AustralianSuper’s Education Manager - Peter Treseder, and Manager of Portfolio Reporting, Emma Negri provide an in-depth look at investment performance in 2020, and the importance of thinking long term when it comes to your super.
When it comes to investing and super, 2020 had it all: early growth, a rapid and significant fall, and a strong and steady recovery. While times of uncertainty are unnerving, AustralianSuper members should be reassured to know the Fund has over 150 investment professionals in-house, situated around the world, who monitor markets and are experienced in managing the portfolio through market events and cycles.
We don’t let short-term volatility cloud our judgement. As Australia’s largest super fund, we make informed decisions, and manage the portfolio for the long term with one main aim - to help all members achieve their best possible retirement outcomes.
Peter Treseder and Emma Negri take an in-depth look at investment performance in 2020
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Welcome, I think 2020 will be a year that will be remembered for many reasons. When it came to investing, we had it all: early growth, a rapid and significant fall, followed by a strong and steady recovery.
My name is Peter Treseder. I'm an Education Manager at AustralianSuper, and I've been helping people understand their super for over 20 years. To have a closer look at 2020, I have with me Emma Negri from our Reporting and Insights team. Welcome, Emma.
Mark Delaney, our Chief Investment Officer, recently recorded a performance update video, which I recommend you watch. In it, he takes a quick look at what happened investment wise in 2020, and how that Balanced option performed.
Emma, we're going to take a deeper dive into 2020. Now, as you know, we have a range of PreMixed investment options, how do the investment performance of these options differ from the Balanced option and why?
Well, they differ due to the asset allocation which varies depending on the option. So the PreMixed options with a capital growth focus include our Balanced option, High Growth, and Socially Aware, and Index Diversified.
Alternatively, the options with a capital stability focus are Conservative Balanced and Stable. The growth focus means the option has a higher allocation to growth assets, such as shares, and while it would aim to generate stronger returns over the long term, it may also experience possible fluctuations in the short term.
The capital stability focus is associated with lower risk, and will have higher allocation to defensive assets, such as fixed income and cash. For these options, returns aim to be steady without large fluctuations. Returns would also be expected to be lower than the growth options over the long term.
Thanks Emma. So, what would be the impact or what would impact growth over the longer term?
When we talk about the difference between the options, to distinguish them, we're often talking about the ratio of growth to defensive assets, which is an approximate way to assess the risk level for the time invested.
If we use the Balanced option as a reference point, it has an allocation to growth assets of 70% and 30% allocation to defensive. It has this allocation to achieve its objective of beating CPI by more than 4%, and to beat the median balanced fund over the medium to longer term.
In comparison, the High Growth option has a growth defensive split of roughly 85% to 15%, and our Stable option has a split which is the inverse of the Balanced option of 30% growth to 70% defensive. In contrast to the Balanced option, its investment objective is to beat CPI by 1.5%, not the 4%, so it has a lower return objective. And to beat the median capital stable fund over the medium term
Thanks Emma, so what's driving the investment returns of these options?
Well, the investments making up our asset allocation are split into broadly three groups, and this is what's driving the returns. So our three groups are equities, mid-risk, and fixed income and cash. And within these groups, equities is made up of Australian shares, international shares, and private equity. And the allocation to equities is considered 100% growth
Sitting in the middle of the risk spectrum is mid-risk, and Mark Delaney calls it mid-risk for exactly that reason, as we assume it to be half growth and half defensive, in that it has characteristics of both. Mid-risk assets are infrastructure and property. The growth characteristic is the potential for capital growth in the value of the asset, and the defensive nature is their fixed and steady income streams, similar to the defensive fixed income asset class.
The defensive asset group is fixed income and cash, which are considered to be 100% defensive assets. So an example of an infrastructure asset is our investment in New South Wales Ports or Queensland Motorways. While an example of one of our property assets is King's Cross in London, which could be described as a diversified property asset as it includes residential, retail, and business precincts, as opposed to a property asset that is just office or residential.
So, taking into account all of this, how do these or how did these options perform in 2020?
Well, the PreMixed option shows perfectly how the different options have performed over the past year, and a year such as 2020 helps to illustrate how the performance of the PreMixed options is affected by market conditions, and how they respond based on their asset allocation, so they have performed as expected relative to each other based on their asset allocation.
You can see that High Growth has had more volatile performance with higher highs and lower lows, and the higher allocation to growth assets means it has generated a higher return over the year, but also experienced increased volatility while achieving that higher return.
The Balanced option had returns slightly lower than the High Growth, yet still showed strong performance for the year, contributed to by the 70% allocation to growth assets.
The Conservative Balanced option with a 50/50 allocation to growth and defensive, sits in the middle relatively when comparing to the other options. It still achieved a solid return, but without moving as high when performance was strong, and not falling as low when performance came under pressure during the height of COVID.
And finally with the Stable option, you can see the returns over one year are more moderate compared to the other options. So during the downturn, it didn't fall by as much, and then during the recovery over the remainder of the year, the returns were not as high as the other options.
Well, thanks Emma, that's certainly looks at the volatility of 2020. Now, given how you described those options, would the volatility over a longer period, say 10 years, look the same?
Yes, absolutely Peter, we would expect what happened over 2020 to play out over a longer term horizon as well based on the asset allocation. As you can see from this chart, the performance over 2020, based on the asset allocation, would be expected to play out over a longer-term horizon such as 10 years as well.
Thanks Emma. Now members can find more information about our investment options on the AustralianSuper website, and understanding these options and choosing the investment mix to match your risk profile is essential. So getting advice from AustralianSuper is as simple as a phone call or going to australiansuper.com
Now, Emma, in hindsight, were the ups and downs of 2020 different to the ups and downs over recent years, say the GFC or Brexit?
At the time of a downturn it can be very unnerving as usually the cause or trigger is different, causing commentators to use the term 'unprecedented', and it usually is. However, when we look back at market downturns over the last century, they have all had different causes and have taken variously different times to recover, yet the markets have historically recovered.
Interestingly, the time to recovery was much shorter for the COVID downturn. Markets recovered from the COVID-19 downturn back to pre-COVID levels in under a year.
There were specific factors in the current situation such as the swift and coordinated action between central banks with the easing of monetary policy and supportive fiscal policy by governments. This has the effect of increasing money supply around the world, preventing a credit crunch and supporting expansion or growth.
Looking back at all the downturns, the similarity they have in common is the uncertainty they cause, and it is usually this uncertainty that has the capacity to cause panic.
It's a very human reaction, the definition of panic is the sudden and strong feeling of fear that prevents reasonable thought and action. So I would think it's really important not to be making investment decisions in a panic, as they probably won't be good decisions.
Thanks Emma. At an individual level, it is often hard to hold your resolve when markets fall, how important is discipline and process, and how and why does a fund the size of AustralianSuper hold its resolve?
Well, it's really hard to hold one's resolve in these situations, but this is where it is so important to be able to maintain perspective and not to panic. Having a long-term plan and sticking to it is so important, because, as we've said, markets have historically recovered and making decisions which are not reasonable when in a panic is not ideal.
For our members, it should be reassuring to know that the AustralianSuper investment team is made up of over 150 investment professionals who have experienced managing the portfolio through these market events.
Our investment colleagues were invaluable in providing perspective during the events of 2020, as they have managed investment portfolios during downturns before. This experience cannot be underestimated.
At AustralianSuper, we do not let short-term volatility cloud our judgement. It is for this reason, and also due to our size, that we're able to hold our resolve and continue to make decisions, and manage the portfolio for the long term.
Thanks Emma, and to demonstrate that long-term view, this chart shows that members may be better off if they stay invested over the longer term. The bumps or downturns of the market may be ironed out over the longer term when members are looking at their retirement savings.
Finally Emma, AustralianSuper recently made a big announcement about carbon emissions in our investment portfolio. Can you briefly explain what AustralianSuper is committing to?
Yes, as part of our ESG or Environmental Social Governance investment approach, AustralianSuper has made a very important announcement and this is to commit to achieving net zero carbon emissions in the investment portfolio by 2050.
Importantly, we have chosen to do this, not only because it is in line with scientific consensus on reducing the economic and social impacts of climate change, but also because we believe in investing in companies with good ESG management, which provides better long-term returns for members, and is therefore consistent with our objective of helping members to achieve their best possible retirement outcome.
So thanks Emma, that's what we're committing to, what have we been doing already?
Well so far, the portfolio has been working to reduce emissions since 2013. So since this time, the team have managed to reduce the carbon intensity in the shares portfolio by 44%. So the commitment to net zero by 2050 is continuing the work in progress.
Thanks Emma. Now the commitment to carbon emissions is one part of our ESG investing role, can you please give me a brief overview of how we implement ESG in our investment process?
Yes, there are three parts to our ESG approach. There is ESG integration, which is ensuring ESG factors are considered before we make an investment, and then ensuring we continue to monitor for as long as we hold an investment. So this includes whether we are investing directly or through external managers.
The second part is Stewardship, and as an active investor, we exercise the rights and responsibilities of being a large shareholder. And direct engagement is key as it enables us to influence through voting and engagement. The aim is to foster positive behaviour on the issues that impact our members.
And finally, Choice acknowledges that members have different values, and we consider it important that we consider these preferences in our investment choices. So every two years, we survey members to ensure we know what is important to them, and the investment approach of our Balanced option and its approach to ESG integration, is consistently applied across all options, and our research shows that most members are currently happy with this.
Well thanks again for your time, Emma, you've given us some wonderful insights about 2020.
For more information about how AustralianSuper invests on your behalf, please go to our website australiansuper.com. There you can also watch the latest performance update video featuring Mark Delaney – AustralianSuper’s Chief Investment Officer. Also at the website, you can see how you can access financial advice.
Thank you for joining us.
Peter and Emma’s 3 key takeaways
1. The level of ups and downs in your investment option in 2020 depended on asset allocation
How your super investment option performed in 2020 depended on the asset allocation – meaning whether your investment option has more of a focus on growth or defensive assets. For example, AustralianSuper’s PreMixed options with a capital growth focus include: Balanced option, High Growth, and Socially Aware, and Index Diversified.
- High Growth – has a high allocation to growth assets, such as shares. This means it had a more volatile performance, seeing higher highs and lower lows. However, it generated a higher return over the year, compared with options that have a more defensive allocation.
- Balanced – has 70% allocation to growth assets (and 30% defensive) and it had returns slightly lower than the High Growth, yet still showed strong performance for the year.
- Conservative Balanced – has a 50/50 allocation to growth and defensive. It achieved a solid return, but without moving as high when performance was strong, and not falling as low when performance came under pressure during the height of COVID.
- Stable – has a higher defensive allocation (70% defensive, 30% growth). As such, the returns over one year were more moderate compared to the other options. During the downturn it didn't fall by as much, and then during the recovery over the remainder of the year, the returns were not as high as the other options.
2. In 2020, investment markets recovered faster than in previous downturns
When it comes to investment markets, compared to previous downturns – for example the Global Financial Crisis (GFC) and Brexit – the recovery time was much shorter for the COVID-19 dip. Markets recovered from the downturn and were back to pre-COVID levels in under a year.
This highlights how important it can be to have and stick to a long-term plan, as market downturns may be ironed out over time. This involves avoiding unnecessary risks, such as switching investment options, because of short-term volatility.
AustralianSuper experts have undertaken substantial research on switching patterns of the Funds’ members1. We’ve found that, on average, the decision to switch investment options – during a downturn – leaves many members worse off over the long-term, compared to sticking with their investment strategy.
3. Committing to net zero carbon emissions by 2050
AustralianSuper supports the global scientific consensus that climate change is having significant physical, social and economic effects. To offset the risk of economic impact on investments, we’re taking substantial actions to support the net zero 2050 goal of the Paris Agreement.
These actions involve investing in companies with good environmental, social, and governance (ESG) management. This can provide better long-term returns for members, and is therefore consistent with our objective of helping members to achieve their best possible retirement outcome.
1. Member switches: Member switches reviewed between July 2009-June 2014. Data from Owen Joseph Scott, 2015
This information may be general financial advice which doesn’t take into account your personal objectives, situation or needs. Before making a decision about AustralianSuper, you should think about your financial requirements and refer to the relevant Product Disclosure Statement. AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.