Understanding volatility

31 October 2022

It’s no secret that financial markets have been turbulent recently. But what does this mean for your future retirement security?

Market volatility occurs when there are large swings in performance, often resulting from investor reactions to economic factors, company news or global events. It’s important to understand what it is, what it means for your super and how we navigate market volatility for members.

What is market volatility?

Volatility refers to the size and frequency of changes in investment prices – both up and down. Remember, market volatility is more pronounced in the short-term. It’s fair to expect periods of heightened short-term volatility from time to time. As you can see below, volatility has been more pronounced in the past two financial years.

Balanced Option Financial Year Returns

The chart shows the annual performance of the Fund’s Balanced option from 30 June 1987 to 30 June 2022. There have only been 4 years with negative returns during this 36-year period.

The chart above shows the annual performance of the Fund’s Balanced option from 30 June 1987 to 30 June 2022. There have only been 4 years with negative returns during this 36-year period.
AustralianSuper investment returns are based on crediting rates, which are returns less investment fees and costs, the percentage-based administration fee deducted from returns from 1 April 2020 to 2 September 2022 and taxes. Returns from equivalent investment options of the ARF and STA super funds are used for periods before 1 July 2006. Investment returns aren’t guaranteed. Past performance isn’t a reliable indicator of future returns.


Why has volatility increased recently?

In general, markets don’t like uncertainty, disruption or instability. Several key macroeconomic factors have contributed to heightened volatility recently.

The transition from the COVID-19 pandemic has led to labour shortages, increased consumer spending and supply chain disruptions. The Russian invasion of Ukraine further exacerbated global supply chain issues. These factors have all contributed to the highest inflation in decades.

High levels of inflation tend to correlate with increased market volatility and lower equity and fixed interest returns. As inflation erodes the purchasing power of future cash flows, it decreases the real value of an investment.

To combat inflation, central banks have been rapidly raising interest rates. We’ve seen the most widespread global tightening of monetary policy in decades. This has led to increased market volatility and underperformance in investment markets. We've seen this not only in Australia, but across the globe.

What this means for your super

It’s important to remember that ups and downs are a normal part of investing. Our investment team prepares for this type of market environment. And, while market volatility is more pronounced in the short-term, your super is a long-term investment. As the graph below shows, even significant market events, like the Global Financial Crisis and COVID-19 selloff, appear relatively smooth in the context of long-term growth over the last twenty years.

Growth of a $100,000 super balance over the long term

The chart shows the performance of the Fund’s Balanced option over 20 years, from 30 September 2002 to 30 September 2022. It uses a starting balance of $100,000 and shows how over 20 years that balance has grown to $465,594.

The chart shows the performance of the Fund’s Balanced option over 20 years, from 30 September 2002 to 30 September 2022. It uses a starting balance of $100,000 and shows how over 20 years that balance has grown to $465,594.
AustralianSuper investment returns are based on crediting rates, which are returns less investment fees and costs, the percentage-based administration fee deducted from returns from 1 April 2020 to 2 September 2022 and taxes. Returns don’t include all administration, insurance and other fees and costs that are deducted from account balances. Returns from equivalent investment options of the ARF and STA super funds are used for periods before 1 July 2006. Investment returns aren’t guaranteed. Past performance isn’t a reliable indicator of future returns.


Portfolio diversification is key. Certain assets – like infrastructure, private equity and cash – can help cushion the portfolio during market downturns, while still positioning the fund to enjoy future upside when the markets recover. Diversification is a cornerstone of AustralianSuper’s long-term investment strategy and a key factor in maintaining resiliency in the face of market volatility.

The Fund employs active management throughout every stage of the market cycle. This means repositioning the portfolio as necessary throughout the cycle. As markets sold off, we reduced the risk in the portfolio – by reducing our exposure to growth assets, in favour of asset classes that carry lower levels of volatility. In addition, short-term volatility can often lead to the mispricing of assets. This means we’re searching for new investment opportunities with long-term intrinsic value.


What can you do to protect your super?

In periods of heightened market volatility, remember, super is a long-term investment. While it can be tempting to switch options when markets become volatile, being invested in a diversified portfolio over the long run can help grow your super.

If you’re concerned about changes to your balance and the impact on your retirement plan, consider speaking to an accredited financial adviser. Speaking to an adviser can help you review your retirement goals and consider your investment options1.

 

Connect with a financial adviser

References:
1. Personal financial product advice is provided under the Australian Financial Services Licence held by a third party and not by AustralianSuper Pty Ltd. Fees may apply.

This may include general financial advice which doesn’t take into account your personal objectives, financial situation or needs. Before making a decision consider if the information is right for you and read the relevant Product Disclosure Statement, available at australiansuper.com/pds or by calling 1300 300 273. A Target Market Determination (TMD) is a document that outlines the target market a product has been designed for. Find the TMDs at australiansuper.com/TMD.

AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.

 


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