Half-Year Investment Update: Investing beyond the volatility

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In our Half-Year Investment Update, our Chief Investment Officer Andrew Howard reviews the investment returns for the VicSuper Options. Andrew explains that by being focused on the long term and not reacting to short term ‘noise’, we are well placed to deliver investment returns that are solid and well ahead of their investment objectives.

Listen to the podcast

In our Half-Year Investment Update, our Chief Investment Officer Andrew Howard reviews the investment returns for the VicSuper Options. Andrew explains that by being focused on the long term and not reacting to short term ‘noise’, we are well placed to deliver investment returns that are solid and well ahead of their investment objectives.

At a glance
At a glance

  • VicSuper’s Growth (MySuper) Option delivered a return of 1.02% in calendar year 2018 despite negative returns in share markets.
  • All diversified Options are performing in line with expectations and outperforming their respective CPI + objectives over the longer term.
  • Focusing on short-term returns is not a reliable indicator of long-term returns and may not give you the best chance to build wealth into and beyond retirement.
  • Our investment approach helped deliver our returns despite the strong share volatility over the second half of last year.
Note that past performance is not a reliable indicator of future performance.
  • VicSuper’s Growth (MySuper) Option delivered a return of 1.02% in calendar year 2018 despite negative returns in share markets.
  • All diversified Options are performing in line with expectations and outperforming their respective CPI + objectives over the longer term.
  • Focusing on short-term returns is not a reliable indicator of long-term returns and may not give you the best chance to build wealth into and beyond retirement.
  • Our investment approach helped deliver our returns despite the strong share volatility over the second half of last year.
Note that past performance is not a reliable indicator of future performance.

Playing the long game
Playing the long game

Looking back on the last six months (and indeed the last ten years), what really stands out to us is that investors with a long-term focus and a sound, well-diversified investment strategy have generally been well ahead of those with a short-term view, switching investments to chase returns. The chart below shows this.

Example: Benefits of remaining vs switching

Benefits of remaining invested vs switching

What the chart reveals (based on assumptions):

Over the 10 years since the GFC (i.e. from September 2009), if a member had switched out of the Growth (MySuper) Option into the Cash Option when the Australian share market (ASX 200) was down more than 2% in a month, then waited until markets had stabilised (i.e. share markets were flat or positive over a month) before moving back in, they would be significantly worse off.

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 lesson? Switching investments—especially in highly volatile markets—could make matters worse.

By focusing on the investment themes that truly mattered, investing ‘through the cycle’, and managing risk through a well-diversified portfolio, our Growth (MySuper) Option was able to deliver a positive return of 1.02% over the calendar year 2018.

This was a strong result given all major developed share markets were down last year – particularly over the last six months. It shows that “time in the market, not timing the market” is what counts, that shares are typically riskier investments than cash or bonds, and that share markets can and do fluctuate, to a lesser or greater degree depending on the circumstances.

Focusing on short-term performance can either be a ‘sugar-hit’ or it can make you feel sick. Either way, it’s not a reliable indicator of long-term returns and, in our view, doesn’t give you the best chance to build wealth into and beyond retirement. You can see the large variation in short-term returns (one month to one year) in the table below. Over three, five and ten years, however, returns are more stable and give a better indication of investment consistency. We think a focus on the long-term and looking out across the investment horizon is a better approach to take when building and tracking your retirement savings.

Periods to 31/12/18 Capital Secure FutureSaver Capital Stable FutureSaver Balanced FutureSaver  Growth FutureSaver  Equity Growth FutureSaver
1 Month %   0.29 0.01  -0.57  -0.92  -1.94 
3 months %   -0.16  -1.15 -3.03  -3.99  -7.37 
FYTD %  0.84 0.28  -1.03  -1.71  -4.54 
1 year %  2.47 2.32  1.41  1.02  -1.67 
3 years % p.a.   4.27 5.62  6.40  6.79  7.50 
5 years % p.a.   4.59 5.89  5.59  7.00  7.37 
10 years % p.a.  4.91 6.11  7.27  8.06  9.22 
Source: VicSuper; Note that past performance is not a reliable indicator of future performance.

Looking back on the last six months (and indeed the last ten years), what really stands out to us is that investors with a long-term focus and a sound, well-diversified investment strategy have generally been well ahead of those with a short-term view, switching investments to chase returns. The chart below shows this.

Example: Benefits of remaining vs switching

Benefits of remaining invested vs switching

What the chart reveals (based on assumptions):

Over the 10 years since the GFC (i.e. from September 2009), if a member had switched out of the Growth (MySuper) Option into the Cash Option when the Australian share market (ASX 200) was down more than 2% in a month, then waited until markets had stabilised (i.e. share markets were flat or positive over a month) before moving back in, they would be significantly worse off.

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 lesson? Switching investments—especially in highly volatile markets—could make matters worse.

By focusing on the investment themes that truly mattered, investing ‘through the cycle’, and managing risk through a well-diversified portfolio, our Growth (MySuper) Option was able to deliver a positive return of 1.02% over the calendar year 2018.

This was a strong result given all major developed share markets were down last year – particularly over the last six months. It shows that “time in the market, not timing the market” is what counts, that shares are typically riskier investments than cash or bonds, and that share markets can and do fluctuate, to a lesser or greater degree depending on the circumstances.

Focusing on short-term performance can either be a ‘sugar-hit’ or it can make you feel sick. Either way, it’s not a reliable indicator of long-term returns and, in our view, doesn’t give you the best chance to build wealth into and beyond retirement. You can see the large variation in short-term returns (one month to one year) in the table below. Over three, five and ten years, however, returns are more stable and give a better indication of investment consistency. We think a focus on the long-term and looking out across the investment horizon is a better approach to take when building and tracking your retirement savings.

Periods to 31/12/18 Capital Secure FutureSaver Capital Stable FutureSaver Balanced FutureSaver  Growth FutureSaver  Equity Growth FutureSaver
1 Month %   0.29 0.01  -0.57  -0.92  -1.94 
3 months %   -0.16  -1.15 -3.03  -3.99  -7.37 
FYTD %  0.84 0.28  -1.03  -1.71  -4.54 
1 year %  2.47 2.32  1.41  1.02  -1.67 
3 years % p.a.   4.27 5.62  6.40  6.79  7.50 
5 years % p.a.   4.59 5.89  5.59  7.00  7.37 
10 years % p.a.  4.91 6.11  7.27  8.06  9.22 
Source: VicSuper; Note that past performance is not a reliable indicator of future performance.

Growth vs defensive allocations for selected VicSuper Options

Growth vs defensive allocations for selected VicSuper Options

Source: VicSuper; returns are total returns expressed in local currency (except China)

It is important to note:

  • All diversified Options are performing in line with expectations and outperforming their respective CPI + objectives over the longer term.
  • Options such as Equity Growth with high exposures to growth assets (e.g. Equities) have over the last six months underperformed Options such as Capital Stable with lower exposures to growth assets over the short term—given the recent declines in share markets.
  • Lower risk Capital Secure and Capital Stable Options have been better insulated from the recent share market sell-off—given their high strategic allocations to defensive asset classes such as Fixed Interest and Cash, and demonstrate the power of diversification.

Growth vs defensive allocations for selected VicSuper Options

Growth vs defensive allocations for selected VicSuper Options

Source: VicSuper; returns are total returns expressed in local currency (except China)

It is important to note:

  • All diversified Options are performing in line with expectations and outperforming their respective CPI + objectives over the longer term.
  • Options such as Equity Growth with high exposures to growth assets (e.g. Equities) have over the last six months underperformed Options such as Capital Stable with lower exposures to growth assets over the short term—given the recent declines in share markets.
  • Lower risk Capital Secure and Capital Stable Options have been better insulated from the recent share market sell-off—given their high strategic allocations to defensive asset classes such as Fixed Interest and Cash, and demonstrate the power of diversification.

A balancing act
A balancing act

It was easy for investors to become complacent as we entered 2018. Equity markets went from strength to strength, interest rates were low, company profits delivered record highs on a frequent basis and key global economies were growing together. Which is exactly why we began to reduce risk in our investment strategy in the second half of 2017 and into the first half of 2018. We believed it was risky to continue to rely on share markets going up after an extraordinary run since the end of the GFC. Our investment approach helped deliver our returns despite the strong share volatility over the second half of last year.

So it’s no big surprise that 2018 again reminded us of the importance of asset allocation and diversification. Being proactive by adding or reducing risk in the portfolio was crucial to our investment strategy in 2018. So was being ‘true to label’ across our asset classes and investment options—being ‘authentic’ in the way we invest, protecting the portfolio when required while taking up attractive return opportunities as they arose. While markets continued to rise steadily for much of the year, we were not chasing these short-term returns, preferring to take some risk ‘off the table’ by reducing our equity exposure and maintaining our fixed interest exposure.

It was easy for investors to become complacent as we entered 2018. Equity markets went from strength to strength, interest rates were low, company profits delivered record highs on a frequent basis and key global economies were growing together. Which is exactly why we began to reduce risk in our investment strategy in the second half of 2017 and into the first half of 2018. We believed it was risky to continue to rely on share markets going up after an extraordinary run since the end of the GFC. Our investment approach helped deliver our returns despite the strong share volatility over the second half of last year.

So it’s no big surprise that 2018 again reminded us of the importance of asset allocation and diversification. Being proactive by adding or reducing risk in the portfolio was crucial to our investment strategy in 2018. So was being ‘true to label’ across our asset classes and investment options—being ‘authentic’ in the way we invest, protecting the portfolio when required while taking up attractive return opportunities as they arose. While markets continued to rise steadily for much of the year, we were not chasing these short-term returns, preferring to take some risk ‘off the table’ by reducing our equity exposure and maintaining our fixed interest exposure.

Why did we reduce risk in the Growth portfolio in 2018?

  • We saw threats on the horizon in share markets, especially around geopolitical issues and US monetary policy, not to mention share markets becoming more expensively priced.
  • Our exposure to fixed interest was a good way to reduce share market risk to protect members’ retirement savings.
  • We enhanced the diversification of the portfolio by selectively investing in new property, infrastructure and timber assets.

How is the portfolio positioned moving into 2019?

  • Our portfolio is relatively well positioned with enhanced downside protection from a year ago to weather further share market volatility as well as take advantages of investment opportunities that arise from continued volatility.
  • We will continue to invest proactively and in a responsible manner, investing in sustainable outcomes across all our investment options.

Why did we reduce risk in the Growth portfolio in 2018?

  • We saw threats on the horizon in share markets, especially around geopolitical issues and US monetary policy, not to mention share markets becoming more expensively priced.
  • Our exposure to fixed interest was a good way to reduce share market risk to protect members’ retirement savings.
  • We enhanced the diversification of the portfolio by selectively investing in new property, infrastructure and timber assets.

How is the portfolio positioned moving into 2019?

  • Our portfolio is relatively well positioned with enhanced downside protection from a year ago to weather further share market volatility as well as take advantages of investment opportunities that arise from continued volatility.
  • We will continue to invest proactively and in a responsible manner, investing in sustainable outcomes across all our investment options.

The smoother the better - our aim is to deliver a consistent pattern of returns

In pursuing our mission of optimising members’ retirement savings, we must remain true to our investment principles. By doing this, investment returns for all VicSuper Options (excluding cash) were ahead of their individual objectives. What is also important is how we deliver investment returns. You can see in the chart below the smoothness and consistency of the VicSuper Growth (MySuper) Option’s returns (green line) over time. A critical part of this is our ability to manage risk and diversify the portfolio to help smooth returns in periods of share market turbulence (ASX 200, blue line). This provided significant protection for investment returns in the latter months of 2018.

VicSuper Growth Option vs ASX 200 - Performance over last five years

Growth option vs ASX200 

Source: VicSuper

The smoother the better - our aim is to deliver a consistent pattern of returns

In pursuing our mission of optimising members’ retirement savings, we must remain true to our investment principles. By doing this, investment returns for all VicSuper Options (excluding cash) were ahead of their individual objectives. What is also important is how we deliver investment returns. You can see in the chart below the smoothness and consistency of the VicSuper Growth (MySuper) Option’s returns (green line) over time. A critical part of this is our ability to manage risk and diversify the portfolio to help smooth returns in periods of share market turbulence (ASX 200, blue line). This provided significant protection for investment returns in the latter months of 2018.

VicSuper Growth Option vs ASX 200 - Performance over last five years

Growth option vs ASX200 

Source: VicSuper

Well placed for 2019
Well placed for 2019

Time will tell as to how the above-mentioned investment themes will play out in 2019. It seems that markets will remain risk-averse until there is more certainty on big issues like the US-China trade dispute, interest rate policy (particularly in the US) and Eurozone geopolitics, at the very least.

We will continue to maintain a diversified approach, managing risk effectively in asset classes (e.g. equities) where that is required while being proactive and flexible in other asset classes (e.g. infrastructure, direct property), taking up new investment opportunities as they arise.

What is most important is our ability to operate an investment strategy that can navigate challenging markets, source new investment opportunities, and manage risk effectively on behalf of our members.

Any investment decision made is not done in the context of the short term outlook but rather taking a proactive approach to ensuring that the investment strategy has every opportunity to deliver on the long term investment objectives.

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:

— Discover more about how we invest your super
— Read other articles in Investment News
— Discover more about the benefits you get as a VicSuper member

Important information

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.

Time will tell as to how the above-mentioned investment themes will play out in 2019. It seems that markets will remain risk-averse until there is more certainty on big issues like the US-China trade dispute, interest rate policy (particularly in the US) and Eurozone geopolitics, at the very least.

We will continue to maintain a diversified approach, managing risk effectively in asset classes (e.g. equities) where that is required while being proactive and flexible in other asset classes (e.g. infrastructure, direct property), taking up new investment opportunities as they arise.

What is most important is our ability to operate an investment strategy that can navigate challenging markets, source new investment opportunities, and manage risk effectively on behalf of our members.

Any investment decision made is not done in the context of the short term outlook but rather taking a proactive approach to ensuring that the investment strategy has every opportunity to deliver on the long term investment objectives.

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:

— Discover more about how we invest your super
— Read other articles in Investment News
— Discover more about the benefits you get as a VicSuper member

Important information

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.