Posted on 23/10/2018
“You spin me right round, baby
Right round like a record, baby
Right round, round round”
Dead or Alive
September Quarter 2018 Investment Update
The arrival of market volatility in September and continuing into October masked an overall decent quarter for most asset classes. Nonetheless all the action arrived in early October with shares falling as much as 5-6% and then recovering some of this by mid-month. The storm clouds are hovering over markets with rising interest rates, global trade wars and high asset valuations finally taking its toll. The late Peter Burns summed it well with markets spinning right round and we expect the spinning or volatility to be a feature of markets as it grapples against a backdrop of higher interest rates, trade skirmishes and frankly some pullback after its recent good run.
The 3-5 year returns continue to exceed expectations across most of Statewide Super’s investment choice options. The table below shows superannuation option returns ending 30 September 2018 over 1 year, 3 years, 5 years and since inception.
|Super Returns to 30 September 2018*|
|Investment Option*||1 Year||3 Years||5 Years||Since inception|
*Selected Statewide Super Pre-Retirement Member Investment Options. Investment returns are net of investment fees, tax on investment income and the asset-based administration fee. For information on other fees that may apply, see our “Fees and Costs” booklet for further information. Pension options are not shown but are available on the Statewide Super website.
Investment returns can go up and down and are not guaranteed. All investments have risk, and past performance is not a reliable indicator of future performance. For more information on risks associated with investing, consider the “Risks of Super” and “How we invest your money” booklets available at statewide.com.au or by calling 1300 65 18 65.
Our default MySuper option continues to perform well and currently ranks 1st out of 42 funds over 5 years ending 30 September 2018 according to the SuperRatings MySuper survey.
The chart below shows our MySuper investment option performance relative to the median peer fund since inception.
Source: SuperRatings Fund Crediting Rate Survey September 2018. For further information about SuperRatings visit www.superratings.com.au. 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 30 September 2018. Investment returns are net of investment fees, tax on investment income and administration fees. For information on other fees that may apply, see our “Fees and Costs” booklet.
Welcome to the jungle
The toxic mix of geopolitics, trade wars and rising interest rates have finally impacted markets. We believe the recent volatility will remain for the foreseeable future as markets factor in headwinds and grapple with the uncertainty. Furthermore China is coming to grips with their unsustainable mix of rising debt and global trade wars. The current US Administration’s retreat from international policy and governance also sours the mood for international capital markets with scarce and rising international demand for US dollars impacting various Emerging Market economies.
Unfortunately Australia is sleepwalking into a difficult global environment with the constant change in federal leadership taking the focus away from governing the country. Furthermore, residential house prices have finally started their descent which may cause households to restrain spending as they seek to pay off their already high debts.
In this environment, a diversified portfolio utilising active management should help to buffer some of the volatile and lower returns. Diversification means holding asset classes like Cash, Bonds, Unlisted Property and Infrastructure. It also means employing a range of investment strategies like style variation within equities (particularly value), various absolute return strategies, credit and private equity.
A short history of market corrections
The siren of market timing is particularly loud given the past 9 years of strong returns from equities, infrastructure and property. We all succumb to it as the crescendo of noise and sentiment forces us to act in some way or another. But does it actually work? The very smart folks at global investment management firm AQR have done some analysis using 100 years of market drawdowns (eg crashes). The chart (with the kind permission from AQR) shows that balancing a short term correction versus a long term investment objective isn’t easy!
Source: AQR, “It was the Worst of Times: Diversification during a Century of Drawdowns
The analysis by AQR confirms what we’ve thought about market corrections. An approach for a long term investor like a diversified growth/balanced fund is to add strategies that offer some diversification away from equities without impacting long term returns and may offer some protection in market corrections. As the chart above shows, holding put options (portfolio insurance) offers protection in a market fall but holding those puts over the long term provides poor returns. Market timing is obviously difficult and detrimental to a longer term investment strategy. Statewide Super’s strategy, as mentioned earlier, is to add some of the alternative strategies outlined in the top right quadrant of the AQR chart to our diversified portfolios.