Super funds should bounce back after COVID-19

19 March 2020

| By Jassmyn |

Superannuation fund members should hold and wait their portfolios during the current market volatility brought by the onset of the COVID-19 pandemic, according to Rice Warner.

The research house said funds had diversified investment pools and the share market falls were not reflective of the position for the whole portfolio.

“Portfolios with high domestic and overseas equity percentages go down rapidly when markets fall, but history shows that they recover when those equity markets recover – which they will,” it said.

“This was demonstrated quite starkly during the global financial crisis (GFC). The All Ords Index fell 54% during the GFC and took 18 months to recover (October 2007 to March 2009).”

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Rice Warner said member should be cautious of selling out of these portfolios after the big falls as they could be caught.

“Unfortunately, there is already evidence that many have panicked and moved money to cash – the early movers might feel vindicated but history tells us that the panickers don’t revert back to growth assets, at least not quickly enough, and they all will miss the upturn (probably starting next year),” it said.

On unlisted assets, Rice Warner said many funds had a more robust and transparent process for the valuation of unlisted assets following the GFC but said funds needed to ensure these processes were followed effectively to avoid a recurrence of these issues.

“The high levels of unlisted assets will smooth the reduction in unit prices for some funds. The unlisted assets will likely fall in value too, though the extent will depend on levels of economic activity,” it said.

“As the annual valuations of airports, toll raids and conference centres are made, they will be reduced to reflect lower revenues.”

The research house noted that funds using bucketing strategies with retirement products were better placed and members could continue to draw pensions from cash and not panic about the fall in the rest of their portfolio at least for the next six to 12 months.

“Although assets values will recover, they are unlikely to recover quickly to the record levels they reached immediately prior to the latest plunge. The price/earnings ratios were at historically high levels, largely due to the record low interest rates,” Rice Warner said.

It also noted that it might be challenging for super funds to answer the increased number of member inquiries if its staff were largely working from home and outsourced service providers were operating less effectively than usual.