Investments

Welcome and thanks for joining me for the 2023/24 mid financial year investment update. My name is Peter Treseder.

I'm an education manager at AustralianSuper and I've been helping members understand their super better for over 25 years with the fund.

So I'll be your host today. I note that today is Valentine's Day and maybe today is the day you fall in love with your super, or you continue to love your super. AustralianSuper acknowledges the traditional custodians on the land of which we work.

We pay our respects to the elders past present and emerging and we extend that respect to all Aboriginal and Torres Strait Islander people.

Before we start, please be aware that the information provided in this webinar and the answers to any questions will be of a general nature only.

This information does not take into account your personal objectives or financial situation. So please assess your situation and read the product disclosure statement and target market determination document before making any decisions.

Behind the scenes I have fellow colleagues that will be answering these questions feverishly as we go through the webinar but please bear in mind that we have several thousand people attending this webinar today.

I'm not running this webinar by myself. I'd like now to introduce a panel of today's speakers, who are going to provide most of the information. Sam Weaner, our Manager of Investment Communications. Amber Rabinov, Head of Macro Research and Strategy. And Nicholas Keats, a Financial Planner. I'll start with you, Sam, welcome.

In your role, how do you help members?

Hello, my name is Sam Weaner and I’ve worked in the investment industry for over 20 years. And in my role at AustralianSuper, I provide investment updates to members as well as information about the performance of our investment options.

And Amber, same question to you. How in your role do you help our members?

I'm Amber Rabinov. I lead a team of highly specialised economists and strategists and our work is all about thinking how the global economy and financial markets will evolve over time.

Now doing this allows us to find investable opportunities in asset markets and the broader portfolio in order to help maximise financial retirement outcomes for all of AustralianSuper’s members.

And Nick, you're a financial planner. Tell me a bit about your role.

Sure, hello Peter and hello everyone out there. My name is Nicholas Keats I’m a financial planner, I’m licensed by industry fund services, and I'm engaged by AustralianSuper to provide advice to the membership base.

I've been a planner for a bit over 20 years now and I've been with this group since 2006.

My role as a planner generally involves working with clients one on one or one on two to develop their financial wealth over time using a range of, at times, varied and sometimes competing strategies.

Okay, so let's get into it. Sam, I'll start with you. Can you get things going?

By walking us through AustralianSuper’s investment performance to 31 December 2023.

Thank you, Peter. The good news is that performance has been positive for members in recent periods. We'll start off looking at the balanced option, which is the default my super option.

So over the last 6 months the option returns 3.49%. To the period ending 31 December 2023. An almost 8% per year over 10 and 20 years.

And the balanced option has been able to achieve this long-term performance due to our active investing approach, as well as our capabilities to invest in unlisted assets like infrastructure, private equity, and private credit. Next, we’ll look at the broader options.

So for our other investment options, the last 6 months has also provided positive returns for members in both the PreMixed and the DIY Mix options.

This chart shows the diversified PreMixed options on the left, and the DIY Mix options that focus on specific asset classes on the right.

So with the PreMixed options, the options that have higher allocations to growth assets, this includes options like high growth and balanced, outperformed the more conservative options, conservative balanced and stable. This is expected because the conservative options invest with a lower growth objective, as well as have a focus more on capital stability and downside protection. Now over the last 6 months, a big driver of markets has been the asset classes like Australian shares and international shares, which help the performance of the PreMixed options, as well as the Australian Shares/international shares DIY Mix option.

In addition, fixed interest in cash returns were much higher this past period due to the current level of interest rates.

Now it is worth noting the comparison of the index diversified option to the other PreMixed options. So index diversified invests in Australian shares, international shares, fixed interest and cash by following market indices and it does not have any investments in unlisted or private market assets.And in recent periods, the Australian shares and international shares performed much better than some of those unlisted assets. And that's why the indexed diversified option performed a little bit better in the short term.

Thanks, Sam. Now, AustralianSuper has a number of investment options, each option having its own objective and benchmarks.

Most members are in the default option, the balanced option. How did the performance of the balanced option compare to its benchmark?

A key aspect of investing is comparing your options performance to its objectives. So for example, the objective of the balanced option is to outperform the median return of the super ratings balanced index.

And this is a peer group made up of 50 other balanced funds. Our long-term objective is to outperform this objective as well as being one of the top performing funds, over the medium to longer term.

Now the good news is we've been successful with outperforming this benchmark over that performance over 10, 15 and 20 years.

This is largely driven by that active investing approach, which includes active asset allocation and actively selecting securities that we expect to outperform over time.

Now, it is also worth looking at the more recent periods. If you look at the last six months and year, our relative performance has been under the benchmark. This is largely due to our cautious approach in positioning the portfolio, in the current economic environment, which Amber will discuss in more detail.

That's great, Sam. Now you've covered the performance of the balanced option for those still building their super in accumulation phase.

There are many members drawing on their super in retirement phase through our Choice Income product. Now there's a no tax or no investment tax on earnings in this phase.

So what has been the performance of the balanced option for members in retirement?

The Choice Income options do have that benefit of growing free of Australian tax. This is why you often see the Choice Income returns are higher than super returns during rising markets.

In this chart, we see that the balanced option returned just over 10% over one year, and over 9% per annum over 15 years to 31 December 2023.
And we show 15 years because the inception of the option was in January 2008.

Similar to the super options, the Choice Income balanced option has also outperformed the super earnings benchmark over the longer term.

Okay, turning it to you, Amber. Sam has spoken about performance, what factors played a role in investment markets over the past 6 months.

What is the economic outlook moving forward?

Well the good news is, Peter, the economic outlook is looking more encouraging as we move through the early months of 2024.

Market calls of impending recession have quietened down somewhat. Now following more than two years of high inflation, prices growth softened faster than expected into the end of 2023.

In the key global macro economy, so the US, headline inflation has fallen to around 3% in annual terms on the headline consumer price index measure.

That's considerable easing from the peak of over 9% in mid-2022 and also on the Federal Reserve Banks’ favoured personal consumption expenditure measure, it's now tracking closer to 2½%. Notably, economic activities also displayed encouraging resilience through 2023 in the US with additional savings built up over the COVID period being spent and also stronger than expected fiscal support for the economy.

The labour market, while maintaining strength, is certainly also not looking as tight as it was in late 2022 and into 2023 and this is feeding into a slowing in wages growth.

Now as you can see on this slide on your screen, on the chart on the left, the inflation situation in the UK and also in Europe is trending quite similarly, if a little behind the US lead.

Here in Australia, where we had a more conservative approach to managing COVID and therefore a later recovery in activity, you can see that this is translated through to a later peak in inflation and later rate rises by the RBA in response, and therefore, prices growth is taking a little bit longer to come back down to the RBA's 2-3% target.

Now that said, the trend in inflation remains on track to follow the lead from offshore. In contrast to the US, here in Australia, economic momentum has softened a little over the last 12 months or so and this has fed into a loosening in the labour market. With the unemployment rate nudging up to around 3.9% from a multi-decade low of 3.4% in late 2022.

We have yet to see this translate through to official wages measures though. These tend to be quite lagged in terms of data releases, but we can probably expect a topping out over the next few quarters.

So, the welcome news that this brings is that central banks not only appear to be done with rate rises, so yes, cautiously accepting that they've done what was needed to be done to cool the economy and restrain prices growth and bring inflation back towards their targets.

So repeating that, now that market expectations are for central banks to be done with raising rates, but more than this, the leading central banks, after beginning to discuss the possibility late last year, are now actively planning to start reducing interest rates to less restrictive levels as we move through the year.

As confidence builds, that inflation will return to around 2%. Turning back to the US and the Federal Reserve, the strength of the broader economy there means it will be likely more patient in reducing rates as it's aware of the upside risk to prices in the outlook and doesn't want to be too premature in calling victory on slaying the inflation dragon.
As such, at this stage, markets are expecting the Fed to start cutting rates only from the middle of the year in the US.

Back at home for the Reserve Bank of Australia, which met last week, inflation in their words is still high at 4.1%.

Given this stronger inflation situation and the fact that wages growth is yet to start to soften here, markets are expecting rates to remain on hold at current levels for a bit longer, perhaps only being reduced as we move towards the end of this year and at a slower pace than in the US, in part also because they weren't raised as high, as you can see in the chart on the right hand side of your screen.

So, let's put all these facts together. Where do we find ourselves? We're cautiously optimistic about the path ahead.

We are positioned to be opportunistic and are moderately positive in our outlook for investment markets. We think that this is an environment that should be supportive for member returns.

Thanks, Amber. Do you see any risks on the horizon that may affect the outlook you describe and what could disrupt economies in 2024?

That's a great question, Peter. A key area of concern we're currently focusing on is the geopolitical environment.

Now quickly, what do we mean by geopolitics? It's simply politics on a global scale.Parties typically countries trying to reach their political goals via their control and influence over geographical areas of the world using power derived from both hard sources like the military and the economic realms.

But also soft sources, thinking here, diplomatic relationships and cultural aspects. As investors, we focus on material impacts from the geopolitical environment, on the global economy and systematically important markets. So for us, looking out over 2024, most concerning are, of course, downside geopolitical risks. We've grouped these into three key areas.

The first is the risk around intensification in areas of military conflict. So that is how the conflicts in the Middle East and between Russia and Ukraine unfold.

For us, the number one key risk for the macro and market outlook, is the potential impact on oil markets from a significant escalation of hostilities in the Middle East, which would have a significant downside impact on growth and upside impact on inflation.

In Ukraine, the big worry here is particularly for Europe. A Russian victory could embolden Russia to continue in its endeavours to expand its territory. Turning to number two, national elections. Almost half of the world's population, two-thirds of democracies or as many as 77 countries go to the polls this year.

That is, one is key to watch, which could have a significant impact on the economy. It's the US presidential election coming up in early November. At this stage, we are looking for a 2020 replay of current President Joe Biden versus former president Donald Trump.

Now the outcome is really uncertain, at this stage, and it's not just for the race to the White House but also for the ballots of power in Congress.
So, this is going to remain in focus for much of this year. Overall, the broad trend in aggregate for global investment markets may well be similar no matter who takes office. But another Trump presidency could lead to some higher short-term market volatility, given his more unpredictable style.

Perhaps we're wrong, importantly, there will likely be changes in the domestics of the US domestic winners and losers. And with fiscal policy and other economic policies directed and also some major implications for those two life conflicts I mentioned.

Finally, sticking with the US focus, the third area which we're concentrating on is the continuing evolution in the relationship between the US and China. So the focus here is how targeted trade and economic policy restrictions unfold. Particularly on the US side, but also how the Taiwan issue is managed. Whilst there's been a more stable understanding of established on relations since the November 2023 meeting between presidents Xi and Biden.

The longer-term trajectory of the relationship remains quite negative. We’re hopeful that this will be managed carefully rather than be allowed to deteriorate in an uncontrolled fashion.

Okay, back to you Sam. Take into account the foundation of economic drivers that Amber has described. What has been driving specific returns of asset classes?

So, the economic backdrop that Amber has described has been that foundation for what's driving returns in recent periods. But it's also worth looking at the perspective of the short term and the long term with investment returns. And this is where we are focusing on Australian shares and international shares. And these markets are really responded to the concerns about inflation as well as that level of interest rates.

On this chart, we see benchmark returns. Australian shares in orange and international shares in blue. And there's quite a lot of volatility in the returns of these markets over the last six months.

From July to October, there was quite a bit of fluctuation, and this was largely due to the uncertainty about inflation, as well as central banks continuing to hold steady their tighter monetary policy. Effectively central banks were maintaining their level of cash rates during that time period.

Now, listed markets then rebounded quite strongly since October. Based on inflation figures coming in lower than expected.

Australian shares performance especially rebounded from that time period. Largely spurred by strong gold and iron ore prices, which is a large contributor to the Australian economy.

International share returns continue to be driven by the returns of technology companies that have really propelled that market.

Now for that other perspective, the long-term perspective, we often use the term long term investing. You'll hear it from us several times a day.

And we can recognise that it's very difficult to think about the long term when the day-to-day news cycle and the fluctuating share prices are very much in the front of our minds.

However, we take this same perspective using these same markets of Australian shares and international shares over 30 years.

You can see that there's been a fair bit of ups and downs over time. However, the overall trend has been upward. And we often focus on the downturns, that's where we see the most pain.

You think of the tech bubble bursting in the US in the early 2000’s. The global financial crisis in 2008-2009, as well as the recent COVID-19 downturn in 2020. These were times where the markets were a little rougher for investors. However, the overall trend despite these downturns has been positive over the long run. And the key driver for this over the long run is earnings growth.

So, it's how much can a company earn? And as companies benefit from a growing economy, as well as their own profitability, this increases the value of those companies over time. And this can be seen in the recovery from those downturns, as well as that overall trend towards positive returns.

So even though the day-to-day value of your portfolio may fluctuate, being able to invest in the prosperity of companies over several decades can help increase your account balance.

Thanks Sam and it's a bit like tennis here, so back to you Amber. Sam mentioned that we are an active manager.

We have over 300 people in the investment team spread across the globe. What is the investment team doing with the portfolio during the current market environment?

So for the AustralianSuper investment team, our number one focus is how to make money for members.

The team is seeking to make investment decisions today that will benefit members over the long term as Sam said, not just over the economic cycle over the next one, two or three years.

Now while we've enjoyed positive returns in 2023, we are monitoring the path ahead. Keeping a close eye on inflation and central bank activity.

Through our active investment approach, we have the ability to adjust the portfolio and seek the investment opportunities that unfold from the current economic environment.

One strategy for the investment team is to pursue more investments in private markets. So, these are typically real or physical assets such as roads, ports, properties, or even private businesses.

These assets don't trade on public markets like bonds or listed shares that Sam's spoken about a lot today.

So, in particular, we look for investment opportunities where we can use our ability and scale to effectively access these deals, ideally also at a lower cost.

A recent example of this is the investment we made in Vantage Data Centers. Technological disruption such as AI and the demand and use of data is an investment theme that we expect to deliver strong growth in the future.

As part of our private markets portfolio, we're investing in digital infrastructure that supports growing demand for big data and also cloud computing.

Vantage is an investment that supports the rapid growth of technology companies that require data storage, cooling and power. And we see this as an investment in a growth market that's got strong pipeline of development prospects.

This is just one example of where we're pursuing investment opportunities in today's market that have the potential to add some long-term value for our members.

Okay, now looking at members and Nick you've been sitting on the sidelines up until now.

Sam and Amber have spoken about investment performance, economies, and outlook. Where do you usually start when you talk to a member about investment options, performance, and choice?

Sure, good question, Peter. From a planners perspective, when we start talking to members around investment choice, we normally tend to take a bit of a step back initially and have a more general discussion, often around conceptual issues. Now, we've listed a few of those here and I'll run through them.

The first one notes identifying or understanding your risk tolerance, now, every investment has a risk return trade off that's getting a bit technical. Broadly we all know that markets will go up and down to a degree and it's a matter of finding a manner of investing that still allows you to sleep comfortably at night. So that's dealing with risk tolerance. 

The next point refers to what we call diversification. Now that is, and we've alluded to it through the course of the session today, the process of investing across a wide range of asset classes in an effort to try and smooth before it's over time, and limit the likelihood that a single asset class will run roughshod of your entire investment. The third point notes understanding your investment timeline.

Now, nowadays, how long members invest for is not just up to the point of retirement, but potentially well into your eighties or nineties. So, the longer we are investing for, generally the better we're able to ride out rough patches in short-term periods.

So, timeline is important. The fourth item their notes stay the course. Now, we've spoken about market noise.

It's trying to ignore the white noise in the short term essentially, what does that mean? Well, that's largely a case of trying to ignore either the market or the media white noise in the short term.
What happens in the weeks, months and even up to a year or so. In investment markets needs to be viewed in light of your longer-term goals when you're managing wealth.

One thing we do know is knee-jerk reactions usually tended to trap quality long-term planning by negatively impacting consistency over time.

So from there we'll often take that discussion and look to select an investment option or a combination of investment options that's designed to meet your needs individually as a result.

The idea being the process sets a sense of expectation around what might happen tomorrow without knowing what will happen tomorrow. We generally tend to find it provides for a more measured approach to investing when the waters get a little bit choppy.

Okay, I'll pick up on the last point there, Nick, stay the course. And I think that's something that members maybe sometimes struggle with.

Investment markets will always have ups and downs. What discussions do you have with members when markets do this and how do you address the so-called dash to cash?

That's a very good question. It's a hard one because money is about you.
There's no two ways about it, and it's very difficult when things are a little on the wild side.

Emotion tends to overrun reason. Now, let's spill the cat, everyone would like big returns every year with no risk.

The simple truth is that's just not an option. So, if we're looking at a dash to cash or a flight to cash as it's sometimes called. You need to make sure you're getting two decisions very, very right. Now, the first one is not surprisingly, when do I make the choice to move or to dash into cash?

And the second one follows on pretty quickly thereafter and it's around when do I make the move back into the market thereafter.

Human nature, sadly, tends to suggest we probably manage this fairly poorly because we normally wait for a loss of some considerable significance before we're shifting into cash. And then, again, human nature suggests we wait for returns to be good for a while as reassurance before we dip our toe back into the pond.

This to me tends to highlight the risks of investment switching when returns are volatile or negative. Because making decisions based on short-term market movements can very much impact the long-term performance for any given member. Now, we do have a slide here that demonstrates this very, very well.

If you have a look at this slide, it shows the returns for the balanced option over the last 20 years to the December just gone.

Now in that there are many ebbs and flows, there are quite a few ups and downs and Sams spoken about those already.

To me as a plan of the big takeout really is a case of a consistent approach helps as markets tend to bounce back.

No one unfortunately rings a bell at the top or the bottom of the market, so we don't know when a rise or a fall is going to come.

As a result, staying the course, which we spoke to a second ago, is often a better long term outcome.

Yes, that's right Nick and as you can see from the chart there are more ups than downs and the only way you get all the ups is to ride all the down in that stay the course philosophy.

Now finally, Nick, cash flow whilst working can be fairly consistent, but when salary or wages stop, funding cash flow in retirement becomes vital.

Beyond members making investment choice, what are some of the other investment structures you may talk to members about?

From a planning perspective when we talk about structure, most people tend to think of structure as what type of account do I need? Should I keep an accumulation account? Or what we traditionally call super. Would I use a pension account or some other tool or vehicle? Now whilst that's an important part of the discussion, how you structure your affairs and retirement is a bit more expansive than that.

I tend to relate this to clients in this sort of a three tiered or three columns approach. Now the first one says cash flow.

Generally, a number one goal in retirement will be how do I fund the income that will provide me a comfortable lifestyle ongoing day after day, week after week in an automated fashion?

It might be that we're splicing together or pulling together a few different income sources. The cash flow is always number one.

I’ll then talk to retirement savings down the bottom, next. Now retirement savings you can think of as the pool of wealth, that we manage or maintain over the long term in retirement and that would include decisions around things like, what's my investment approach?

What sort of vehicle or tool do I use to meet my needs over that period of time? The one in the middle, cash reserves, from a structural perspective is to me very important but generally not considered quite as often as the other two.

It's sort of the bridging item between daily cash flow and long-term wealth management.

Now cash reserves, they can kind of cover four or five different main points. Cash reserves when we speak to it are dealing with money that's literally in the bank, in a non-volatile asset that's available for a couple of different functions. The first one to me is riding out fluctuations in cash flow day to day.

Sadly, we often end up with a few bills all at once at the end of a quarter.

Money in the bank means we can pay that without impacting the day to day needs. It also provides immediate access to cold hard cash in the event of an emergency.

Now, speaking personally from a client that I dealt with recently. They had to make a dash interstate; I’m based in Hobart as were they. They had to make a dash to Brisbane to provide support to a family member at very, very short notice.

It literally involved driving down to the airport, buying a ticket, getting on a plane and going. So, reserves can provide funds to meet those kind of unexpected costs.

The third item I’d come to is we can use it to fund short term expenses that are expected or of a known dollar amount and timeframe. And it might be like an emergency holiday to the Bahamas in a year’s time or perhaps the car needs to be upgraded in 6 or 12 months.

We can allocate money prospectively, for a non-volatile asset for that. The fourth item I’d probably touch on is, and it's not as used as often, is a cash reserve can allow us the opportunity to buffer or float pension drawings in the course of retirement when returns are a little bit wild.

That is, you might find it's a preference to reduce the rate of drawing out of a pension account subject to the minimums allowed by law. And you can then allow for that, while using cash reserves to cover those needs in a short period.

Obviously, like none of this is long term by nature, but it is designed when we have the structure in place appropriately. It is designed to provide a degree of comfort or peace of mind in the short term, in the knowledge that you can leave the markets to do what they're supposed to do with capital wealth over the long term.

Thanks Nick and that's probably an area that's going to grow and grow and grow as more members do, or more people in general, head to retirement.

That concludes the presentation section of today's webinar.

I hope you've enjoyed the session and feel more informed about AustralianSuper’s latest investment performance, what we're expecting over the next 6 to 12 months for investment markets and economies and most importantly for your super.

Our Chief Investment Officer, Mark Delaney, has also recorded a mid-year update which you can find on the Australian Super website.

If you'd like more information on what we've covered, there are a number of helpful resources and links that have been added to the chat as the webinar has progressed and you can find them at the bottom of your screen.

There is also a range of webinars and video recordings available on the website, as well as details of how you can attend future webinars and future face-to-face seminars.

You can receive help and advice from AustralianSuper in a number of different ways and we will interact with you in the way you want to.

Over the phone advice on simple matters such as investment choice can be attained over the phone at no additional cost. Or you might want to try the calculators, or you might want to speak directly and have an appointment with and get comprehensive advice from a financial planner like Nick.

That pretty much brings us to the end of time for this webinar. 

So once again, Sam, Amber and Nick, thank you for your time and, thank you for enlightening us a bit about the investment world in the world of financial advice.

And once again, thank you to the many people who have joined us today taking time out of their day on Valentine's Day.

Hopefully as I said at the start, today's the day you fall in love with super you might even fall in love with how investment works.

But on behalf of Australian Super, I wish you all the best for the future. Thank you.

End transcript