Posted on 24/01/2019
“Up, down, turn around
Please don’t let me hit the ground
Tonight I think I’ll walk alone
I’ll find my soul as I go home”
Temptation by New Order
December Quarter 2018
The December Quarter delivered a ‘wake-up call’ regarding investment risk, with volatile markets leading to poor returns across the higher return/risk options. Share markets in Australia and around the world fell by 8-15% over the quarter. Statewide Super’s default MySuper option managed to avoid a negative calendar year, returning 2.13%, well ahead of MySuper peers in the SuperRatings survey (who had a median 2018 calendar year return of 0.57%). At the time of writing this report, the share markets have recovered somewhat, being up nearly 10% from their Christmas Eve lows and 4% for the first few weeks in 2019. Nonetheless, volatile markets are back and we suspect this will be an ongoing feature for some time. One of the great 80s UK bands, New Order, didn’t sing about investing, but their song Temptation nicely describes the feeling once large moves and negative returns take centre stage.
We’ve been warning about a return to volatile markets for a while, and, as always, reiterating the old maxim “careful for what you wish for”. What caused the falls? Well, nobody really knows how or when the falls arrive and certainly during the quarter it’s very difficult to discern how much of this is due to a changing economy and how much a good old-fashioned correction. We’re not heroic and think it’s a combination of both. However, rising US interest rates, trade tensions between US and China, the US Government shutdown and peak profit margins certainly added to the negative sentiment.
Statewide Super’s 3-5 year returns continue to exceed expectations across most of the investment choice options. The table below shows superannuation returns ending 31 December 2018 over 1 year, 3 years, 5 years and since inception.
|Super Returns to 31 December 2018*||1 Year||3 Years||5 Years||Since Inception|
*Selected Statewide Super Pre-Retirement Member Investment Options
The default MySuper option continues to perform well and ranks 2 out of 46 over the 5 years ending December 2018 according to the SuperRatings MySuper survey.
This graph assumes that $50,000 was invested in the Statewide Super MySuper option on 1 July 2013 and no contributions were made between 1 July 2013 and 31 December 2018.
The chart below shows the percentage of our assets that have outperformed their SuperRatings peers (for super and pensions combined) across multiple time periods.
Old man take a look at my life
Economic cycles do not die of old age. Yet Chairman Powell of the US Central Bank (the “Fed”), recently said “Business cycles don’t last forever, unless you’re Australia, where they’re in year 27 – which feels like forever”. This contrasts with the advice from the great economist, Keynes “The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.” Stock market returns do not move in unison with economic growth but try to anticipate either a slow down or uptick in economic activity. It’s that constant probing and anticipation that causes market volatility (ie. variation in returns) to be greater than the underlying economic volatility. This obviously begs the question: where are we in terms of the overall global economy and should we ignore short term market volatility? The next paragraph answers the first part of the question. As to the second? There’s no quick fix here other than staying disciplined and maintaining an overall diversified investment strategy.
The global economy continues to grow but recent data confirms that the growth rate is slowing in many parts of the world, including China, Japan, Europe and perhaps the US. Before we all go and batten down the hatches, we are talking of slowing growth NOT forecasting a recession (no one can do that!) and certainly not a depression or some sort of market crash. The underlying economic cycles are indeed “ageing” for many economies but given the deep contraction during the 2008 global financial crisis and indeed its slow recovery, there’s really nothing stopping global economies from continuing to grow other than geo-political or unforeseen/extreme events (“black swans”).
The same applies to Australia although dark clouds are hovering with falling house prices, tighter credit conditions, a slowing Chinese economy and tough retail conditions. The one bright spot is a job market that’s continuing to add employment and therefore reduce unemployment rates not only here but in many parts of the world.
Pleasingly, South Australia continues to do well although we are not immune from slower global growth and falling eastern States’ house prices. Our State is benefiting from investment in infrastructure and key strategic areas like defence, space-advanced manufacturing, education, agribusiness and tourism.
A Brief History of Returns – Statewide Super v Index v Future Fund
The crescendo of noise post the recent Productivity Commission review of super and the Royal Commission can add to the confusion about where members should entrust their hard-earned retirement savings. To help you, we’ve done some analysis of Statewide Super’s 5 year returns versus similar indexed (low fee, passive) equivalents.
Super returns Statewide Super MySuper option vs indexed equivalent
|Super Returns to 31 December 2018||Investment Fee||1 Year||3 Years||5 years|
|Statewide Super MySuper||0.83%||2.13%||7.45%||8.07%|
|HostPlus Indexed Balanced#||0.02%||-0.58%||5.48%||6.18%|
|SuperRatings MySuper Median||n/a||0.57%||6.36%||6.62%|
# The HostPlus Balanced Index is net of fees and taxes.
Pension returns - Statewide Super Growth option vs indexed equivalent
|Pension Returns to 31 December||Investment Fee||1 Year||3 Years||5 Years|
|Statewide Super Growth||0.83%||2.34%||8.20%||8.87%|
|Vanguard Diversified Growth^||0.29%||-0.87%||6.04%|| |
^ Vanguard Diversified Growth is gross of fees, pre-tax.
Our investment beliefs are simple – we aim to implement strategies that we believe offer better prospects for performance net of fees and taxes. Just focusing on the fee component has not worked in the past – it's performance net of fees and taxes that matter and we will continue to manage that trade-off. Furthermore, the broader capital markets/investing opportunity set is greater than just listed equities, cash and fixed income. Our diversified portfolios contains core unlisted commercial property, unlisted infrastructure (such as airports and ports), Australian venture capital, event-driven absolute return strategies, private credit and active Australian equities.
We’d add the Future Fund returns too but at the time of this note they have yet to publish their December quarter. A recent article in the Australian Financial Review, quoted Statewide Super’s 5 year return ending 30 June 2018 for the Growth Pension option at 11.87% per annum compared to the Future Funds’ 5 year return of 10.40% per annum. In fact, median growth options for industry funds have outperformed the Future Fund over 3, 5 and 7 years.
Have we done anything different over the past quarter? Well yes, the falling markets allowed us the opportunity to re-balance a little back into Australian and global shares during the quarter and we’ve increased our investment allocation towards absolute return strategies. For the first time in many years, our cash balance has fallen just below our target as we’ve used the cash to fund these initiatives.
The reality of ‘what goes up can also fall’ came to the fore over the December 2018 quarter. As many readers of this quarterly will note, we’ve always recommended holding a diversified portfolio of shares, property, infrastructure, bonds, cash and other alternatives with various allocations depending on time frames and income needs. That belief remains the same in rising or falling markets. As always we are deeply grateful to you, our members, for allowing us to manage your retirement savings and encourage you to call our contact centre team if you need further guidance