Key points in this CIO Update
- Recent share market volatility has seen investors overreact on the upside and downside.
- A long-term focus and a diversified approach have helped protect member returns as well as provide smooth, consistent performance.
- We have invested in a range of sustainable, value adding infrastructure and property projects in Australia and overseas.
- We remain cautious in our investment outlook and are focused on providing members with sustainable, long-term investment returns.
Investing through the highs and the lowsThis March marks the 10 year anniversary of the end of the GFC in 2009. Since then, we’ve enjoyed a ten-year bull market in shares—an extraordinary run that, as with all bull markets, will come to a halt at some time! In 2018, we saw media headlines at both ends of the hysteria spectrum. The reality is that after a sharp sell-off in Q4 last year, equity investors have been smiling again thanks to a strong recovery in January and February this year, with last quarter’s falls all but erased.
- Volatility in share markets is not uncommon. What’s unusual is the strong share returns experienced over the last 10 years.
- The share market has overreacted on the downside and on the upside and media headlines - often no more than ‘clickbait’ - have been extreme.
- Amid all the volatility, the key themes have not really changed in the last 12 months -Trump, the US/China trade war, Brexit negotiations, and the all-important US Fed interest rate policy have remained the key drivers of share markets.
The lesson is: don’t react to the short-term ‘noise, keep focused on the long-term, and diversify your investments.
It's not all about equities!
Most of our members do not rely solely on equities (shares) to drive their investment return and manage risk. It’s a key reason why diversification is the most powerful tool we have to manage investment risk. Within our diversified options (see chart below), we’re very focused on understanding how much risk we’re taking.
- Members in Options with higher exposures to less risky ‘defensive’ assets like Cash and Fixed Income (e.g. Capital Secure) and less exposure to ‘growth’ assets like equities are better insulated from falls in equity markets.
Our investment Options are true to label and will always reflect our investment approach and strategy.
Playing the long game
Volatility and market noise come and go. Remaining invested is key. A member investing $100K into the VicSuper Growth Option in December 2009 and keeping it invested would be about $30K better off* today than a member switching in and out of cash on reaction to market falls of 2% (see chart below; *calculation assumptions can be found at the end of this article).
Assuming a member had invested say $100,000 at the end of September 2009, without taking into account any other factor, they would have had around $169,000 at 30 September 2018 if they had switched between the Growth/Cash options at certain points. That’s well short of the $207,000 if he/she had remained invested in the Growth (MySuper) Option. Note: All returns are calculated by VicSuper and assume an initial investment from September 2009. Returns are illustrative only and use data from the 10 year period September 2009 to September 2018. Example does not take into account any other factors such as fees.
- The first two months of 2019 further highlight the importance of remaining invested - equity markets are up about 10%, and even the UK market has risen 6% despite Brexit uncertainty.
- Switching investments, even in volatile markets, can make matters worse.
The old adage of ‘time in the market’ holds true - letting compounding do its work and not chasing returns gives an investor the best chance at maximizing long-term returns.
Sustainable investing for the long term
We’ve been evolving our investment strategy since 2017—reducing our reliance on Equities and increasing our exposure to (say) Real Assets. Being ahead of the curve with a robust investment approach has really helped to protect and build members’ investment returns.
- Our Real Assets have a strong sustainability theme—we aim to deliver positive, viable investment returns for members while being a responsible corporate citizen.
- We’ve invested globally and offshore in sustainable assets ranging from Finerge Wind Farm (Porto, Portugal), Ross River Solar Farm (Townsville, Queensland), as shown.
- Keeping true to this theme, we’ve recently invested in Wheelabrator Technologies, a waste disposal and renewal power generation company with sites in the US and UK.
- 16 waste-to-energy facilities
- 2 waste fuel facilities
- 3 facilities under construction in the UK
- Waste processing capacity of 8 million tonnes and electricity generating capacity to power over 650,000 homes.
These kinds of assets are typically not available to investors in self-managed superannuation funds (SMSFs).
Investments in action - strong returns, ready to navigate through 2019
We delivered a positive return in our Growth option in 2018 despite negative returns in share markets in 2018. Member investment returns have been boosted by recent share market gains (January and February).
- To sustain the recent market gains, there needs to be stronger corporate earnings and economic growth. Rising interest rates, political instability and trade uncertainty could continue to cause renewed volatility and risk aversion.
- Economic conditions in Australia have softened. Consumer spending, slow wages growth and a weaker housing market are worries, but strong infrastructure spending, public consumption and broader investment will help to maintain growth this year.
Our ‘risk-aware, return-ready’ approach will continue to help build and protect members’ retirement savings.
In times when the market is more volatile, it can help to talk to someone about your super. Talk to us before you consider switching portfolios. At VicSuper, you get financial advice at no additional cost in most cases. For more about our advice services, go to Help and advice.
For more about how we harness different sources of investment returns for our members:
— Read more about Real Assets in our Real Assets fact sheets
— Read other articles and subscribe to Investment News
— Learn about investment basics to help you understand your super better
— Find out about VicSuper's investment strategy
— Learn about how we invest responsibly
This advice has been prepared without taking into account your objectives, financial situation or needs. You should therefore consider the appropriateness of the advice in light of your individual circumstances before acting on the advice. You should also obtain and consider a copy of the relevant Product Disclosure Statement available at www.vicsuper.com.au before making any decisions. VicSuper Pty Ltd ABN 69 087 619 412, AFSL 237333, Trustee of Victorian Superannuation Fund ABN 85 977 964 496.
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