Did you receive a negative return on your superannuation fund recently? You aren’t alone.
Under normal circumstances, the variety of superannuation assets would prevent me from making any broad sweeping statements about super returns.
But this past year was unusual in that both growth assets and defensive assets fared poorly.
This outcome was to be expected for growth assets such as shares and property. 2022 was a challenging year; as we emerged from lockdowns we were immediately hit with war, inflation and rising interest rates. And it makes sense for growth assets to devalue under those conditions.
Why did traditionally “defensive” assets such as bonds fare poorly?
I’ve written about this phenomenon before here. That article explains how after the Global Financial Crisis in 2008, bonds slowly lost much of their “defensiveness” due to lower interest rates. This resulted in a slightly negative performance for bonds in 2020 during the COVID share market crash.
Fast forward to May 2022 and shares were once again on the decline, but so were bonds. And this time there was nothing ‘slight’ about it. Bonds saw significant falls over the course of 2022 – in fact, the Global Aggregate Bond Index fell 14%. That is a rate of decline typically associated with more volatile assets like share markets.
If low interest rates caused the problem, why didn’t rising interest rates fix it?
As interest rates rose over the course of 2022, it put pressure on bond prices. Investors can get higher returns from new bonds, term deposits or even cash. Even unlisted assets held by the big superfunds had to be revalued downwards in light of these higher interest rates.
In essence, 2022 was the perfect storm to deliver superfunds their worst outcomes since 2008. The tide of money that lifted all assets since COVID is now receding. This makes it more important for investors to be discerning about which assets to invest in going forward.
There are upsides to come from this. A higher interest rate will allow investors to safely diversify their assets. This approach will mean their returns will come from more areas than we have seen in the past two years.
While we are not “out of the woods” as far as returns go, a return to somewhat more normal interest rates will be welcomed by many investors.
For more information
If you have concerns about any of the issues raised in this article, please reach out to your local RSM office.