This is an edited transcript of a presentation by Troy Rieck, LGIAsuper's Chief Investment Officer, at the Get Set for Retirement online seminar on 21 April 2020. Highlights include:
You can also watch the full video of Troy’s presentation below. All investment returns mentioned in this article and video are after investment fees, administration fees and tax.
COVID-19 has had an enormous impact on our economy, employment and society. Many of us have never been through times like these.
The impact of Government measures to fight the Coronavirus health crisis are working, but they are also having a heavy impact on the Australian economy and financial markets. And we are seeing similar effects across the globe.
From their peak in late February through to late March, the Australian share markets saw a 35% fall in prices. That fall is as fast as we have ever seen in history except for the 1987 share market crash. And the bounce back from 23 March 2020 is also the fastest 20% bounce in a peak-to-trough investment period.
These are worrying times for many people.
Cash rates in Australia are now one-quarter of 1%, and bond yields are less than 1% per annum. The Australian Dollar has been down to 55c against the US Dollar recently – that is a rate we have not seen for almost 20 years.
What does this mean for your superannuation account balance? It certainly doesn’t feel that way, but the diversified investment Options are now close to breaking even for the Financial Year to Date.
For example, our flagship option, MySuper Under 75, has returned -2.2% for the financial year to Friday 17 April. For the same period, our Aggressive option was down 3%, and our Defensive option was up 1%. Returns for our members in the pension phase of the fund were generally higher than this.
It is incredible to think that after such a large fall in share markets, most of our options are down only a small amount for the financial year to date. It is for this reason that we urge members to stay focused on the long-term investment horizon, as hard as that can be.
If I look over the last four years, for example, our MySuper Under 75 option has achieved a cumulative return of almost 34%, that is about 8% per annum. That is an excellent outcome. Long timeframes are the key to this success.
LGIAsuper's competitive performance
The latest survey from SuperRatings ranks returns for financial year to date (31 March 2020), and LGIAsuper achieved high rankings for MySuper and our other diversified options:
• Balanced: ranked 1st out of 50
• Defensive: ranked 2nd out of 25
• Diversified Fixed Interest: ranked 2nd out of 25
• MySuper Under 75: ranked 4th out of 50
• Aggressive: ranked 4th out of 50
• Diversified Growth: ranked 6th out of 50
So LGIAsuper members' returns are as good as anyone else's during these times. We are also pleased with the performance of some of our other options, notably our Diversified Fixed Interest and Cash options.
Diversified Fixed Interest is now our second-best returner for the financial year to date, by focussing on the simple and most liquid securities in fixed interest. Our Cash Option remains both fit for purpose and true to label – it is plain vanilla cash, with no risky credit securities included in it.
Preparing for recovery and growth
Your investment team has been busy preparing for tougher times ahead, and our long-term planning has already helped us cope with the recent volatility.
We began selling shares in late December 2019 and early January 2020, as we viewed increases in share prices as being much greater than the likely growth in corporate earnings. We also raised cash early in this crisis, and this has been our most successful move in the portfolio.
It has never been more important to manage liquidity risk, and members can be confident that if they wish to make an investment switch or withdrawal, their money is safe and readily available as they need it.
LGIAsuper has had an overweight allocation to international shares compared to the domestic share market. This approach has performed very well for us recently, in terms of returns in the US share market, and the exchange rate. Given that difference in performance, we now feel like it is time to bring some of that money home.
We have continued to sell bonds. Bond prices are now very high, and their expected returns are very low. There is a risk of negative real return in the long-term because the inflation rate is higher than the yield. These defensive assets are not going to generate the returns that our members need to establish their long-term retirement plans.
So, have shares hit their lowest prices yet? If anyone claims they know the answer to that, you should have some scepticism about their confidence. Be wary of anyone with a clear picture of how this global pandemic is shaping financial markets, and what it means for long-term earnings prospects.
We will get through COVID-19. Life will certainly go on, and financial markets will recover. The big question that we are focused on here is: what happens next? As the economy begins to re-open and businesses start to operate as normal again, what happens in the long-term? That is the crucial question for all risk assets.
One of the key challenges facing us has been that share prices were already quite high as we headed into the COVID-19 crisis. The prices paid for a dollar of earnings were close to record levels.
If we look at what share markets have done since then, the bounce back has likely overcompensated for reasonable estimates of the fall in corporate earnings over the next 12 months to 3 years.
On top of that, there are the challenges mentioned earlier of very low cash rates and bond yields, and an exchange rate in Australia that has fluctuated wildly in the last three months.
…but some positive signs as well
There are some prospects ahead that excite us. Australia is perhaps as well positioned as any country to deal with COVID-19 challenges from a health perspective, and we have relatively low debt-to-GDP ratios in Australia. This will help us in terms of funding the economic recovery.
We are also linked closely to the Chinese economy. Given that China seems to have emerged quite quickly from COVID-19, Australia is ideally positioned to benefit from a bounce-back in our largest trading partner.
Australia is heavily reliant on our export markets, and we therefore hope that other nations also look to re-open their economies as fast as practical, and the return to a more normal life begins very soon.
We will have further challenges ahead, but members should also feel empowered to ask questions about their investments. Information fights fear and helps people to make better decisions. Please talk to us if you have any questions about your investment portfolio or the actions that we are taking on your behalf.
As always, LGIAsuper will be here to help you through these times and beyond.