Posted on 01/08/2019
“Blinded by the light
Revved up like a deuce”
Manfred Mann’s Earth Band, Blinded by the Light
Fiscal 2018/19 Annual Review
Progressive Rock classics like Manfred Mann’s interpretation of Bruce Springsteen’s “Blinded by the Light” nicely describe markets for the fiscal 2018/19 year. Like moths to a brightly-lit bulb, markets gyrated to the sounds of geopolitical tweets and the anticipation of monetary policy. Moreover, like a bad comedy movie we can sum up the year in terms of Trade, Trump Twitter and Term structure of interest rates. The dominant factor has been interest rates, with the fears of higher rates negatively affecting markets in the first half, then easing with lower rates supplying the fuel for an asset market revival in the second half. Our central bank, the RBA, recently cut rates to just 1% and the so-called “emergency level” of 1.5% looks like a flesh wound given back-to-back cuts of 0.25% in June and July.
We start the new financial year with the same old conundrum. How should we allocate your retirement savings in a world of low interest rates, higher shares, property and infrastructure prices and frankly weird global geopolitics? In a word: diversification. We will continue to seek a broader diversification of investing your assets across our diversified member investment options.
The 2018/19 financial year ends with respectable returns across the major investment options. Our default MySuper option finished the financial year with 7%, being just shy of the median MySuper return of 7.07%.
Statewide’s 3-5 year returns continue to exceed expectations across most of the investment options. The table below shows Superannuation option returns ending 30 June 2019 over 1 year, 3 years, 5 years and since inception.
|Super Ratings to 30 June 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 5 out 44 funds over 5 years ending 30 June 2019 according to the SuperRatings MySuper survey.
Global and Australian Economy
The Australian economy continues its sluggish approach in terms of reducing unemployment against a backdrop of threatening trade wars, high household debt and record low interest rates. Residential housing seems to be bottoming out although with record low rates and high household debt we wonder what benefits there are to already high house prices appreciating from current levels. Lower rates, recent tax cuts and the option of further fiscal stimulus should enable Australia to maintain moderate economic growth.
Global economies continue to grow, with fears of slower growth empowering central banks to loosen interest rate policies to provide support. Bond markets continue to price what we believe is an overly pessimistic scenario with the perverse consequences of negative interest rates across many parts of the world. We may well look back in a few years and wonder what negative interest rates and negative yielding bonds have contributed towards supporting long term economic growth. Other issues pertain to rising local populism and its impact on trade barriers/wars. A small open economy like Australia will be impacted by moves that limit our ability to trade with the rest of the world.
The side effects of excessive low rates continue to be inequality in terms of asset appreciation, global currency manipulation leading to trade wars and the lack of underlying economic reforms that may lead to higher productive economic growth. There’s also fears of financial instability should the already high asset prices lead to further credit growth, making economies more fragile should rates rise higher (they will!) over the medium term. The current record debt globally is extremely exposed to an environment that leads to higher rates. Whilst we do not believe rates can go too high because of large existing debt around the world, a small move may indeed cause negative feedback loops that typically produce meaningful falling markets.
A fair question to ask is what else can policymakers do to help the economy over the short to medium term? The answer is fiscal! National governments can use their budgets, particularly in the world of extremely low long term bond rates to run fiscal deficits. The stimulus can be a combination of tax cuts, infrastructure spending and more support of welfare, health and education.
The Folly of Short Term Performance Chasing
We frequently find short-term performance-chasing at various times during the market cycle. The most pernicious occurs during extreme movements – FOMO (fear of missing out) – or when there’s been a sharp fall. Today it’s largely due to the former with many investors seeking to enhance or increase risk at the margin after a sharp move up in markets.
The following chart shows the relationship between the 1 year MySuper returns for the 2018-19 financial year compared to 2017-18 for the SuperRatings contributors. If the top performers in 2017-18 (ie. higher excess returns above median) were also the best-performing funds in 2018-19, we would expect a steep trend line indicating a strong correlation somewhere near 1.0. However what we see instead is a very random scatter, which tells us that the strongly-performing funds from last year have generally not continued to significantly outperform this year, suggesting there is very little predictability in fund outperformance year on year.
We are not surprised by this result. If you manage default option superannuation over the long term, it’s all about managing returns over a 7-10 year time frame, and for members this means managing a strategy over your working/retirement cycle depending on age, work and appropriate income/capital to be drawn down at retirement. The default option return for a given one-year period will be of relatively low significance to most accumulation members still with a considerable time horizon to retirement (although will be a greater concern to those already in pre- or post-retirement).
Outlook for Markets and Returns for Super
Short-term forecasting of default superannuation returns is on par with astrology and roulette. However over an economic cycle, say 7-10 years, we can provide a guide and range based on elementary valuation techniques. The following table provides a guide for what we expect typical asset class returns will be gross of fees and taxes, and a typical default Super fund return net of fees and taxes.
|10 year Forecast|
Our investment beliefs for running retirement assets have not changed. We believe returns are generated by investing in a broad range of assets over the long term. We do not engage in short-term market timing or “performance chasing” as we believe it’s too hard and akin to a lottery. We remain confident that our current structure will serve our members well over the medium to long term.
The information provided contains general advice which does not take into account your specific objectives, financial situation or needs. Before investing, you should consider the appropriateness of this general advice with regard to your personal circumstances. You may also wish to obtain independent financial advice. This article is not intended to be, and should not be construed in any way as, investment, legal, or personal advice.
These forecasts are predictive in character, may be affected by inaccurate assumptions or by known or unknown risks and uncertainties and may differ materially from results ultimately achieved.