “Discretionary contributions are certainly a bit lower, and you do see a movement, especially from the advised clients, into more conservative options,” George said.

Yet despite some members’ anxiety, experts maintained that Australia’s super funds have historically weathered market slumps reasonably well. SuperRatings said the average returns for a balanced fund over the past decade were still 7.6 per cent a year, for example.

KPMG’s head of asset and wealth management, Linda Elkins, suggested assets in the no-frills MySuper system were largely well managed in times of market turmoil.

“I think that concept of MySuper in Australia, for our accumulation system, is really powerful, and has served us really well and does mean people can be rest assured that those chief investment officers are doing that consideration for them right now,” said Elkins, a former executive general manager at super giant Colonial First State.

Experts also said funds here did not face the same risks that recently required an emergency bailout of the UK’s pension system, after last month’s dramatic surge in the yield on UK government bonds (known as gilts). The market chaos was sparked by the UK’s government’s disastrous mini-budget, which ultimately culminated in last week’s resignation of prime minister Liz Truss.

AMP chief economist Shane Oliver said a similar shock in Australia’s superannuation system was unlikely for a couple of reasons.

First, he said the Albanese government wasn’t proposing anything like the tax cuts proposed by Truss. Second, he pointed to fundamental differences in the two countries’ retirement savings systems. In the UK, pension funds are largely “defined benefit”, which means they pay members a fixed amount in retirement, often a percentage of the member’s wage. As a result, the funds have fixed liabilities, and can get caught needing to quickly sell assets to meet these liabilities. Oliver said this was essentially what happened in the UK bond market.

In Australia, however, the vast majority of funds are “defined contribution” schemes. This means employers must contribute set amounts on behalf of staff while they’re working, but how much members receive in retirement depends on the returns of their fund, which will be affected by swings in markets.

“It’s a very different situation,” Oliver said. “The risk is with the member, as opposed to the UK, where the risk is with the backer of the pension plan.”

While the design of Australia’s super system means a UK-style crisis is unlikely, it also means members inevitably feel the volatility in returns when markets fall in a heap.

Oliver said such market slumps could be beneficial for younger members, as mandated regular contributions to their fund meant they were buying more shares for the same amount of money. But volatility can be much harder for older members who are approaching or in retirement, as they may not be able to wait for the market to recover before they start using their capital.

Funds attempt to spread the risk by investing in a range of assets including Australian and overseas shares, bonds, and increasingly, in “alternative” assets such as infrastructure and private equity investments.

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This week’s budget also unveiled plans to have funds put more of their assets into housing, thanks to a new “accord” between government, institutional investors including super funds, and the construction sector. While the full details of the plan are not yet clear, the government said it would provide $350 million in funding for 10,000 affordable homes from 2024, which would give funds greater incentive to invest in “social and affordable housing.” Over the long-term, the accord’s ambition is to build 1 million new homes over five years from 2024.

The hope is that diversification such as this helps funds during times of volatility, and it is worth noting that the typical balanced fund’s returns of -5.7 per cent in the year to September is better than the -8 per cent return on the ASX 300.

Even so, there’s no doubting the challenging outlook facing markets from a highly uncertain global backdrop.

As Treasurer Jim Chalmers put it in this week’s budget speech: “The global economy teeters again, on the edge – with a war that isn’t ending, a global energy crisis that is escalating, inflationary pressures persisting, and economies slowing – some of them already in reverse.”

Against these risks, AMP’s Oliver predicted the bumpy ride on markets would continue in the months ahead.“For the next little while I would say that volatility will remain pretty high,” he said.