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Retirees take heed – conservative portfolios can come at a cost
The latest superannuation fund results for 2024 come with a clear message to retirees – there’s a financial cost from opting out of balanced or growth funds and choosing a conservative portfolio allocation.
While a conservative portfolio (21 to 40 per cent growth assets) might come with greater peace of mind, in 2024 it also meant a lower return of 6.3 per cent compared with 8.7 per cent for a balanced fund (41 to 60 per cent growth assets) or 11.4 per cent for a growth fund (61 to 80 per cent growth assets).
Last year’s stellar performance was largely due to surging international share markets, with a return of 21.2 per cent on a currency hedged basis, led by the tech and financial sectors.
The 11.4 per cent growth fund return comes on the back of the surprisingly strong 2023 return of 9.9 per cent and represents the 12th positive return in the past 13 years, says Chant West senior investment manager, Mano Mohankumar (pictured). It is also well ahead of the typical long-term return objective of about six per cent.
On average, growth funds have 30 per cent in total invested in international shares and 25 per cent allocated to Australian shares. While not reaching the same heights, Australian shares, with a return of 11.4 per cent, also contributed meaningfully to the strong 2024 result. All other major asset classes, except for unlisted property, also delivered positive returns for the year.
For retirees, the key takeout from Mohankumar’s analysis is the fact that 12 of the past 13 years have yielded positive returns and over a 15-year timespan (2009-24) growth and balanced funds have outperformed conservative funds – 7.6 per cent and 6.4 per cent, respectively, compared with 5.2 per cent.
“What’s got to be remembered over this period is that we were still emerging from the GFC in 2009, followed by COVID and the interest rate rises that spooked the markets in 2022. Yet the markets have continued to perform.”
It’s common sense that fund members in the accumulation phase (especially those aged below 55) need to think long term, with the evidence showing super funds have delivered on their risk and return objectives over the long term since the introduction of compulsory superannuation in July 1992.
“The typical long-term return objective for growth funds is to beat inflation by 3.5 per cent a year, which translates to just over six per cent a year,” says Mohankumar. “Since the introduction of compulsory super, the annualised return is eight per cent and the annual CPI increase is 2.6 per cent, giving a real return of 5.4 per cent a year – well above that 3.5 per cent target.”
It’s not just an issue of returns; risk must be factored into the equation. It’s normally expressed as the likelihood of a negative annual return, and typically a growth fund would aim to post no more than one negative return in five years on average.
“This objective would translate to no more than six negative years over the 32 financial years shown. As it turns out, there have only been five, so the risk objective has been met as well as the performance objective,” he said.
There is ample evidence to suggest that many of those either heading into or in retirement are deeply anxious about their financial security – highlighted by reports such as the Grattan Institute and the Retirement Income Review.
In these circumstances it’s understandable that retirees should opt for a conservative portfolio with the focus on capital security – not investment returns – especially if they their retirement coincides with a calamitous financial event such as the GFC.
But to do so could diminish their financial health with the Chant West figures demonstrating that growth and balanced funds provide capital security and offer returns comfortably above the inflation rate over the long term.
