Investments

Welcome and thanks for joining our mid financial year investment update.

Tonight, we'll be discussing AustralianSuper's investment performance for the six months to 31 December 2022, how we're managing your super in the current market cycle, our outlook for Australian and global economies, as well as investment markets, and importantly, strategies to help manage and grow your super.

My name is Jaclyn Livingstone. I'm an Education Manager at AustralianSuper, and your host for this evening.

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

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

This information does not consider your personal needs or financial objectives, so please assess your own financial situation and read the Product Disclosure Statement and Target Market Determination document before making any decisions.

To start, I'd like to introduce you to tonight's speakers. I am joined by Sam Weaner, Manager Investment Communications.

Hello, I'm Sam Weaner and I’ve worked in the investment industry for over 20 years and in my role at AustralianSuper, I provide members with updates on our investment strategy as well as the performance of our investment options.

We also have Amber Rabinov, Head of Macro Research - Investments.

Hi, I'm Amber Rabinov, Head of Macro Research here at AustralianSuper. In brief, my team conducts research into typical economic issues, including GDP, inflation and interest rates, as well as longer-term themes that impact on the economic environment, such as demographics, geopolitics, and the energy transition – all in order to support the Fund's investment performance to benefit all members.

Thank you both for joining us. In his latest performance update, Mark Delaney, our Chief Investment Officer, pointed to a positive start for the first half of the 2023 financial year.

Sam, could you start by walking us through the recent performance of AustralianSuper’s main investment options?

Thank you, Jaclyn. Let's start with a look at the returns in accumulation options, and then go through the returns for our retirement options.

On this table we see the performance of our super PreMixed options as well as our DIY Mix options. The table shows the three-month, six-month or financial-year-to-date performance, as well as the ten-year average annual returns.

On row two of the table we see the return of the Balanced option and this option we talk about a fair bit because over 90% of AustralianSuper members invest in this option. The Balanced option returned 2.79% for the six months or financial year to date for 31 December 2022.

We also see that the growth-oriented options like the High Growth option in row one of the table outperform the more defensive portfolios like the Stable option in row six of the table.

We also see that the Indexed Diversified option did have higher short-term performance over the last six months, and this is largely due to that rebound of listed assets like Australian shares and international shares during that period.

We turn our attention to the ten-year average annual return figure. This is in the third column. We see that the returns remain strong for most AustralianSuper options and that the Balanced option had an average annual return of 8.76% for the period.

On the next table we see the returns of the Choice Income options which is our account based pension offering. Just like accumulation, the PreMixed options all had positive returns for this time period.

Since pension accounts are tax exempt, when markets are rising, you do see higher returns in pension accounts than in accumulation accounts.

Now, when markets are negative, it is worth noting that an example like the Diversified Fixed Interest option in that second last row of the table, that six-month performance did have negative returns and the returns for pension accounts are slightly lower than accumulation accounts when markets are negative. This is because accumulation accounts do have a tax adjustment during times of negative returns.

Now, a frequent question that we do get is, what are the factors causing this performance? And the biggest contributor to the PreMixed returns over the last six months has been the strong performance of Australian shares, international shares, as well as unlisted infrastructure assets.

So, the performance of listed shares has been closely linked to the levels of inflation, as well as the levels of interest rates, and basically how these affect the future profitability of companies. So, this has led to very volatile returns over the last few months.

When you think of when new news comes to market about inflation, CPI releases or any central bank policy changes, this has added a lot of volatility to returns.

However, the trend has been positive for listed shares over the last six months. In unlisted infrastructure, we’ve seen strong revenues support the valuations in these assets and some of the assets we hold in the portfolio have had very favourable returns.

Assets like NSW Ports, Transurban Queensland Motorways, as well as renewable energy assets that we hold in the portfolio.

Now there are still plenty of hurdles that have been affecting investment markets. That level of inflation that we talked about, increases in interest rates, that concern of slower economic growth are weighing on returns, and this is especially notable on fixed interest assets where we've seen this higher interest rates push down the prices of bonds in the portfolio.

The one benefit, though, is even though these higher interest rates have hindered recent returns, it does increase the projected returns for the asset class.

Considering the challenges you've highlighted, Sam, this is an encouraging start to the 2023 financial year. Thank you. Given the impact that economic developments have on investment markets,

Amber, what are your thoughts regarding what's happening in the Australian and global economies right now, and what might we expect in 2023?

Thank you, Jaclyn. Well, as Sam has highlighted from an economic point of view, 2022 was a challenging year in Australia and around the world. We saw a very strong rise in global inflation stemming from a number of factors.

Broadly, these included substantial government stimulus which boosted consumer demand, particularly for goods and housing, supply chain disruptions, very tight labour markets with multi-decade lows in unemployment, energy price shocks, natural and man-made disasters which lifted food prices, and more recently, the release of pent up demand for services, including travel, accommodation, and restaurants.

Now, this rapid rise in inflation led central banks around the world to lift interest rates significantly and frequently to try to get larger than usual price rises under control.

We've all felt the impacts in our day to day lives with rising petrol prices, food costs, health care costs, mortgage repayments, home rentals and so on. And of course we've seen the impact on our super balances.

As Sam highlighted, equity markets have increasingly incorporated more challenging borrowing conditions and the weaker economic outlook into valuations, and higher interest rates have weighed on bond market returns.

So, where to from here? From a national and a global perspective, we are expecting economic growth to continue to slow in 2023. Inflation figures are well above average around the world, so interest rates are likely to continue going up in the first half of this year, with the aim of slowing down household spending and reducing inflation.

Now the good news is that inflation appears to have peaked in the US and Europe and is likely to also be close to peaking in Australia, which means that interest rates are expected to be far fewer in 2023 than 2022.

Now that said, global central banks are expected to keep monetary policy tight, so the level of interest rates high, in order to ensure that inflation continues to ease back to the more comfortable 2% level or so that's typically targeted.

Now as interest rates are likely to remain elevated for most of 2023, those households with mortgages will still face the pressure of rising mortgage payments, in turn, leaving less income to spend elsewhere.

The lagged impact of this sharp rise in interest rates aimed at easing inflation is leading many economists to predict recessions in 2023 for key markets, including the US and Europe.

On the positive side, the risk of an Australian recession is modest compared to other developed markets.

Our Reserve Bank is not expected to lift interest rates to the same heights as other countries due to the fact that wages growth in Australia has not been as high, as well as concerns about broader risks to households.

We're expecting the Australian economy to fare better than other major developed economies, given the strength of our resource exports, the recovery of services exports in late 2023, and China's recent post COVID border reopening.

So, all things considered, in a relative global sense, Australia is still the lucky country.

It's reassuring to know that our economy is likely to fare better than key global economies in 2023. Thanks, Amber.

Now, Sam, given the economic outlook for the next 6 to 12 months, what are we expecting for investment markets and how are we managing member funds to deliver the best possible returns?

Over the past few months, we have started to see some positive signs for investment markets. Inflation has started to fall in some major economies, and while central banks have increased interest rates, they have slowed the pace.

But despite these signs, we don't feel that we're out of the woods quite yet. As Amber pointed out, over the next 12 months, we expect inflation to remain above central bank targets, interest rates to remain higher, and this is expected to slow global growth.

Given these conditions, we incorporate that into our asset allocation views of the portfolio. Now we've increased the level of defensive assets and reduced the exposure growth assets in the portfolio.

This means that we've reduced allocations to asset classes like Australian and international shares, and increased the fixed interest and cash in the Balanced option.

We'll soon show a chart that shows the changes of the asset allocation of the Balanced option over the last year.

This shows the position in the orange bar from 31 December a year ago, and the blue bar shows 31 December 2022.

What this demonstrates is that we’ve lowered the allocation to Australian and international shares, primarily due to the headwinds that we see for this asset class that potentially slow our economic growth. Also, the valuations for listed shares are still above some historical averages.

The higher allocations to fixed interest and cash are key to the defensive position in the portfolio as they provide some downside protection. Even though recent returns for fixed interest have been negative, this asset class is designed for portfolio stability and we anticipate that its higher yields will help future portfolio returns.

The increases that you see in private equity and unlisted infrastructure are due to some of the higher projected returns that we see for these asset classes.

We also see some great opportunities for disruptive technologies in these asset classes, and across the portfolio. Areas like digital infrastructure, robotics and energy transition are all themes that will change the way we live and work.

And put simply, we're investing in assets that we feel will outperform inflation over the long term.

Thanks for explaining what AustralianSuper is doing to manage investment performance over the long-term, Sam. While the investment team monitor and manage the portfolio, what are some of the things members could be thinking about or doing to help their super?

There are four key items that members should consider. First, it's quite normal for investment markets to go up and down, and we recognise that for members it can be unsettling to see your investment balance tread sideways or even possibly even go backwards.

When it comes to your super, it’s important to think of it as a long-term investment and look through these short-term market movements. Even in retirement, you may need to earn a living off your income for several decades.

What we’ll see in the next chart that comes up is something that demonstrates this long-term idea, that even during downturns such as the Global Financial Crisis and even the COVID-19 downturn, recently, markets have historically rebounded and grown higher over time.

This chart demonstrates that the Balanced option over 20 years with $100,000 invested with no additional contributions, grew to over $468,000 over 20 years. And that's quite a benefit for members invested in that option.

Second, diversification can buffer member balances during those big market swings. Investing in a mix of assets can help cushion your balance against the market ups and downs.

So, spreading your investments over a variety of countries, regions, and different asset classes can help reduce your risk. While one asset class may perform poorly during a part of the economic cycle, the other asset classes may be able to balance out some of those negative returns.

The benefit of the PreMixed options is we do this asset allocation for you. Our investment team invests in a variety of asset classes to help grow your super balance, and we actively adjust the asset allocation based on our economic and investment outlook.

Third, make sure you’re in the right investment option that suits your appetite for risk. You should be invested in a way that makes you feel comfortable, and that you can sleep at night.

We offer a number of investment options that let you tailor the level of growth or volatility that you want in your portfolio.

The range of PreMixed options offer growth options like High Growth and Balanced, or more defensive options like Conservative Balanced and Stable, to help you adjust your risk.

Details on all these investment options are available in our Investment Guide as well as on our website.

Now finally, if you are unsure or if you have any concerns about your super or what investment markets are doing, it can be beneficial to get professional advice.

So even like when you need an electrician or a car repair, it can be helpful to get the information you need you need for your situation.

AustralianSuper members have a variety of tools, resources, and advice options, so you can often set your mind at ease by getting the information that you need that's suitable for you.

Thank you for your insights Sam, and thank you to you too as well, Amber.

If you’re looking for help and advice, you can visit our website. Qualified financial advisers can also provide members with advice on simple matters like your super investments or contributions or insurance within your super, and that's at no additional cost and it's done over the telephone.

For members that might have more complex things to discuss, or if you'd prefer to meet with an adviser in person, AustralianSuper also offers access to financial planners in AustralianSuper offices around the country, and this does involve a cost.

If you're interested in learning more about super, we also offer a range of webinars at different times throughout the year, so you can tune in from the comfort of your own home or wherever you have internet access. To find out more, visit australiansuper.com/webinars

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

Thanks again for joining us, we look forward to seeing you at the next update in August.