The Truth About Superfund Performance in FY 22/23

A few weeks ago, I read over a striking article on The Australian news website:

“2023 Top Balanced Funds” – July 17, 2023.

The article highlights the great performance of Super funds throughout the past year.

Here’s an excerpt from the article:

“…led by Raiz Super’s ESG portfolio that achieved 13.3% for the year, with the other top five sustainable balanced options mostly beating the balanced options.

The preliminary (about one third of funds are yet to report results) median return for balanced portfolios is 9%. In this case, balanced means those with 60% – 76% of their portfolio invested in growth assets. The annual result for 2023 is a big turnaround that more than offsets last year’s 3.4% loss.”

Super funds performed exceptionally well over the last year…

Based on these reports, it appears that super funds have done well in the past 12 months. That is good news.

Why does this matter? Because I reckon just about everyone in some way has money invested in, or participates in the investment market—in which super is a big dog. Super is the oversized St. Bernard dog that we’re all biting onto like fleas.

But… Let’s take a closer look

Look at the figures they’re celebrating and see if what is being touted as great, is really great.

The article stipulates a median return of 9% for the balanced funds.

The greatest return of 13.3% for the Raiz Super ESG portfolio is a decent number for sure, but I will use the 9% median amount for reference.

Compared to what?

What do these numbers mean without context? And what about the year before when super funds lost 3.4%?

Before I get to all that, how about checking my math:

FY21/22 – $100,000 in super lost 3.4% means you have $96,600 at end of the year.

FY22/23 – $96,600 in super gained 9% means you have $105,294 at end of year.

Over the course of these two financial years, you have made 5.3% or 2.65% per annum.

This is what the super funds are celebrating: a 2-year average return of 2.65%. This is the, “More than offset” return making you big bucks on your cash.

2.65%

Time to retire and party?

Maybe not just yet… Cause it gets better.

Inflation is eating up your return

In this whole article there is no mention of the giant hungry bear in the room, inflation.

What has it done to the value of your money?

We all know inflation was rampant for 22/23 financial years. Because it’s top of mind, we tend to forget what it was like before this time.

The following graph shows that inflation was on a big step up from a very low base, June 2021 onwards.

In June 2021 inflation was a very low 1.1%. However, it jumped very quickly to 3.8% in the September quarter. It came back a little and then skyrocketed in the year of 2022, peaking at 7.8% before dropping back down again to a ‘low’ of 6% in June 2023.

Even a conservative average of 4% over these 2 years means your $100,000 in super now has the buying power equivalent of $92,160 today.

Let me explain how this works…

Where did all that money go?

Imagine you had $100,000 in your safe at home on January 1st , 2022.

Inflation that year was a constant 4%. That inflation has now eaten away at your buying power. Your $100,000 can no longer buy the same amount of ‘things’ that it could at the start of the year.

In fact, your buying power on December 31st of that same year would now be $96,000.

You may still have $100,000 in your safe, but it will only buy what $96,000 would have bought at the start of the year.

Your buying power has been degraded.

The value of your money reduced.

In the Super fund example, it’s like storing money in your safe at home. It’s locked up while displaying numbers on a screen. It means nothing until you draw it out and then ‘realise’ the loss or the gain.

Using that same 4% per annum average for inflation, we’d see things look like this if we were to pull out all our money at the end of either of these years:

FY21/22 – $100,000 in super lost 3.4% means you have $96,600 at end of the year. Minus 4% inflation value reduction means: $92,736 buying power (if drawn out).

FY22/23 – $96,600 in super gained 9% means you have $105,294 at end of year. Minus 4% inflation value reduction means: $101.082 buying power (if drawn out).

Oh dear…

The great performance of super isn’t looking so flash anymore

When broken down, these funds have provided you with 1% over 2 years, 0.5% per year, of real buying power advantage.

Sounds fantastic, sign me up..!

Please remove razor blades now…. It gets better.

Let’s withdraw some cash at the end of the 22/23 FY.

Notwithstanding the tax-free environments in some super funds (you’re going to need that), depending on a person’s age. If we used a simple tax rate of 15%, the final results will look like this:

$100,000 starting point
Withdraw $105,294 at end of 22/23 FY
pay 15% on the gain = $5,294 x 15% = $794 $104,500 capital remains at a buying power reduced by 4%

$100,320 in real buying power dollars.

To recap, you put in $100,000 and after 2 years and (a very low) tax you have the equivalent of $100,320.

You made $320.

Oh, but that is inflation and not the government etc… Well, it is two very closely aligned, similar things. However, that might be a topic for another day.

Final Words..

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