Posted on 29/01/2018
“Time keeps on slippin’, slippin’, slippin’
Into the future”
Writer: Steve Miller
Methuselah and Icarus walk into a bar……
I’m sure Steve Miller didn’t think about investment returns and economic cycles when he wrote “Fly like an Eagle” in the late 70’s. If the eagle looked down on the world today it would see an ageing “Methuselah” known as the economic cycle, meeting the flying “Icarus” representing asset prices. Sure all is good at the moment and the 2017 year was strong, but balancing Methuselah’s age with Icarus’ altitude will not be easy in 2018. We could well see a year of strong economies and disappointing markets as rising interest rates and volatility finally start to take effect.
First the good news, the one to 5 year returns ending 2017 across most options has allowed our members to continue to build and maintain a retirement pot of savings. The tables below show Superannuation option returns over 1, 3 and 5 years (or since inception) ending 31 December 2017.
|Super Returns to 31 December 2017*||1 Year||3 Years||Since Inception#|
|Super Returns to 31 December 2017*||1 Year||3 Years||5 years|
*Selected Statewide Super Pre Retirement Member Investment Options. Returns are net of investment fees and tax on investment income. Administration and other fees apply. See our “Fees and Costs” booklet for further information.
#These investment options have been available for less than 5 years. Returns since inception (July 2013) are shown.
Pension options are not shown but are available on the 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.
The chart below shows the returns of Statewide Super’s MySuper option since inception relative to the median MySuper return. We continue to comfortably exceed our peers since MySuper was launched on 1 July 2013.
Source: SuperRatings Fund Crediting Rate Survey December 2017. For further information visit: https://www.superratings.com.au/products/fcrs. This graph assumes that $100,000 was invested in the Statewide Super MySuper option on 1 July 2013 and no contributions were made between 1 July 2013 and 31 December 2017. 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.
Repeating the incredibly good absolute returns over the past 3-5 years will be near impossible. Even a flying eagle has its limits and equity, property and infrastructure returns will moderate from here. They may even go negative for a while and flirt with the other great Steve Miller song – The Joker. Unfortunately, no Abracadabra….. (ok enough of the Steve Miller Band jokes).
A Year of Global Economic Recovery
Australia enjoyed decent economic growth although the headline number is masked a bit by the population growth rate, particularly high immigration. When it’s broken down per household the story isn’t quite as promising with many households balancing high house prices, large debts (particularly mortgages) and low wage growth. Given these conditions, Australia’s Central Bank, the Reserve Bank of Australia is in no hurry to raise interest rates. Nonetheless, the unemployment rate has drifted lower and overall economic conditions point to further good near-term growth.
China remains an enigma. A large economy with a diverse set of growth drivers, it’s also centrally planned with international capital controls and high debt. We don’t think this is sustainable and an increasingly power centric Premier will need to confront some difficult reforms sooner rather than later.
The US continues to grow and impressively add jobs despite an erratic President. Proposed US tax reforms are also expected to help economic growth. The recovering US economy is leading the world in terms of moving away from its ultra-low interest rates and we expect to see higher rates in the US compared to Australia by the end of 2018.
European economies are also enjoying better growth, reducing their higher unemployment rates and generally faring much better than previously thought over a year ago. The European recovery has also surprised many and we believe the European Central Bank will also look to implement tighter monetary policy.
South Australia has performed better than expected too. With the recent closing of the Holden car making plant there were genuine fears of unemployment reaching 8% plus. However, what we’ve seen is jobs growth and a steady unemployment rate with big ticket items like the steelworks in Whyalla, submarines/shipping in Port Adelaide and select mining projects implying a better future. There’s also an election in March that’s too difficult to predict. Whoever wins, there’s a promising future for SA.
We believe there’s enough momentum in global economies to continue their good growth into 2018 absent any geopolitical or natural shock. The big question is – will asset valuations continue to increase on the back of this good growth or are they already fully-priced?
Market Review and Outlook
We were surprised by the strong and synchronised economic growth across the world. That surprise has been matched by the equally impressive calendar year returns for shares. The perfect set of conditions of steady growing economies, low interest rates, low volatility and rising markets will be difficult to maintain again in 2018.
Throughout the year, we’ve continued to diversify the portfolio into absolute returns and niche opportunities in credit. We’ve also slightly biased the overall equity portfolio into “value/valuation” styles as these strategies have underperformed the growth focussed strategies. We continue to be overweight in our strategic asset allocation in cash, underweight in equities and hold more foreign currency.
We believe a key advantage of running investments at Statewide Super is our size. With assets under management of approximately $8 billion, our size means we are nimble enough to invest in boutique investment opportunities that the big funds cannot access, whilst it provides the scale and efficiencies for us to keep fees low.
The start of every calendar year is packed with investment professionals forecasting the year ahead and strategising an approach that will reward them. We are no different with one MAJOR exception. We do not believe in short term market forecasting (e.g. less than 3 years). Why? Because we do not believe we or anyone has the ability to do so. Be wary of the soothsayers, gurus and, frankly, cranks that do. What we try to do is construct a portfolio of investments that will meet members’ investment objectives over the medium to long term (5+ years). With that in mind, we repeat our view that returns for the major asset classes will be lower than that achieved over the past 5 years and will be more volatile than what we’ve recently experienced. Returns for default MySuper strategies are forecast to earn mid-single digit returns over the next 5-7 years. The investment objectives will be much harder to achieve simply because both Methuselah is old (but can get much older) and Icarus will one day discover the forces of gravity (in this case, financial gravity of excessive valuations).
Another sign that markets are indeed “frothy” concerns both corporate and investor behaviour. It’s in environments like this where corporate and investor behaviour becomes reckless. A good example is the recent merger and acquisition activity from Westfield and Fox. Insiders and founding families selling businesses are a good signal that markets are fully priced. Furthermore, the incredibly irrational price of Bitcoin and other cryptocurrencies implies greed, and fear of missing out has taken over from patience in terms of investing. A lot of money made in the short term can be instantly wiped out for those with poor patience, risk control and diversification.
As mentioned earlier, the current cycle is long in the tooth and the prices for long term assets are expensive. It important to remain vigilant and stick to well diversified retirement investment plans.
Chief Investment Officer