LUCRF Super CIO Leigh Gavin (Photo: Adam Yip)
LUCRF Super CIO Leigh Gavin (Photo: Adam Yip)

Investors will return to work after the holidays facing the most challenging environment in a decade, superannuation investment heads say.

Poor market performance in the final months of the calendar year has pulled annual returns from balanced options down towards zero and several factors have experts fearful of volatility ahead.

Calendar-year returns for balanced options could even turn negative for the first time since 2011, analysts say, and funds with 100 per cent exposure to Australian equities are already well into negative territory.

Market headwinds will put the onus on funds to step up communication with members unaccustomed to volatile markets, particularly those nearing retirement who are watching their savings take a hit at the same time as the housing market slumps.

Statewide Super CIO Con Michalakis, who is a finalist for CIO of the year at the 2019 Conexus Financial Superannuation Awards, said the final months of the year had been tough, challenging members and investors to keep a cool head through the volatility and remain focused on the long term.

“You’re getting a really significant drawdown in the market,” Michalakis says. “Now, for the first time, we’re going to go through a period where interest rates are going up around the world and liquidity is being drained out of the system, particularly with quantitative tightening.”

Trade wars and geopolitics are also feeding the fire, he says.

Member engagement will be important, particularly for those nearing retirement, he says. They will need to understand how the different parts of their portfolio are working at this time, with defensive options kicking in and holding up their portfolio while more aggressive options fall.

“I think the next three or five years will be a difficult time and it will test resilience,” Michalakis says. “It will test your investment strategy. It’ll test your ability to think long term. It will test some of the members. Have they taken on too much risk? Have they taken on too little risk?

“My quarterlies are about that, we do member roadshows, we speak to members, we speak to the stakeholders, just conditioning them that there is no free lunch here,” Michalakis says. “You can’t pick corrections, you can’t trade short term.”

LUCRF CIO Leigh Gavin says the outlook for 2019 is “more challenging than usual” but “most of the traditional economic indicators that we look at are still broadly positive”.

Equities could still earn high single-digit or even low double-digit returns next year, Gavin says, but the unwinding of quantitative easing will probably lead to continued volatility in to 2019, as there is no historical parallel for this unwind.

He says the future, whilst challenging, is also exciting for funds and LUCRF Super has been keeping its portfolio relatively liquid in the hope of benefiting from an increased liquidity risk premium as the cycle turns.

“The Australian economy has gone for 27 years without a recession, which does make you worry that the next one could be a doozy, especially if combined with a housing downturn,” Gavin says. “The role of funds in helping that transition is going to be important…in helping finance the economy…stepping in and plugging the liquidity gaps.”

The above comments come as market commentators say superannuation funds are at risk of experiencing their first annual loss in seven years.

Superannuation research house SuperRatings found returns of -0.6 per cent in November for members invested in the median balanced option – following -3.1 per cent in October – had brought calendar year returns to just 1.8 per cent.

Those with 100 per cent exposure to Australian equities are already well into negative territory for the calendar year, SuperRatings finds, with a total 2018 return of -2.4 per cent for the year to date. The median international equities option is still in the black, with 2.1 per cent returns for the year to date.

Superannuation and pension research consultancy Chant West says super funds are heading towards a flat calendar year result. The median growth fund experienced 1.8 per cent growth for the first 11 months of 2018, and further sharemarket losses over the first half of December had reduced that figure to an estimated 0.5 per cent, Chant West states.

Further sharemarket falls could cause the first year of negative growth since 2011. In any case, returns are nowhere near the 10 per cent average of the previous six years, Chant West states.

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