Performance update FY2020/21

Last financial year (2020/21) saw stellar investment performance for superannuation funds, despite the fact that most of the world is still experiencing the health and economic repercussions of the COVID-19 pandemic.

NGS Super’s Diversified (MySuper) option returned 17.34% for FY2020/21. The biggest contributors to that performance were listed equities and private equity investments. For example, the ASX 300 (the Australian shares benchmark) returned 28.9%, and the MSCI all country world index (the international shares benchmark) returned 28.5% in AUD (39.3% in USD). Unlisted infrastructure assets returned about 10%, which is in line with historical performance averages. Unlisted property assets returned less than average, at around 4%, mainly due to retail and office valuations being negatively affected by lockdowns and work from home orders.

Fixed interest investments returns were more modest. The Bloomberg AusBond Composite 0+ index (the Australian fixed interest benchmark) returned -0.6%. The Bloomberg Barclays Global Aggregate index – hedged to AUD (the international fixed interest benchmark) returned about 0%. Finally, cash also returned close to 0%.

From these performance figures, it’s clear that last financial year was what we call a ‘risk-on’ environment (where higher risk assets outperform defensive assets) despite the pandemic. So what’s behind this? When the COVID-19 pandemic first hit in February 2020, Australian and international shares took a nosedive and had lost more than 30% of their value by the end of March 2020. To put this into perspective, these losses — and the rapidity of the dive — were even more severe than the 2008 global financial crisis. Bond prices went up as investors sought more defensive assets. At that point, global anxiety was high. Countries rushed to close their borders and shut down economic activity to contain the spread of the virus. There was no health solution in sight, and share prices suffered massively as fear completely took over markets. To try to offset the economic impact, governments announced fiscal packages including relief payments and other forms of assistance. At the same time, central banks cut cash rates almost to zero, to inject liquidity and support their economies. These measures helped to reassure investors, and share prices stabilised before beginning to claw their way up again.

In November 2020, Pfizer announced a successful COVID-19 vaccine. Markets were euphoric, and hard-hit shares in cyclical parts of the economy such as financials, materials and energy began to outperform the broader market. Investors responded by shunning bonds as the economic outlook improved on the news of a vaccine. As vaccination rates picked up in early 2021, economic growth rates, employment rates, mobility, commodity prices and inflation surprised to the upside.

Better-than-expected economic figures led to concerns about the possibility of inflation, causing bond yields to rise and bond prices to fall.

In short, markets rose as quickly as they fell, performing a classic ‘V-shaped’ recovery, with all major equity indices now well above their pre-pandemic levels. It’s a great demonstration of how market participants react dramatically to bad news, but are as eager to respond when governments and central banks step in to support them.