Investments

Welcome and thank you for joining us today for this webinar. At the webinar today, we're going to be talking about investments, and then looking at the end of the financial year investment update and outlook. We're going to look at the fund's performance, how AustralianSuper is managing the current market volatility, and the investment outlook. My name is Peter Treseder. I'm an Education Manager at AustralianSuper. And today, I will be your host for the evening.

In the spirit of reconciliation, AustralianSuper acknowledges the Traditional Custodians of the land on which we work. We pay our respect to Elders past, present, and emerging, and we extend that respect to all Aboriginal and Torres Strait Islander people.

Please know that the information in this webinar may include general financial advice, which doesn't take into account your personal objectives, financial situation, or needs. Before making a decision, read the relevant product disclosure statement available at australiansuper.com/pds. Remember, investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.

I'd like to introduce tonight's panel of speakers. We have Mark Tierney, he's AustralianSuper's Global Economist. We have Sam Weaner. He's the manager of our Investments Communications. And, Kate Vallance, one of our Financial Planners. And together, we're going to, as I said, discuss the financial year just gone by. To begin the webinar, I'm going to share a video with you, of AustralianSuper's Chief Investment Officer, Mark Delaney. And he's giving a brief update on the fund's end of financial year 2022 investment performance.

After more than a decade of growth in which the balanced option has delivered an average annual return of 9.3%, the past 12 months have seen considerable volatility in investment markets. This has impacted member balances. So, what's driving this volatility? There are a number of reasons including geopolitical tensions, increases in inflation, and rising interest rates. For example, pent up demand from consumers, supply chain blockages, and the war in the Ukraine have all contributed to higher prices, especially food and fuel prices. To curb this rising inflation, central banks have responded by raising interest rates to slow demand. This has resulted in falls in investment markets. While you may have seen news headlines about large falls in share markets, it is important to remember that the balanced option is also a diversified portfolio that also invests in fixed interests, cash, infrastructure, property, private equity, and credit assets. Investing in these other asset classes, which are typically less volatile than listed shares, means that the portfolio returns are cushioned from the significant volatility we're seeing in share markets.

Why did the balanced option perform better than listed share markets?

The balanced option benefits from investing in several asset classes, in both listed and private markets. So, assets like Australian shares and international shares are examples of listed assets while private equity, unlisted infrastructure, unlisted property, and private credit are examples of private markets. And the slide that's up there now is our long term view, which is our strategic asset allocation, which is the target weights that we have for the portfolio over the next five plus years. And, it's really looking at, what is the economic conditions we expect and what are the market conditions we expect over that time frame. And with the goal of the balanced option of outperforming inflation over the long term, holding a significant weight to these listed markets as well as private markets provides the potential for your retirement savings to really keep up with the rising costs that we see over time, especially from inflation. This diversification across the asset classes also provides that smoother ride for your journey. So, over a lifetime of investing, you expect a lot of ups and downs in different parts of the financial markets. And the last three years have been a perfect example of how volatile markets have affected your portfolio. And each asset class in the portfolio responds a little bit differently to these market conditions. So, during market expansions, we increase growth in the portfolio to add to things like listed shares and private equity to really take advantage of those market upswings. Whereas, during economic slowdowns when we predict a potential downturn, we want a lower risk in the portfolio by allocating more to areas like fixed interest. And while this process doesn't necessarily eliminate negative returns, it can make a smoother ride along the journey. The next slide shows the building blocks of the portfolio and the performance of those underlying asset classes. So, the orange bar shows the return over the last one year, while the blue bar shows the return over the last five years. And this shows a little bit of what Mark Delaney was talking about, how over this last year, share markets like Australian shares and international shares were heavily impacted by those rising interest rates and those global tensions. And we saw those negative returns in those areas, but these are also the same share classes that have provided beneficial returns over the last three to five years. And it's been a large part of that rebound from the COVID-19 downturn that we've seen recently. The assets in the middle of those private market assets provided both downside protection, as well as a boost to the balanced option returns, where they've provided positive returns over the last one year and over the last five years in the portfolio. And we've especially seen some beneficial returns from transport infrastructure holdings in the portfolio as well as industrial properties. Assets like Transurban Queensland and Wiri Logistics Estate in New Zealand have helped to boost member returns over time. The one asset class that has had a challenging year as well is fixed interest. And that's where we've seen those rising interest rates having that effect of putting downward pressure on the bonds in the portfolio or the fixed interest assets. And that's where we've seen that when central banks increase the cash rate, that's what puts that downward pressure on the prices. However, when we look forward with the current yields that we see in fixed interest and that potential for an economic downturn, we do see that fixed interest assets are a little bit more attractive at current yields.

How did they all come together when it comes to both long and short-term performance? And how did that compare to the investment objectives it has?

So in the next slide, you'll see, this is the performance of the balanced option compared to the median manager over the one year and over the long term. So, the balanced option has an objective of outperforming inflation plus 4% over a rolling 10-year period, but it also has the dual objective of outperforming the median manager over the long term as well. And while this was a difficult year for performance of losing 2.73%, it continues to outperform the median manager over the short term, as well as the long term. And this outperformance goes a long way to building the super balance over time and shows that the balanced option continues to be a top performing fund.

Mark, Sam's spoken about what's happened. As an economist, where are economy's heading and how will that affect members’ super?

Last year was exceptionally unusual. Normally, you can get high inflation, or you can get weak economic growth. And we got both last financial year. I mean, that's very, very rare. For the first, say half to three quarters of the financial year, it was high inflation that was the dominant influence. That was the biggest concern. So, it was bad for fixed interest products. But then when we start to become concerned about slowdown in economic growth, which was a natural response to higher interest rates, so that was bad for share markets. So, the chart that Sam showed earlier, you know, showed exactly that. It was a poor year for fixed interest, and it was a poor year for shares. And that's what you get from the combination of high and rising inflation and slowing economic growth. That's not going to last forever, that combination. There will come a point in the not too distant future when inflation is going to peak. What's likely to last a bit longer is slower economic growth, but that won't last forever either. It's a difficult combination for central banks like the Reserve Bank of Australia or the U.S. Federal Reserve to deal with. Getting the balance right, getting inflation back down without hurting growth too much is a very difficult balancing act. So, there will be uncertainty amongst the central banks, just how far they should continue to push up interest rates. And that means a bit more uncertainty in financial markets as well, but it's not going to last forever. As inflation starts to come down again, central banks will have a little bit more leeway when they consider monetary policy not to push up interest rates as aggressively, as has been the case so far this calendar year. And that's an important consideration because once we hit that point where inflation has peaked and central banks slow the rate of monetary tightening or, in some cases, possibly even stopping, the outlook then changes quite a bit for financial markets, where at least have some certainty about where interest rates are going to peak. And from that point, things get very interesting because we know that after this cyclical uncertainty, what's coming is a major structural improvement in global economic growth. The spending, which is required, for example, when the energy transition is astonishing is the only way to describe it. What is required to deal with climate change over the remainder of this decade is going to be one of the biggest investment booms of all time. And the spending is not optional. The opportunities that that will throw out are going to be amazing. So, we can confidently say yes, the next few months, difficult period, where we go from this transition from inflation to slow growth, but once we get through that period, the outlook over subsequent years becomes a lot brighter because of this non-optional spending on things like the energy transition or climate change adaptation. So, for areas like infrastructure and private equity, the outlook remains very, very positive.

Now Kate, in my role and in your role as a financial planner, we talk with members every day. How do they feel when we have a year like we've just had?

After many years of positive returns, members are finding it hard to see their super balances go down. So, people have got used to seeing their super rise. And so when their balance falls, it can be very worrying time and it's often quite a shock. So, this is completely understandable and it's especially true for members who are at or near retirement. It can be very stressful when the funds people are relying on to pay their living expenses through retirement suddenly start to decline in value, leaving them with no idea as to whether they will keep falling or bounce back quickly as was the case with the COVID-19 downturn in March 2020. History shows us that despite different market events including the Iraq war, Global Financial Crisis, and the COVID-19 pandemic, over time, investment markets and member balances have continued to rise. $100,000 invested in the balanced option over 20 years without additional contributions would've grown to over $450,000 at the end of June this year. And we expect the positive years to return. And if you're unsure about what to do, we recommend you seek financial advice which we'll talk a bit more about later.

Now that we've seen this year's results, how is AustralianSuper managing the portfolio based on the economic outlook that Mark spoke about?

Sure, in our investment process, we analysed the expected market conditions over the next few years as well as those longer-term trends. We've already started to reduce risk in the portfolio based on our current outlook. And this chart shows the asset allocation of the portfolio at 30 June last year, as well as 30 June this year with the orange bar being last year and the blue bar being 30 June this year. And it shows how we progressively moved assets away from listed shares like international shares to areas like fixed interest and across other private markets throughout the portfolio. And when you compare this to our strategic asset allocation, this demonstrates the strategic tilts we take based on that one to four year outlook in the portfolio, so how we can change the portfolio based on those economic conditions. And while we do see ongoing volatility in investment markets, that's where we look for those investment opportunities. What areas may have been mispriced by the current market conditions. We see, especially, some growth potential in private markets in areas like logistics and telecommunications, as well as climate solutions. And we're actively looking to add to our infrastructure and property positions in those areas. And the key aspect of the investment process is patience. That long-term investment means looking through these day to day short-term conditions that we're currently experiencing. It also means evaluating the value that we see in the portfolio and its assets, and what earnings and the quality of those earnings can create over time. So, our investment team actively manages the portfolio, so that you, as an individual member, can stay the course and focus on your own personal investment objectives.

What can members consider when it comes to their account, that that real meat and vegetables situation that's going to affect themselves?

Well, Peter, we understand why some of you feel like you should be doing something when markets are falling. So members feel they should switch into a more conservative option like cash or our stable fund. While it may feel like you're protecting your retirement savings by switching investment options, by doing this, it may actually have the opposite effect and lock in the losses as you need to get the timing of both the switch into and out of the investment options right. And unfortunately, it's very hard to tell how long a downturn may last or how quickly markets will recover. People who switch out, then have the issue of not knowing when to switch back in, as timing this is extremely difficult. This makes it almost impossible to improve your returns by switching options. Our data shows us that making decisions based on short-term market movements can often leave markets, members sorry, members worse off financially in the long term. History shows that markets have always recovered. It's also important to remember that times when markets are going down are often good buying opportunities. So, it's like going to the shops when the sales are on. So, let's take a look at an example that demonstrates the difference between staying invested in a diversified investment option like the balanced fund, which is our default fund, compared to switching to the cash option. So, in this scenario, the member had $350,000 invested in the balanced option on the 31st of December 2019. On the 23rd of March 2020, this member decided to switch from the balanced option to the cash option. What they had read in the media about market changes in relation to COVID-19 fueled this change. They stayed invested in the cash option until the 30th of June 2022. So, this graph shows us that if the member had stayed invested in the balanced fund, their balance at the 30th of June would've grown to $393,000. But instead, switching to the cash option resulted in a lower balance, $298,000. So, switching and staying in cash left this member almost $95,000 worse off than if they'd stayed invested in the balanced option through this period. So, remember, if you are unsure about investment choices, please do seek financial advice.

How do members behave during the periods of investment downturns? You touched on it about switching.

Well, I once attended a talk where the speaker stated that one of the biggest risks for individual investor performance is investor behaviour. So, while feeling very worried about markets declining, it's completely understandable that some members will start to think of switching to what they perceive as the relative security of a cash investment. So, while this sounds logical and like it is a much safer option, it can be quite risky as we have seen in the last couple of slides. Most people don't see cash as risky, but there is a very real danger of cash falling behind inflation in the long term. When investing in cash, you may not have the stress of seeing your balance fall but when you take into account inflation, you can still be losing money in real terms, even when your balance is going up. And this sounds a bit confusing, so here's a simple example. If you have $100 invested in cash and you earn 1% of interest, your balance would go up to $101 over the year. However, if inflation over that same year is 5%, your money would now only be worth $96. Meaning, you wouldn't be able to buy as much with that as before.

Mark, Kate raised the loss of purchasing power when inflation exceeds returns. Now a slow increase in interest rates and inflation was expected, but that hasn't been the case.

No, it hasn't been the case. And that's mainly because inflation has got away from all the central banks to a much greater extent than they anticipated. So, they've been forced to lift interest rates more aggressively in the short term. Now the upside for that is that the end rate, the peak rate, may be lower than would normally be the case. And this is the kind of different world we're operating in post-COVID compared to pre-COVID. If you go back and look at previous cycles where interest rates have gone up, it tended to be a lot slower, say 25 basis points each time. And as the Reserve Bank of Australia today, now it's more like 50 basis points each time. So, the central banks have had to be far more aggressive to try and catch up with inflation, but there does come a point where rates do peak. And that, I think, is important for everyone to recognise. Interest rates don't rise forever. And as soon as growth starts slowing more significantly, interest rates will peak. But the pre-COVID, post COVID difference goes beyond that, just the speed of the monetary tightening. People are used to the idea of low inflation. It was only two years ago, for example, that the Reserve Bank of Australia was criticised for having inflation too low for half a decade, basically. They didn't get within their 2% to 3% target band. And that was true for most central banks including the U.S. Federal Reserve and the European Central Bank. Now they've been criticised for allowing inflation to be too high and above the target band. So, I think some people do think, okay, what we're doing now is completely temporary. And there's an element of truth to that. But the assumption we are going to go back to the pre-COVID world of inflation being extremely low over the longer term is very unlikely, even as inflation comes down. So that's an important consideration for everyone. If inflation is, say in Australia, say 3% rather than 1.5%, that extra 1.5% compounds year after year after year, chewing into the purchasing power of the money you are earning. So that's, you know, exactly why Kate is correct. When you think about the post COVID world, even if inflation it's only, say 1.5% higher than used to be the case over the long term, it has a meaningful negative impact on your living standards. So, for a lot of, you know, for a lot of people, cash just won't provide the necessary returns. Hence, we need the diversification in areas like infrastructure and property, where we can generate the returns and provide the diversification to deal with a period of inflation, which is not out of control. But even slightly higher does make a difference to your living standards.

Thanks, Mark. Now Kate, you spoke earlier about the dangers of switching and the dangers, potentially, of being invested in cash. AustralianSuper's got a number of investment options that members can use. How might using these options help members to minimise risk?

Well, Peter, if a member isn't comfortable with larger up and down swings in their super balance, there are other options they can consider that are less impacted by rise and falls in share markets. So, these include the stable and conservative balanced options, for example. These are similar to the balanced option as they're also diversified, but have less in shares and more in cash and fixed interest. Their long-term performance is not as strong as the balanced option, but over the short-term, investors have a less bumpy ride as the ups and downs are less pronounced.

And if you want to see the full range of investment options available to you, please go to the investment section of the website. Members can receive advice from AustralianSuper in a few ways. It can be done using the various calculators on the website. It can be over the phone or face to face. Simple topics, such as investment choice, can be provided over the phone. The cost of which is covered by your administration fee. And you can use our Find an Adviser tool to find an adviser convenient to you, if you'd like to explore face to face advice. Your advice journey can begin by calling us on 1300 300 273. I'd like to thank Sam, Mark, and Kate, for their time and their insights. Now we must remember, there has been volatility in markets over the last 12 months, but that is normal when it comes to investing. When markets are volatile, the important thing is not to panic and instead to focus on the long term, which superannuation is. It's long term while you are working. And it will be a long-term, hopefully, when you're in retirement. The fund's long performance remains strong despite short-term volatility. History has shown us that markets do recover. Getting advice can help ease concerns when investments experience downturns. On behalf of AustralianSuper, thank you for attending and farewell for now. Thank you.