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JOSH: Hi, and thanks for joining us on this episode of the New School of Super. Now, immediately some things will be very different, as you would have noticed. Firstly, rather than coming to you as a podcast as we normally would, we're here today as a webcast. Secondly, you would have noticed that the normal host, Anne Fuchs, our wonderful head of retirement and advice here at Sunsuper isn't sitting in the host's chair. Instead you've got me: Sunsuper's national education manager, Josh van Gestel. Now, although some things are different, some things are absolutely the same, and I'd like to just welcome Brian Parker, our wonderful chief economist. Brian knows all that there is to know about wealth markets, investments and what's happening with the economy and, very importantly, what that means in relation to your superannuation. Hi, Brian, how are you?
BRIAN: Hi, Josh. Good to be with you.
JOSH: Now, I think it's important that in these times we first acknowledge that there are a lot of people in financial hardship; we also acknowledge that people are going through different changes, whether that be in employment or their own financial circumstances; and we also reflect that at the moment we've got people in Victoria who are facing a further lockdown, so our thoughts do go out to all of you. But, before we get started on talking about what's been happening in the economy over recent months and where we see things lying ahead, I think it's important that first, Brian, you look after our compliance team's requirements.
BRIAN: Lovely, Josh. Look, it's important that everyone remember that what we're going to talk about today is really just general advice only; it doesn't take into account anybody's particular personal circumstances. We'd also recommend that, before you act on anything that you hear today, you consider what it means for your circumstances and also think about getting personal financial advice. You can also obtain a copy of our product disclosure statement either from our website - it's on super.com.au - or by calling us on 131184.
JOSH: That's great. Thank you, Brian. I think probably the first thing I'd ask of you, Brian, is to maybe give us a reflection on where we've been - this seems like it's been going on for a very long time - and maybe some thinking as to where you think things currently are and how markets are responding throughout all of that.
BRIAN: It's maybe worth reflecting back on the last financial year, which has been a really extraordinary period. It really was a year of two halves. When I think back to where we were towards the end of 2019, we'd seen actually some very, very good performances from world share markets and we'd seen renewed optimism about the outlook for the world economy. There was a range of issues that had really plagued markets for a while that were actually seeming to ease. Two spring to mind. One was Brexit. Remember Brexit? It hasn't gone away, but it reached a deal and successfully passed through the House of Commons. The US and China trade tensions: they tended to ease because there were signs of a trade deal in the offing. Really we started 2020 on a relatively optimistic note. Then COVID-19 reared its head, and we've really seen extraordinary volatility in markets. We saw some very, very sharp falls in share markets in particular, during the month of March in particular, as it became clear that, with not just the outbreak itself but also measures to deal with the outbreak, we were going to have some really very, very damaging effects on the world economy. Let's make no mistake: we're really in the midst of the worst global economic downturn that any of us have seen in our lifetime. We're also in the midst of perhaps the worst Australian economic downturn that anyone has seen in their lifetime. What has also, I think, surprised many people is the fact that, after that very sharp fall in share markets, we've actually seen some much better returns really since the end of March; share markets have started to perform very well and that has taken a number of people by surprise.
JOSH: I think I'll come back towards the end, if we've got time, just on some thoughts that you dropped in about Brexit and also China. Just picking up on what you're saying with the markets at the moment, I think certainly we can see a lot of people reacting, with regard to their superannuation, to what they're seeing happening on the share markets or perhaps to some concern there. Obviously we've got diversification across a whole range of assets, so what have you actually been seeing happen with not just equities markets but also, I think, broader assets that we invest in?
BRIAN: That's a really good question, Josh. Maybe it's worth bearing in mind that one of the lessons from this crisis is that every crisis, every downturn, every bear market that you care to name, every recession, comes to an end, bar none, and this crisis is proving to be no different. Even though, with the recovery that's underway, there are bound to be setbacks along the way - both setbacks with virus containment, as for example we've seen in Victoria and elsewhere, and also economic setbacks; we've certainly not passed the worst of the economic impact of this - I think it's important to bear in mind that, even though share markets have experienced very, very sharp falls during the month of March and have had a fairly poor financial year, other assets have held together remarkably well. For example, fixed income investments have performed well, as investors sought safety; they sought the safety of government bonds, so fixed income has generally performed quite well. We've also seen our unlisted assets hold their value to a much greater extent than world share markets, and that's exactly what we would expect to see during a downturn such as this. Now, the unlisted assets that we hold in private equity, in infrastructure and in property are not immune to what is a very, very savage economic downturn and certainly the value of these assets has been marked down to reflect the new economic reality, but some of those assets have actually held together remarkably well. Our property assets: our tenants are still paying rent. Our electricity distribution assets in Europe, for example: the lights are still on. Our gas distribution assets in Europe: people are still using gas to heat their homes and for industrial uses. So, although the range of assets in the portfolio has held its value remarkably well in the face of what is a very, very savage downturn, it does highlight the importance of being diversified and not putting all your eggs in one basket. While it's very, very hard to find assets that are totally immune to this, having a diverse range of assets does allow you to cushion the blow of crises such as this, and that's certainly what we've seen here at Sunsuper.
JOSH: So, if we think on that, how have we actually seen all of those assets playing to our performance? What has our performance looked like, particularly over the last year?
BRIAN: Look, we're likely to have produced a negative return for the financial year to 30 June: a negative return of around 1.3 to 1½ per cent. That's the first negative return for a financial year since 2012. Even though any sort of negative return is always disappointing, given where we were in markets only three or four months ago, the strength of that rebound that we've seen has really meant that the negative return for the year is much, much less than perhaps we might have expected at the depths of the crisis. The speed of the recovery has been truly remarkable and I think it reflects a couple of things. Firstly, there is just how aggressive the policy response has been and not just efforts to contain the virus outbreak by authorities around the world but also the economic policy response to ensure that, in the words of the Reserve Bank Governor, we build a bridge from where we are now to an eventual economic recovery and keep as many people as we can employed, keep as many people as we can on payrolls and ensure that those people who are unemployed are well supported so that they continue to be able to spend and live through what has been a very, very difficult set of economic circumstances.
JOSH: I think you mention two things there. Firstly, we are talking here about what's happened over the last 12 months, but you also mention that this is the first negative return that we've had since 2012 and really, when it comes to superannuation, we should think of it more as a long-term investment. So, talking about those negative returns that we've had in the last 12 months, how actually have they translated closer to the last decade; what have we actually seen in the long-term?
BRIAN: Look, I think it's important to bear in mind how we go through our working lives. If I think about the typical Sunsuper member, the average age of the Sunsuper member is something like 36 to 37; the median age is somewhere in the late 20s. People in their 20s and 30s are likely to experience a number of very, very major economic and financial crises over the course of their working lives. You're absolutely right: superannuation is not only the most substantial asset that many of us will ever hold but also the longest term asset that many of us will ever have, and the reward, if you like, for enduring crises such as these - the compensation for having tolerated these sorts of very, very difficult environments - is higher long-term returns. It's always very, very tempting, I think, during a crisis such as this to panic and to become more conservative in your investment strategy. But quite often we tend to see some members become more conservative at really, really difficult times; they tend to become more conservative after markets have fallen, and that can be really, really damaging to your long-term wealth. We find that the vast majority of members end up better off by simply holding on and accepting that these crises are part of investing and part of their working lives; these have happened before and they will happen again.
JOSH: On that point, if you have someone who's maybe made an investment change over recent months and chosen to go to a more conservative option, what does that in fact do? What are going to be the implications of that decision and not just in terms of missing out in that long-term performance? Are there any other considerations that they need to think about there?
BRIAN: It's a really, really difficult question, Josh. Once you've made a decision to become more conservative, the temptation is to then say, 'Well, markets have recovered; maybe I should be going back into markets; maybe I should actually go back to where I was.' That does run the risk of zigging when you should be zagging. I think the lesson really is, firstly, if you are thinking of actually making a significant change to your investment strategy, do reach out and seek financial advice. Do get in contact with Sunsuper and talk to one of our financial advisers just to make sure that you understand the trade-offs involved, because there are trade-offs. If you opt for a more conservative investment strategy, while that does protect your capital in the short term, it does mean that, when markets recover, you miss out on at least part of the upswing; you miss out on at least part of the recovery in markets. The other important point to note here is what I call the 'sleep at night' test. Sometimes moving to a more conservative investment strategy allows you to sleep soundly at night and, if you then accept that the longer term returns you've experienced perhaps won't be as strong as they would be if you stay in a balanced or a growth strategy, sleeping at night can never be overrated. By all means, let's make sure that we understand that we need to take risk to generate long-term returns but not so much risk that we can't sleep at night with the worry of it.
JOSH: Maybe just to close on this point or to close off this point here, when it comes to making an investment decision, should you be thinking about what markets are doing? Notwithstanding what you're saying the implications are, when you're making an investment decision or choosing not to, what are the things that really you should be thinking about?
JOSH: I think there are a few things to unpack there. Firstly, this crisis is another lesson in just how difficult it is to predict short-term market movements. Just as no-one could have predicted the speed with which markets declined in March, I don't know many people who claim to have predicted just how fast share markets would recover. Certainly, here in Sunsuper, we don't design investment strategies based on our own or anybody else's short-term economic or market forecasts. We just don't think that you can reliably generate excess returns by doing that. We believe that you're far better off designing an investment strategy that suits your long-term investment needs and is consistent with your long-term investment goals and your appetite for risk and holding on to it. Unless your circumstances change, it's hard to basically make a case for making a change to your investment strategy. But, again, I'd also point out that there are some members who actually did move to take advantage of the market falls that we saw. We saw a relatively small number of members move to cash at a very inopportune time but, at the same time, we also saw some members who turned around and said, 'Well, share markets have fallen; this may be an opportunity.' Well, that proved to be correct, but it's a very, very hard thing to do: to basically step in and be prepared to take risk when other people are in their panic mode. I can't stress enough that, if you have an investment strategy that suits your long-term goals and suits your appetite for risk, it's a dangerous thing to change it, especially in the midst of a crisis; and, if you are going to make a change, do seek out and get some advice first.
JOSH: And I think it's important maybe to just reiterate this to those who may be listening, especially those approaching retirement: how is it that we actually manage that through the life cycle strategy?
BRIAN: That's a really good question, Josh. What we also found was that, pleasingly, those members who are in our life cycle default option were much less likely to make an inopportune change during the worst of the crisis. They were much more likely to stay the course, and that's a very, very good thing. We deliberately design the life cycle option so that it suits members at different phases of their life. So, for those members who are approaching retirement or indeed are in retirement, we automatically and gradually reduce their exposure to risk. We reduce their exposure to growth assets, such as share markets, as they approach retirement. The reason we do that is that, while we can't prevent negative returns from time to time, if share markets take a major downturn just before you're about to retire, it doesn't ruin your retirement plans; it doesn't make as big an impact on your final balance as it would do if you were still invested quite aggressively. We try our best to smooth the ride, if you like, especially for those members approaching and in retirement - and, again, that's exactly what we've seen. So, even though investments across the board have suffered negative returns, we find that, with our conservative and retirement options, for example - our retirement option forms part of the life cycle default - those portfolios didn't fall in value anywhere near as far as, say, our balance for rogue options, and that's exactly what they're designed to do.
JOSH: Now, if we just switch our thinking a little bit, we've got - these are some things that you alluded to earlier - still unfolding; we've got the US election ahead of us, which is starting to really ramp up a bit; and we're also seeing, again, Chinese government movement and different things happening there. Thinking about the recovery as well, notwithstanding what we're seeing in Victoria at the moment, how do you maybe see things playing out over the months ahead?
BRIAN: We're getting a very salutary lesson. Even before COVID-19, there was still a long list of things that we could worry about, Brexit being one. As an issue, Brexit is not going away. We still don't have a final trade deal between the EU and the UK as to how their trading relationship will operate after 31 December, and that is a hard deadline. US-China tensions have not gone away; if anything, they've been added to through the course of this crisis. You mention the US election. The US election has so far not really been on the markets' radar screen, but it will appear there relatively shortly. The economic recovery itself is going to be very gradual, very patchy and very uneven. Some countries, some regions and some industries will fare better than others. Some industries and some regions will take some time - in fact, many years in some cases - to fully recover, if ever. It's important to bear that in mind. So this is not going to be all smooth sailing. There's an old adage that 'share markets climb a wall of worry'. I don't think that's ever been truer than we've seen in recent months. But the recovery in share markets has come despite the fact that there is a long list of things that we can worry about. So I'd caution: look, we still live in very, very uncertain times and there are still lots of things that could set us back over the coming months, but I suppose I'd really rate it as I did earlier - it's a point that I make regularly at presentations to members - that every crisis, every bear market, every downturn and every disaster that you'd care to name comes to an end, bar none. This COVID-19 crisis, as severe as it has been for the world and for here in Australia, will be no different.
JOSH: I was going to ask you for some closing thoughts or remarks, but I think to some extent you've probably just closed that off. Do you have any final things that you would say to anyone who's watching?
JOSH: Look, again, just to reiterate: we certainly acknowledge that these are very, very difficult times; this is the most extraordinarily challenging set of economic and financial circumstances that any of us have faced in our working lives, without any doubt whatsoever. I'd also, I suppose, reiterate the message that, if you are worried and if you are thinking about making a change to your superannuation strategy, do call us; do call one of our financial advisers or, if you have your own financial adviser, reach out to that person and get financial advice to ensure that any change you make is actually in your best interests. I can't stress enough just the value of getting professional advice before making any serious investment strategy decision.
JOSH: That's great. Thank you, Brian. Yes, to reiterate that point, I think it's really important that you consider speaking to one of our advice team. Just give us a call on 131184 and we'll absolutely help you out to make sure that you have more confidence and more comfort, not just with how your super is invested at the moment but certainly with where you're headed into retirement. On behalf of both Brian and myself and also Sunsuper, I'd again like to wish you all well. We do hope that you keep safe and we hope to see you again on our next podcast. Thank you very much for joining us.