Strap in and ride the market bumps
Strap in and ride the market bumps

In my recent CIO Updates I have communicated about the reasons for share market volatility, the importance of long-term investing and diversification, and how reacting to markets and trying to time them is an approach we think members should avoid. This month I will show you why ‘time in’—not timing—the market is so important and how a transparent, authentic investment approach can help deliver solid, consistent investment outcomes.

Most of us have seen (or at least heard about) the share market sell-off, and some might be understandably concerned about what it means for their super balance. And while shares have certainly experienced losses and volatility in recent months, the VicSuper Growth Option has delivered a stronger, smoother path of investment returns than Australian shares during this time and over the last five years.

One reason for this long-term outperformance is because the Growth portfolio is well-diversified across asset classes (see charts below) with an appropriate balance of higher risk growth assets (e.g. Equities) and lower risk defensive assets (e.g. Fixed Interest) that is well-aligned to its objectives. This has helped protect the Growth portfolio from share market volatility while providing additional sources of returns from other asset classes such as Real Assets (e.g. infrastructure) and Alternatives (e.g. private equity).

Another reason is that we invest our members’ super in a manner that is true to type—that is, investing consistently and in a disciplined way across asset classes (equities, cash, etc.), taking a long-term investment view, having a sensible approach to risk, and investing in a responsible manner by taking environmental, social and governance factors into account.
In my recent CIO Updates I have communicated about the reasons for share market volatility, the importance of long-term investing and diversification, and how reacting to markets and trying to time them is an approach we think members should avoid. This month I will show you why ‘time in’—not timing—the market is so important and how a transparent, authentic investment approach can help deliver solid, consistent investment outcomes.

Most of us have seen (or at least heard about) the share market sell-off, and some might be understandably concerned about what it means for their super balance. And while shares have certainly experienced losses and volatility in recent months, the VicSuper Growth Option has delivered a stronger, smoother path of investment returns than Australian shares during this time and over the last five years.

One reason for this long-term outperformance is because the Growth portfolio is well-diversified across asset classes (see charts below) with an appropriate balance of higher risk growth assets (e.g. Equities) and lower risk defensive assets (e.g. Fixed Interest) that is well-aligned to its objectives. This has helped protect the Growth portfolio from share market volatility while providing additional sources of returns from other asset classes such as Real Assets (e.g. infrastructure) and Alternatives (e.g. private equity).

Another reason is that we invest our members’ super in a manner that is true to type—that is, investing consistently and in a disciplined way across asset classes (equities, cash, etc.), taking a long-term investment view, having a sensible approach to risk, and investing in a responsible manner by taking environmental, social and governance factors into account.

Growth vs defensive allocations or selected VicSuper options

Growth vs defensive allocations or selected VicSuper options

VicSuper growth option long term strategic asset allocation

VicSuper growth option long term strategic asset allocation

VicSuper Options: stable returns, true-to-label investments
VicSuper Options: stable returns, true-to-label investments

Let’s look at the performance of some of the VicSuper FutureSaver Options (see table below) where I’ll make some key points:

  • All 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 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 well insulated from the share market sell-off due to their high strategic allocations to defensive asset classes such as Fixed Interest and Cash, and demonstrate the power of diversification.

Period to
31/10/18

Capital Secure
FutureSaver

Capital Stable
FutureSaver

Balanced
FutureSaver

Growth
FutureSaver

Equity Growth
FutureSaver

ASX 200 
Index

1 month % -0.42 -0.97 -2.06 -2.57 -4.58 -6.05 
 3 months % 0.01  -0.35 -1.19 -1.59 -3.21 -5.92
 FYTD % 0.58  0.47 -0.04 -0.26 -1.66 -4.61
1 year %  2.85 3.40 3.70 4.03 3.67 2.94 
 3 years % pa 4.06 5.30 6.28 6.78 7.97 9.80
 5 years % pa 4.72 6.26 7.28 7.93 8.77 6.02
 7 years % pa 5.29  7.13 8.58 9.57 11.06 9.21
 10 years % pa 4.87  5.97 7.05 7.72 8.93 8.53
Source: VicSuper; Note that past performance is not a reliable indicator of future performance.

Let’s look at the performance of some of the VicSuper FutureSaver Options (see table below) where I’ll make some key points:

  • All 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 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 well insulated from the share market sell-off due to their high strategic allocations to defensive asset classes such as Fixed Interest and Cash, and demonstrate the power of diversification.

Period to
31/10/18

Capital Secure
FutureSaver

Capital Stable
FutureSaver

Balanced
FutureSaver

Growth
FutureSaver

Equity Growth
FutureSaver

ASX 200 
Index

1 month % -0.42 -0.97 -2.06 -2.57 -4.58 -6.05 
 3 months % 0.01  -0.35 -1.19 -1.59 -3.21 -5.92
 FYTD % 0.58  0.47 -0.04 -0.26 -1.66 -4.61
1 year %  2.85 3.40 3.70 4.03 3.67 2.94 
 3 years % pa 4.06 5.30 6.28 6.78 7.97 9.80
 5 years % pa 4.72 6.26 7.28 7.93 8.77 6.02
 7 years % pa 5.29  7.13 8.58 9.57 11.06 9.21
 10 years % pa 4.87  5.97 7.05 7.72 8.93 8.53
Source: VicSuper; Note that past performance is not a reliable indicator of future performance.

Don't drive while looking in the rear-view mirror
Don't drive while looking in the rear-view mirror

Firstly, if you’re thinking about switching, remember that we’re here to help. Just call us on 1300 366 216. And remember, you can get financial advice on your VicSuper account at no extra charge.

We understand that some members might look at the VicSuper Options and be tempted to switch in and out of them in order to ‘chase’ returns and time markets. While this strategy can work at times, as mentioned, as a long-term investor we think our members should avoid this approach.

A core reason for this is because timing the market entails buying or selling stocks (or unit prices) in a reactive way, based on their past movements. It’s like driving a car from Melbourne to Sydney with your eyes fixed in the rear-view mirror instead of looking ahead! A better way to invest involves patience, forward-thinking, and a considered approach that includes:

  • a long-term investment strategy
  • an understanding of the trade-off between risk and return
  • an awareness of the investment’s long-term historical returns, the beneficial effect of compounding investment returns over time, and the difficulty of picking market cycles correctly (which is hard even for professional investors). 

We can go further, using an example based on certain assumptions, to show why timing/switching is a poor substitute for time in the market. The chart below shows three different investment scenarios and assumed data for the 10 years to September 2018. These scenarios measure: a) the choice to remain invested in the VicSuper Growth Option (blue line); b) the choice to remain invested in the VicSuper Cash Option (orange line); and c) the choice to time the market by switching in and out of Growth and Cash (grey line) at various points in time. During this particular period, the choice to switch Options and time the market produced a poorer return than remaining invested in Growth.

Firstly, if you’re thinking about switching, remember that we’re here to help. Just call us on 1300 366 216. And remember, you can get financial advice on your VicSuper account at no extra charge.

We understand that some members might look at the VicSuper Options and be tempted to switch in and out of them in order to ‘chase’ returns and time markets. While this strategy can work at times, as mentioned, as a long-term investor we think our members should avoid this approach.

A core reason for this is because timing the market entails buying or selling stocks (or unit prices) in a reactive way, based on their past movements. It’s like driving a car from Melbourne to Sydney with your eyes fixed in the rear-view mirror instead of looking ahead! A better way to invest involves patience, forward-thinking, and a considered approach that includes:

  • a long-term investment strategy
  • an understanding of the trade-off between risk and return
  • an awareness of the investment’s long-term historical returns, the beneficial effect of compounding investment returns over time, and the difficulty of picking market cycles correctly (which is hard even for professional investors). 

We can go further, using an example based on certain assumptions, to show why timing/switching is a poor substitute for time in the market. The chart below shows three different investment scenarios and assumed data for the 10 years to September 2018. These scenarios measure: a) the choice to remain invested in the VicSuper Growth Option (blue line); b) the choice to remain invested in the VicSuper Cash Option (orange line); and c) the choice to time the market by switching in and out of Growth and Cash (grey line) at various points in time. During this particular period, the choice to switch Options and time the market produced a poorer return than remaining invested in Growth.

Example: Benefits of remaining invested vs switching
Example: Benefits of remaining invested vs switching


Benefits of remaining invested 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 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, 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 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.

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 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, 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 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.

Looking ahead, lessons learned
Looking ahead, lessons learned

The last three months (and probably all of 2018, in retrospect) have borne out the importance of remaining invested through the market cycle, having a diversified portfolio, and being clear-eyed about the investment environment ahead rather than reacting to all the events and market ‘noise’.

An important part of doing that is having a disciplined, consistent and sound approach to managing the VicSuper Options. We’re prudent, long-term, risk-aware investors, but at the same time we’re proactive, seeking out new investment opportunities as they arise (e.g. in infrastructure, private equity, and property).

Balancing these qualities is important and has ensured that all VicSuper Options are ‘true to label’ by investing members’ super in the way they were designed to do, with the result that they are performing ahead of their investment objectives over the long term.

In next month’s CIO Update, I’ll look at what drove markets and investments in 2018, and provide a summary of how we have been investing your retirement savings over 2018.

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.

The last three months (and probably all of 2018, in retrospect) have borne out the importance of remaining invested through the market cycle, having a diversified portfolio, and being clear-eyed about the investment environment ahead rather than reacting to all the events and market ‘noise’.

An important part of doing that is having a disciplined, consistent and sound approach to managing the VicSuper Options. We’re prudent, long-term, risk-aware investors, but at the same time we’re proactive, seeking out new investment opportunities as they arise (e.g. in infrastructure, private equity, and property).

Balancing these qualities is important and has ensured that all VicSuper Options are ‘true to label’ by investing members’ super in the way they were designed to do, with the result that they are performing ahead of their investment objectives over the long term.

In next month’s CIO Update, I’ll look at what drove markets and investments in 2018, and provide a summary of how we have been investing your retirement savings over 2018.

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.