Investments

Good afternoon and welcome. Thanks for joining our end of year Financial Year Investment update.

Today's webinar flows on from the end of financial year performance update presented by our Chief Investment Officer, Mark Delaney, which you may have seen already. If you haven't, there is a link to it, to the video currently on the AustralianSuper Internet landing page.

Today I'm going to be talking about AustralianSuper's investment performance for the financial year just gone by, how we're managing your super in the current market cycle, our outlook for the Australian and global economies, as well as investment markets and importantly, strategies to help you manage and grow your super.

My name is Peter Treseder I'm an Education Manager at AustralianSuper and today I'm going to be your host.

AustralianSuper acknowledges the traditional custodians of the land on which we work and we pay our respects to their elders, past, present and emerging, and we extend that respect to Aboriginal and Torres Strait Islander peoples.

Before we start, please be aware that the information being provided in this webinar today and the answers to any questions will be of a general nature only. We do not know your personal needs or your financial situation or objectives, so please assess your own financial situation before making a decision and please read the product disclosure statement and target market determinations available on our website before you make decisions. We're talking about investments, so please remember that investment returns are not guaranteed and past performance is not a reliable indicator of future returns.

To help me with today's discussion, I have with me two of our experts from our Investment team, Sam Weaner, Manager of our Investment Communications, and Amber Rabinov, head of our Macro Research and Strategy Investments. Thank you for both joining me.

Starting with you, Sam. How do you help members? Hello, I'm Sam Weaner and I've worked in the investment industry for about 20 years now and at AustralianSuper, I assist members with updating information about our investment strategy as well as updating information about our performance of investment options.

And welcome, Amber, same question to you. How do you help members? Hi everyone, I am Amber Rabinov. I lead a team of highly specialised economists and strategists. Together, we work 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.

Thanks, Amber, and thanks, Sam for joining us. Now, Sam in his investment update, Mark Delaney, our Chief Investment Officer pointed to the positive returns for the 2023 financial year. The majority of our members are invested in the fund's default option, the Balanced option. So maybe we could start there. And could you please explain how that Balanced option is invested?

Thank you. Peter. To start off, the primary objective of our investment team is to generate strong long term returns for members, and we seek to do this by actively investing in assets as well as diversifying across asset classes to help manage downside risk. So the strategic asset allocation for the Balanced option represents how we do this.

You can think of each asset class as a building block of the portfolio And the strategic asset allocation provides a mix of different asset classes. These include growth asset classes like Australian shares, international shares and private equity, Mid-risk asset classes that have a mix of growth and defensive characteristics. These asset classes are unlisted property, unlisted infrastructure and credit. As well as defensive asset classes like fixed interest and cash to help manage downside risk. You can think of the strategic asset allocation as a starting point for our investment approach. It's the mix of asset classes that help achieve the investment objective of each option. And for the Balanced option, the objectives are to outperform the consumer price index by 4%, as well as beat the median balance fund over the medium to long term. Effectively, we're looking to outperform inflation as well as outperform competitors in the industry. The key part here is outperforming inflation is very important because you want your investment balance to maintain your cost of living, as inflation increases over time. So this benchmark mix of assets start with the strategic asset allocation, basically has that portfolio that has the growth potential to meet those objectives.

Okay now the investment earnings of super. Now that's super in the accumulation phase, or if I've got a transition to retirement account, the investment earnings are concessionally taxed and if I've got money in an account based pension or the Choice Income account that AustralianSuper has, the earnings are tax free. So there's going to be different return rates we're going to be talking about Sam. Could you take us start by taking us through some of the recent performance of AustralianSuper's main investment options?

Yeah, the end of the financial year gives us a good opportunity to reflect on the returns over the year as well as how we perform for members. So we'll start with the returns of the accumulation option and then look at the returns of the retirement options.

And on this first chart, we have the performance of the PreMixed options with the one year return in orange as well as the ten year annual average return in blue. For this one year we're very pleased that each of the PreMixed options had positive returns for members and we're able to help increase the balances of members invested in each of these options. There's two key themes we'll talk about as we go through the webinar today. One is the performance of listed markets like Australian shares and international shares, as well as how they compare to private market assets like unlisted property, unlisted infrastructure and private equity over the year. One aspect you can highlight and see the difference on this chart is that the performance of the Index Diversified option compared to the Balanced option, which has a similar risk return profile. In Index Diversified the growth portion of that portfolio was invested in listed shares like Australian shares and international shares, whereas the Balanced option is invested in a mix of private markets and listed markets. Over this last year, Australian shares and international shares did very well compared to private markets and that's where you see that higher return for Index Diversified in this period. Now over the long term, the Balanced option actually does very well because of our active approach as well as the investment in these private markets. And that's where you see the Balanced option pull ahead over the ten year period with that 8.60% average annual return compared to 7.22% for the Indexed Diversified option.

So thanks Sam, that's our PreMixed options, like the Balanced option, where AustralianSuper decides what the pie chart investment looks like. You can choose your own options through our DIY, do it yourself options. How did they perform Sam?

So we look at the DIY Mix options. These are the options that focus on specific asset classes and this is where you can see that performance from Australian shares and international shares over the one year period as well as over the ten years per annum. So in Australia over this last year, there was a very strong rebound that came off the concerns of the market had about interest rates and high inflation a year ago. And effectively the returns were also supported by higher company earnings and earnings growth over the year. International shares had a very similar story where the returns really did a strong rebound from a year ago, especially in technology shares, where we saw technology shares really take a leap forward over the last six months. For diversified fixed interests, we still do see an effect where that increase in interest rates over time puts downward pressure on the prices of bonds in the portfolio due to that inverse relationship, higher interest rates lead to a lower price. And that's where we see the negative return over the one year there In Cash options, we have seen the return increase compared to previous years, largely due to those higher interest rates that we see in the market. So that actually has helped the Cash option.

Okay, and as I mentioned before, even though they're invested in the same options, there is a different level of return between let's say Super and Transition to Retirement and our Choice Income account, because the Choice Income account, there's no investment tax paid there. What have the returns been for the Choice Income account? Peter you're right that the Choice Income accounts effectively have the same underlying investments as the Super options, and the main difference is that difference in tax treatment where the Choice Income accounts don't pay Australian income tax. So this is where you see that the PreMixed options had a higher return over one in ten years due to this difference in tax treatment. So you see that the Balanced option over ten years had that 9.48% return over that time period.

On the next chart, you can see how this differential tax treatment affects the DIY Mix options. And this also brings up a frequently asked question we often get about Australian shares and franking credits. Whether you're invested in the Super option or the Choice Income option, you do get the benefit of franking credits through the crediting rate or the return that you receive. The main difference is in the Choice Income option, it doesn't pay Australian income tax, but you still get that benefit of franking credits. So whether you're invested in Australian shares, in the Australian shares option or in one of the PreMixed options that benefit passes through on your return.

Thanks, Sam. Now, turning to you, Amber, Sam's gone through the investment performance, What factors in the economy have played a role in investment markets?

Thanks, Peter. I think it's helpful firstly to explain why we spend so much time thinking about the macro economy and the outlook. Now traditionally we look at the economic cycles, so whether the economy is in recession, recovery, expansion or slow down and what these economic phases imply about factors including economic growth, inflation and the setting of interest rates to help inform the asset allocation process. As what we find is different asset classes can perform quite differently depending upon where the economy is in the cycle. Now, with that in mind, we can see that inflation has peaked around the world. Now, while prices are continuing to rise, they're doing so at a slower pace. We can take the US as an example and see this reflected in the fall in annual headline inflation over 9% last year. It's currently tracking around 3% at the moment. It's a similar situation in Australia. Headline inflation has fallen from around 8% in year on year last year to currently tracking around 6%. As a result, major central banks around the world are coming to the end of their cycle of rising interest rates. Now that said, there are concerns regarding the stickiness of price rises given the continued strength in spending and healthy labor markets. With unemployment rates around the world remaining at multi-decade lows as such, we think global central banks will keep interest rates relatively high, even though the immediate inflation emergency appears to have receded for now. Moreover, we think that monetary policy takes time to work its way through the economy. The full impact of interest rate hikes aren't felt for anywhere between, say, 12 to 24 months after they're implemented. So if you think about it, it's kind of like if you're driving a car and you want to turn a corner, but you won't get around the corner until maybe one or even two years after you've turned the wheel.

Now, as Peter's mentioned, our CIO Mark Delaney spoke in his end of year update. As he mentioned, these economic conditions are expected to generate a much more challenging growth environment over the outlook period. So by challenging, we mean that a further easing in household spending is expected as additional savings built up over the COVID period run out. And also a more challenging environment on the corporate side of the fence, businesses already beginning to suffer from tighter credit conditions as well as lower profits and margins. And ultimately, we expect these factors to feed into a broader slowdown in economic demand. But with this change in market cycle, we think opportunities will also be provided for our investment process. So the concurrent fall in valuations, which we expect with an economic slowdown, will make assets more attractive for us to buy into.

Thanks, Amber. Now, Sam, given the economic conditions that Amber has just outlined, can you provide some more detail on the performance of the underlying asset classes within the portfolio?

Earlier, we started talking about the building blocks of the portfolio in the Balanced option. This chart shows more detail about the returns of these asset classes that we use in each of our PreMixed options and how they've done for the one year ending 30 June 2023. So as Amber pointed out, the returns of each asset class can vary depending on the economic environment and market conditions. So in a diversified portfolio, you can often expect one asset class to do really well, whereas other asset classes might have challenges during that period. And that's the benefit of diversification because you don't always know the timing of when that will occur. So we put it the last year in context let's highlight a few asset classes that have done well as well as a few that haven't done as well over this last year.

So, we'll first start taking a look at listed shares like Australian shares and international shares as well as unlisted property, unlisted infrastructure. So in Australian shares and international shares, these asset classes actually exceeded our expectations for the year. We think the environment that we're facing, that high interest rates, high inflation, we expect expected some more challenges in how these companies would perform over the year. However, there is very high consumer spending over the year on the back of the pandemic and effectively the basically the corporate earnings did very well. We saw this both in Australia as well as internationally. And internationally we saw a strong rebound from the technology sector, with especially over the last six months, and this is where some stocks actually performed by upwards of over 100% in the portfolio. But it was a very concentrated rebound with technology really leading the way of that performance.

And looking at unlisted infrastructure, this is an asset class that actually does well during high inflation, but there's actually some inflation protection in infrastructure assets. Many times the revenue from an infrastructure asset is linked to inflation. Think of toll roads or utilities that are higher, those higher prices actually flow through to benefit these assets. So while it hurts a little bit to have higher toll bills or higher utility bills, you can be slightly comforted by the fact that some of those revenues flow through and benefit your retirement portfolio.

Now, it's also worth looking at a few asset classes that did not perform as well this last year. So we'll take a look at private equity as well as fixed interest and we’ll close on unlisted property.

So with private equity, we have updated the valuations in this asset class and they really reflect the current market cycle for private equity portfolios. And a large part of that is the higher interest rates that has put a damper on the valuations there. Now, we have looked at each of the largest holdings in the private equity portfolio and looked at the fundamentals, and we still believe that this is an asset class that will perform well for the fund in the long term and give a strong performance for members. In fixed interest, this is where that increase in interest rates over the years still put a negative effect on the on the performance of the price of bonds in the portfolio. And that's why we see the negative return in fixed interest.

Now, unlisted property is worth highlighting because that's where we saw some key things on the back end of the pandemic that really affected the returns there. And this is especially in retail properties as well as office properties. So this also highlights the importance of our valuation approach. We update our valuations with a frequency to make sure that there is a fair value in the crediting rate that we provide to members. So we want to make sure those are updated frequently. And this negative 8% return that we see this last year reflects that. So we thought it was important to update the returns of those office properties as well as the retail properties Because an office that's slow return to work that we've seen post the pandemic has affected their valuations. We also see a lot of vacancies in retail properties as well.

Now looking forward, we are looking to reposition the property portfolio and invest in more asset sectors that will do well. Those things are like industrial warehouses as well as logistics centers. As an example, a recent investment we have there is the Amazon Robotics Fulfillment Center located in Victoria, and these are the types of assets we think will do well going forward.

Thanks, Sam. Now, Amber, Sam's had the ability to look to the past and see what's happened. When we look to the future and the economy has done well, there are asset classes that have done well. But when we look to the future, what are we anticipating?

Well, earlier I spoke about why we think about the economic cycle and how that helps us to support our investment process. But increasingly, especially in my team, but across the investment department, we spend just as much time thinking about the thematic and the long run outlook as we do on the cycle and the reasons why are two-fold.

Firstly, because we believe that the global economy is undergoing some fundamental structural changes which mean that the next ten years will likely be quite different to the ten years leading up to the pandemic.

A second reason is our Fund strategy. As we've grown in size with more assets under management. We've increasingly internalised the management of the portfolio and we've also internationalised our asset base. In addition, we have more unlisted assets in the portfolio, and these includes assets such as you can see on your screen that New South Wales Ports Asset or the Amazon Fulfillment Center that Sam spoke of. We tend to hold these unlisted assets for longer periods of time than, say, more liquid assets such as Australian shares or international shares. Now, as such, we've increasingly needed to look through economic trends over the next one, two or three years and really have a good handle on longer term macro influences over the coming five, ten or 20 years to help to inform the kinds of assets we want to hold in the portfolio over the longer term and also the kinds of assets that we don't want to hold in the portfolio.

Now, as I mentioned, we believe that the future will be different from the past and there are four key areas that we've been focusing on which we believe are already making structural changes to the global economy. And therefore these are issues that could impact on AustralianSuper's investment portfolio.

These include, number one, geopolitics. This is all about how different countries interact with each other. Some examples of developments in the geopolitical space include conflicts such as Russia's invasion of Ukraine, what that has meant for the global economy. But also issues such as new trade restrictions and investment restrictions that have been announced by a number of countries recently.

A second major theme is the energy transition. So that shift away from fossil fuels, empowering our societies and towards renewable and zero carbon energy sources such as solar and wind, as well as broader climate considerations. Again, here, there have been key government initiatives in this space which have impacted on the economic outlook. These include the US Inflation Reduction Act, which included significant policy support for energy transition measures.

Third theme that we look deeply into, demographics. So this is all about how population growth is slowing globally and to society's age. This can have a number of big impacts on the economy by the demographic makeup of countries. Here, I mean, the number of workers available, the wages they can demand, for instance, as well as shifts in savings and consumption patterns.

And a final big theme that we've been thinking a lot about of late is technology, particularly in the space of artificial intelligence.

I think a final point that I'd like to make, which is interesting about these four key global themes, is how they interact and are intertwined. And this umbrella theme, if you will, has been a distinct shift away from the importance of pure cost or economic considerations in the setting of official policy and towards national security considerations. We can really see this umbrella theme weaving its way through these four key points that I highlighted for you.

Now, one of the things that tweaked my ears then Amber was AI, artificial intelligence. Now, many people see this as the way of the future Where does AI sit in the world of investing?

Yeah, AI is really, really interesting, Peter. It's an interesting development in the thematic space, not just from a global competitiveness angle, but also from an innovation and also a productivity perspective. Some of the considerations we're thinking about include shorter term issues and firstly, looking through the current hype and some of those movements we've seen in international equities that Sam highlighted, we look through the current hype we can consider the pace of AI adoption across industries, plus the demands upon data and power to drive AI.

Now what we can say is AI is not a new development, but we can see signs of longer term accelerated innovation, particularly in the area of generative AI. Over a longer timeframe what we can say is technological advancements tend to be productivity enhancing and disinflationary. What that means is, they make people more efficient in what they do and the cost of production tends to be lower as a result. And we think AI will be no different. The question is how powerful these forces will be and could they be offset by other structural issues pushing in the opposite direction, for instance, on inflation.

We also need to consider different constraints which present further uncertainty. These include things around regulation, data quality, computing power, as well as the energy that's required to support it, as well as geopolitical considerations and how policies impacting on trade flows. So overall, what we do as a team when we think about issues such as AI, is to ultimately consider their significance, to the outlook for the economy and to our investment portfolio. That is, what does their evolution mean for things including growth, inflation, interest rates, different industries, different countries. And using this research helps us to uncover investment opportunities in order to maximise returns for all our members.

Thanks, Amber. But now Sam Amber has gone through a lot of factors that come into play when we're investing. How is AustralianSuper, you said we're an active manager, how is AustralianSuper positioning the portfolio?

Yeah, the analysis that Amber’s team does really determines how we allocate assets in the portfolio. So we think of the strategic asset allocation as the starting point. This chart shows how this asset allocation positioning has changed in the Balanced option.

From a year ago in orange to 30 June this year in blue. So all the outcome of that economic and market analysis that we've done really leads us to be cautious about how higher interest rates may affect the future of company earnings and the valuation of growth assets. And this is really why we lowered the allocation to Australian shares and international shares and increased the allocation to fixed interest. We effectively move the positioning of the portfolio to assets that we expect to do well during this economic cycle. So when interest rates are peaking or when central banks are close to the end of their tightening cycle, we find that fixed interest may be a favorable place to invest because you receive that higher yield from those investments. So overall our our portfolio position is set to really respond to market conditions that look for investment opportunities that arise through this economic cycle.

Now, Sam, we mentioned before we have benchmarks, one to outperform inflation, the other to outperform competitors. Based on the asset class positioning, how did our performance results compare to those benchmarks?

A key aspect of monitoring investments is to see how they're performing against their objectives. So we are seeking to be a top performing fund over the long term to really help enhance the returns for members.

So this chart shows a comparison of the Balanced option compared to its benchmark over the one, five, ten and 20 years with the option in orange and the benchmark in blue. And the benchmark is the Super Ratings Index for Balanced options, which is a group of our key competitors in the super industry. And looking at the one year return, you do see a result of 8.22%, which is slightly behind the competitive benchmark. And the main reason for this is we we believe were more defensively positioned than the rest of the market. So we do feel that through our economic and market analysis there are some headwinds to the economy and we've positioned our portfolio with a lower allocation to those growth assets. And over this last year, as we saw earlier, Australian shares and international shares beat our expectations and did well. And that's why we we underperformed over this one year period. Now the objective of the option is to beat those benchmarks over the medium and the longer term over that ten and 20 year timeframe. And that's where we've been a pleasingly been able to provide that performance for members over that timeframe. So a major benefit for us is that we're positioning the portfolio to go through this current economic cycle so we can continue to achieve that long term objective in the future.

Thanks, Sam. We must remember super is a long term investment and we've seen this different performances over different time periods. But it's the power of compounding interest, the interest on interest that drives the growth of whether it's Super, the Transition to Retirement account or your Choice Income account. How might the growth of my account with compound interest, What might that look like, say over the last 20 years?

Certainly, another way of looking at the performance is the growth of your portfolio over time. So this is the growth of the Balanced option with $100,000 invested 20 years ago with no additional contributions. And how it is performed through different market cycles. So you think of the time during the global financial crisis back in 2008-2009, as well as the COVID 19 downturn just three years ago, that the Balanced option is really set to to invest through these time periods and provide members with an opportunity to gain some of that performance during those rebounds as well. So when growth returns to the investment markets, a member that investing in the option is able to get that upside swing as well. So we think of investing for a long period of time, there are those ups and downs in the economy as well as investment markets, and you can expect that in your journey of investing.

Yeah, and it is a long term investment and again looking at history, the ups out weigh the downs. So thank you, Sam, for your insights. Thank you Amber, for sharing your expertise.

If you're looking for help and advice, you can visit our website, which has a range of tools and calculators. We have qualified Financial Advisors who can provide members with over the phone advice on simple matters such as investment choice, contributing to super, insurance options available to you. And there is no additional cost for that advice. There is a small fee for people that want to go into the more broad areas of retirement and transition to retirement strategies, and some members might feel they are in a situation where it's complex or they like to prefer to meet with an advisor in person. AustralianSuper offers access to Financial Planners in offices around the country, and that service does come with additional cost. If you'd like to know more about which option is best for you or require further assistance, please visit our Help and Advice page. AustralianSuper.com/helpandadvice

For further education, we have a range of webinars and videos covering a variety of topics and these can be accessed through AustralianSuper.com/webinars

Now that brings us to the end of the formal part of the webinar. but there was one or two questions that did catch my eye, which I'll throw, to you.

One of those themes is about our size and scale and how does that benefit members? I'm happy to take this one, Peter. So in terms of scale and size, I think there are three key factors why this provides benefits for members. I think firstly, it allows us to build out our capability in our international offices and to be able to access the best international investment opportunities to add to our returns. I think a second benefit is our ability to invest in unlisted assets. So those large multi-billion dollar commitments - such as that New South Wales ports asset we have that we saw on screen earlier, the Amazon logistics facility that Sam mentioned, toll roads, airports - investing in these big ticket assets is only possible with scale. And a final benefit, it allows us to have a really strong team of specialists to drive our investment analysis and management. Again, finding those opportunities for the portfolio in order to maximise returns for all of our members.

Look and Sam, just touching on specialists, we have within AustralianSuper. Now I’ve been with the Fund for nearly 25 years, One of the biggest changes I've seen in the investment area has been internalisation. How's that benefiting members? Sure, I’m happy to take that one. So when you think of internalisation first, it's worthwhile defining it. So internalisation means that we're managing the assets in-house. We have a team of over 330 investment experts at AustralianSuper that manage assets on your behalf, and this compares to using external managers. And we do use a mix of both. But right now about 58% of the assets are managed internally. And there's two key advantages to that for members in the portfolio. Number one is it reduces costs for members as well as it helps us manage the efficiencies of reallocating assets. So the first part, internal asset management is actually much less expensive than using an external manager. Oftentimes the fees for external managers can be much higher. So this helps bring down the overall investment fees and costs for members over time. The second benefit is a portfolio efficiency of moving assets around. So we talk a lot about how we move assets through the economic cycle. By using our internal asset management, we can actually more efficiently delegate assets between different parts of the investment team Whereas when you use external managers, that can be often slower to do that. So between lowering costs and adding to portfolio efficiencies, it definitely is a good benefit for members.

Looking and a final one that a number of members are asking, it’s a common theme. And look, I'm going to paraphrase here: I'm approaching retirement. I've got concerns about the market uncertainties, the slowing of the world economy, as you mentioned. How might that impact my super savings?

I can start with that one. One key aspect is, especially when you're approaching retirement, you're getting to the point where you're actually using the money so that the whole goal of investing for retirement is to be able to spend it. So in the short run, you want to make sure you have enough income to meet your current needs, but also you could be retired for many, many years. You might be retired for 20, 30 or more years. So investing in an option that enables you to get growth over time is pretty important as well. But overall, you want to make sure that you're invested in a way that meets your own personal situation. So it is worth looking at different advice options and really asking for help if you have questions about your super.

I might just add to that from my perspective, firstly, recessions are opportunities. We think recessions provide buying opportunities with more attractive entry points to implement our longer term investment strategies. And as I mentioned, this is because valuations or asset prices, they tend to fall as demand in the broader economy slows. And so we can use recessions to position the portfolio for the eventual economic recovery to follow. I think this broadly feeds into the fact that Sam pointed out we actively manage the portfolio as the economy evolves through different cycle points to take advantage of market opportunities. And also, you know, just a final point, just keep in mind the slide that Sam showed earlier on the performance of the Balanced option over 20 years; the importance around staying invested through the cycle. So longer term themes take many years to play out. There might be a few ups and downs, but it's important to stay invested through the cycle to take advantage of those themes.

Thanks Amber, Thanks Sam, now we have reached the end of our time today So once again, thank you, Sam and Amber, for joining us today. And on behalf of AustralianSuper, I'd like to thank the many of you that have joined us today, and I wish you all the best in the future. Thank you.