Posted on 27/04/2020
“Is this the real life?
Is this just fantasy?
Caught in a landslide
No escape from reality”
Queen, Bohemian Rhapsody
March Quarter 2020 Review
The 2020 March quarter was, frankly, a tough one for members across all age profiles. Those in younger age groups are likely to be more concerned about jobs and income, but will have more than enough time to regain superannuation balances lost this quarter over the coming years. For older and retired members, the recent downturn has meant they have given back some of the gains from the last 10 years. We are in the midst of the most challenging set of economic conditions in 90 years. This is a slightly longer quarterly including our approach to managing this crisis from an investment point of view.
The butterfly effect is commonly used in chaos theory to explain how a small action (e.g. flapping wings) can lead to bigger impacts (e.g hurricanes on the other side of the world). In our current situation, someone in a “wet market” picked up a virus from a bat unleashing a pandemic across the world, with terrible health and economic impacts. Unfortunately the health and global economic effects will be long-lasting, although there’s a case for cautious optimism, with Australia flattening the COVID-19 curve.
The damage to company and household balance sheets from social distancing will be the defining feature of the economic situation for the next 1-2 years. We see some pockets of opportunity in this sell-down with respect to credit/distressed credit opportunities but remain focused on keeping our assets well diversified in this environment. Despite buying a small allocation to Australian shares, we have not chased the recent uptick from the lows in late March, and kept some “dry powder” in terms of a higher allocation to cash. We will seek to deploy the cash should markets sell off further.
The 3-5 year returns have fallen substantially from last quarter. The table below shows superannuation option returns ending 31 March 2020 over 1 year, 3 years, 5 years and since inception.
|Super Returns to 31 March 2020*||1 Year||3 Years||5 Years||Since inception|
*Selected Statewide Super Pre-Retirement Member Investment Options.
The default MySuper option ranks 7 out of 47 over the 5 years ending 31 March 2020 according to the SuperRatings** MySuper survey. We will have a 7-year track record for MySuper next quarter.
**Sourced from SuperRatings Accumulation Fund Crediting Rate Survey Mar-20. For more information about SuperRatings visit www.superratings.com.au. Ratings are only one factor to be taken into account when deciding whether to invest in a financial product.
Returns are net of investment fees, the asset based administration fee and tax on investment income. Further administration and other fees apply. See our “Fees and Costs” booklet for more information. 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.
Asset Allocation across Statewide’s Diversified Options
The Investments Team and Investment Committee are meeting weekly to review the portfolios. The weekly meetings started in early March and it is envisaged that weekly meetings will continue as needed (but at a minimum for another quarter) depending on markets and the economy.
Our daily and weekly analysis covers the following nine key areas:
1. Member Switching
2. New Cash flows
3. Asset Allocation/Rebalancing and Stress Testing
4. Preserving Cash
5. Unit Pricing
6. Unlisted Valuations
7. Communications to Members
8. Foreign Currency Hedging
9. Capital Calls
The table below shows the most recent actual asset allocation as at 17 April 2020. As you can see, the options remain well-diversified, have adequate liquidity and more importantly, kept their overall shape in terms of targeted asset allocation.
Actual Asset Allocation
|Asset class||Conservative||Conservative Balanced||Active Balanced||MySuper||High Growth|
|Cash & Cash Equivalent||26.8%||14.8%||6.9%||8.2%||2.0%|
Source: Internal Statewide Super Investment Team Asset Allocation
In terms of stress testing, we have assumed a 10x impact compared to Treasury’s current assumptions of the impact on funds of the COVID-19 temporary early access to super. Our internal data team used a conservative number of approximately 5% of funds under management needing to be paid out of the fund, whereas our stress case uses 10%. On that higher number the various diversified options still maintain their shape in terms of multi-asset class diversification.
There’s been a lot of discussion in the media about growth and defensive assets. Since the inception of MySuper (and indeed our merger back then between Statewide and Local Super) we’ve always classified unlisted property and unlisted infrastructure as 100% growth. We’ve also named our default MySuper option simply “MySuper” for the accumulation version and “Growth” for our pension product. For most of the time this was deemed to be a little too conservative but in times like this we believe this has placed us well given the recent market dislocation from COVID-19.
Finally we have marked down our various unlisted assets based on advice of external valuers and investment managers’ (they too are using external valuers). For example various airports were marked down between 13.5% - 15% in the month of March. Most of our unlisted property assets consist of core commercial properties with very low gearing and they too were marked down.
Economy and Markets
The most frequently asked questions we get are: “how badly will this hit the economy?” and “when will it be over?”
We believe there will be a sharp and deep recession for Australia over the current quarter and we are on track to record our first recession in nearly 30 years. Unfortunately the same applies globally. As to what type of recovery we hope to get, once again we are making a conservative assumption that it will be a long U-shaped economic recovery. Therefore the markets, in our opinion, will remain quite volatile as they adjust to the changing circumstances. Chasing returns via switching investment options is, in our view a hazardous strategy. It is not uncommon to see share markets go up and down between 3-5% per day in this environment, therefore, trying to pick market tops or bottoms is futile. In our opinion, sticking to a long term investment plan based on your own personal circumstances remains an appropriate strategy.
Policymakers have responded to this crisis via lower interest rates and fiscal budget deficits. Central banks like our RBA have dramatically lowered rates to nearly zero and have offered to buy certain interest-bearing financial securities in order to lower costs of borrowing and offer liquidity in these uncertain markets. Both have helped to stem a much deeper downturn but we believe more needs to be done, particularly fiscally.
Australia isn’t particularly well placed in terms of our overall household balance sheet. We’ve come into this downturn in the economy with a lot of debt and expensive houses! The chart below shows our debt levels and house prices. Despite record low interest rates, the sheer level of debt could imply a slower recovery post the crisis.
A basic rule of thumb when thinking of markets is that shares fall at least 30% in a recession and the generally accepted timeframe is 3 months - 18 months. The recovery is at least double that from the bottom to the previous high. During the Great Depression of the 1930s, markets fell more than 80% and took two decades to recover. Thankfully, through the actions of policymakers and the work towards treatments and/or vaccine mean this may not be a drawn-out depression.
Simply put, diversification is the age-old wisdom of not putting all your eggs in one basket. In terms of asset allocation, that means holding a portfolio of cash, bonds, shares, property, credit strategies, absolute return strategies and venture/private equity in various proportions based on return/risk appetites. Generally, members with longer investment horizons and higher return targets can afford to hold more in the higher-risk asset classes like shares, venture capital, property and infrastructure.
The chart below prepared by the Statewide Internal Investment Team shows the benefits of diversification for the various Statewide investment options compared to the ASX All Ords Accumulation Index, a benchmark for stocks in Australia. We’ve indexed the comparisons at 100 from the end of January until 21 April 2020. As you can see, the various options underperformed the share market in early-to-mid February but have fallen less than the share market since then. That’s the key to diversification - it is not dependent on just one asset class although all options were meaningfully lower during the “panic” of mid-to-late March.**
Last quarter’s summary had the following:
“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 advise caution. Long term investors are well placed within our various diversified growth options but we are weary of chasing returns.”
We did not predict the impact of the virus on markets and the economy. Unfortunately that means shorter-term returns are negative due to the falling markets although shares that had fallen near 40% have recovered nearly half their losses. Nonetheless we continue to preach the benefits of longer-term investment planning plus diversification as the best way to navigate these unusual markets. In these unusual times please call us if you need further advice^ on your superannuation investments.