Posted on 28/01/2020
“Check out Mr Businessman oh oh oh
He bought some wild, wild life
On the way to the stock exchange oh oh oh
He got some wild, wild life”
Talking Heads, Wild Wild Life
December Quarter 2019 Review
The 2019 calendar year was kind to long term investors with equities, bonds, property and infrastructure recording positive returns. The decade ends with 10 year returns rewarding higher-risk asset classes providing strong wealth accumulation for many superannuants. Where to from here? Well, we believe (and have been saying for a while) that the best of the returns are behind us. The next decade will be harder than this one and hopefully not the wild, wild life of Talking Heads.
Heading into 2020, the global economy is well placed to build upon its moderate growth. The recent détente between China and the US on trade has helped to put some confidence back into markets. Furthermore the movement of central banks around the world towards lower short term rates has helped underpin asset class returns. Pleasingly, long term interest rates have started to move higher across the developed world in response to expectations of a better global economy.
It’s common for professional investors to opine on the maturity of the market cycle. We would argue that a periodic curve for a market cycle is too simplistic. Good returns since 2009 and current valuations of most asset classes suggest we are approaching its mature stage. In our view, the best approach is to remain well-diversified and seek financial advice based on your age and personal circumstances.
The 3-5 year returns continue to exceed expectations across most of the investment options. The table below shows Statewide Super’s Superannuation investment option annualised returns ending 31 December 2019 over 1 year, 3 years, 5 years and since inception.
|Super Returns to 31 December 2019*||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 6 out 48 funds over the 5 years ending December 2019 according to the SuperRatings MySuper survey.
Some comments on Investing and Behavioural Finance
Our previous two quarterly reports considered the global and Australian economies. Not much has changed other than the recent easing of trade wars between China and the US. As of early 2020, major issues for Australia concern the devastating bushfires and drought. Unfortunately both of these issues will be significant for Australia due to the impact of adverse climate and its effect on the economy. We will write more about this in the March quarterly.
Our internal quantitative team has researched investor behaviour across our various investment options. The chart below shows the dollar amount of our members switching into cash based on weekly MySuper option returns over the past 6 years.
Source: Statewide Super Internal Data of Weekly Switching from MySuper to Cash from June 2013 – November 2019
The chart clearly shows an appreciable switch from MySuper to cash on weekly market moves below -1%. In other words, it appears that our members are switching in reaction to a poor week for markets.
The next chart shows the switches against the Australian share market.
The chart indicates that switching to cash in reaction to negative weekly returns in markets can cost members long term investment returns. We note the data is quite dependent on the time period but includes the difficult Q4 2018 quarter. Interestingly members do not respond to positive returns in the same way, instead showing inertia.
If we consider our members who have switched more than ten times over the last 6 years, 83% would have performed better had they chosen our MySuper option. In particular, 42% earned less than the return on our Conservative Option. This gives evidence that moving away from long term investment plans based on short term market movements (negative or positive) or FOMO (fear of missing out) is not a reliable strategy.
Investing over the Last Decade
The TINA effect (There Is No Alternative) continues to be the only investment strategy that’s worked in the era of low interest rates. The chart below shows the global equities benchmark MSCI All Countries Weighted Index and short term interest rates. The strong returns off the back of the Global Financial Crisis has been backstopped by lower-for-longer rates. Our issue here is the complacency from higher asset prices on the back of these incredibly low global interest rates.
The lower rates and indeed negative rates have pushed traditional “defensive” assets like Bonds and Real Estate to be fully priced^. The traditional sources of defensive assets like fixed income may not provide protection in the next market downturn.
^ Statewide Super classifies property as a growth asset
The markets have continued to break new highs in early January, maintaining a longer-term move that started back in 2009. The memories of last year and the global financial crisis are distant as the TINA effect and the search for higher returns trumps (excuse the pun) everything else. We suggest caution. Long term investors are well placed within our various diversified growth options but we are weary of chasing returns. The same applies even more to those approaching retirement or retired. As always please seek advice specific to your circumstances and stick to your retirement plan.