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A Year of Strong Performance

The financial year of 2024 (FY24) has been a remarkable period for superannuation funds, despite the backdrop of global economic uncertainties and geopolitical tensions. Super funds in Australia have posted yet another strong financial year, with the median growth fund (defined as funds with 61% to 80% in growth assets) delivering an impressive return of 9.1%. This follows the equally robust 9.2% return in FY23, marking the 13th positive return in the last 15 years. These results significantly exceed the typical long-term return objective of around 6% per annum, providing a boost to Australians’ retirement savings.

Driving Factors Behind the Strong Performance

The outstanding performance of super funds in FY24 was primarily driven by strong share market returns. International shares were the standout, surging by 21.5% over the year, with the technology sector leading the charge. This exceptional performance in international shares was a major contributor to the overall growth of super funds, reflecting the global market's resilience and the booming tech industry. Australian shares also had a healthy year, returning 11.9%, which further bolstered the returns for superannuation members.

The experience of the past two financial years serves as a crucial reminder of the importance of maintaining a long-term investment perspective. Two years ago, the financial markets were grappling with surging inflation and uncertainty surrounding interest rate hikes. Few could have predicted the remarkable 19% return over the subsequent two years, especially given the minor setback in FY22 when growth funds experienced a small loss of 3.3%. The ability of the markets to recover and thrive even amid uncertainty underscores the value of staying invested and not reacting hastily to short-term market fluctuations.

The Role of Asset Allocation in Performance

It’s no surprise that super funds with higher allocations to international shares generally performed better in FY24. The top-performing funds leveraged their exposure to these high-growth sectors, particularly in international markets. However, the strong returns were not limited to international shares alone. All major asset classes, with the exception of unlisted property, were in positive territory for the year.

Unlisted property was the only asset class to struggle, primarily due to downward revaluations in the office sector. The pandemic-induced shift in work patterns has continued to exert pressure on commercial real estate, particularly offices, leading to a challenging environment for funds heavily invested in this sector. Despite this, other unlisted asset classes such as infrastructure and private equity managed to finish the year with gains in the range of 5% to 7%, further contributing to the overall positive performance of super funds.

Listed real assets also performed well, with Australian listed property returning an impressive 23.8%. In contrast, international listed property and international listed infrastructure yielded more modest gains of 4.6% and 2.6%, respectively. Even traditional defensive sectors like cash, Australian bonds, and international bonds saw positive returns of 4.4%, 3.7%, and 2.7%, respectively, reflecting the broad-based nature of the market recovery.

Long-Term Performance Remains Key

While the strong returns of FY24 are certainly worth celebrating, it's important to remember that superannuation is a long-term investment. The focus should always be on sustained growth over decades rather than short-term gains. Historically, the median growth fund has typically exceeded its long-term return objective over rolling 10-year periods, despite occasional setbacks such as during the Global Financial Crisis (GFC) of 2007-2009, when growth funds experienced significant losses. The resilience of super funds over the long term is a testament to the effectiveness of diversified investment strategies.

Looking at the top performers for FY24, boutique industry super funds like Mine Super and retail giants such as Colonial First State and Insignia led the pack, each reporting growth of 10.7%. This marks the second consecutive year that Mine Super, which caters to high-risk occupations like coal mining, has topped the annual performance list. The fund's strong return was largely driven by its exposure to large U.S. tech stocks, which have been major beneficiaries of the global shift towards digitalisation and innovation.

Australian Retirement Trust also performed exceptionally well, emerging as the best performer among the big industry super funds with a return of 9.9%, closely followed by Aware Super at 9.6%. The median return across all funds was 9.1% for their growth options, which typically comprise 61-80% in growth assets. This category includes most default MySuper options, which are the default investment strategy for many Australians.

Diverse Investment Strategies Pay Off

The diversity in investment strategies across different super funds is evident in their performance. Funds that maintained a higher allocation to international stocks and other high-growth sectors saw the most significant returns. However, those with a well-rounded approach, balancing growth with defensive assets and niche opportunities in private credit and unlisted assets, also fared well. For instance, MLC Asset Management’s approach of focusing on niche opportunities such as insurance-related investments and maintaining robust, diversified portfolios helped them secure strong returns, with three of their options featuring in the top 10 for FY24.

Looking Ahead

As we move forward, it’s essential to recognise that the high returns of the past two years are not necessarily the norm. While the median returns of 9.1% for FY24 are impressive, they sit well above the typical long-term objective for most super funds, which is around 3-4% plus CPI over 10 years, equating to approximately 6% per annum. Superannuation members should temper their expectations and continue to focus on long-term growth rather than short-term fluctuations.

In conclusion, the financial year of 2024 has been a strong one for Australian superannuation funds, driven by a combination of robust international share markets, particularly in the tech sector, and resilient domestic markets. While the future remains uncertain, the performance of the past two years highlights the importance of staying invested and maintaining a diversified portfolio to achieve long-term financial security in retirement.