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Investment strategy

By Brian Parker, April 2020

Sunsuper Chief Economist Brian Parker explains what’s happening around the world and at home, where markets are heading and what it all means for your super investment.

Sunsuper’s Balanced option for Super-savings accounts suffered losses of 11.8 per cent for the quarter and 3.9 per cent for the year to March 2020. Longer-term returns remain positive, with the Balanced option posting returns of 5.1 per cent p.a. over the last five years, and 6.8 per cent p.a. over the ten years to the end of March. The table below shows returns from the major publicly traded asset classes for periods to the end of March 2020.   

Returns to 31 March 2020 3 months % 1 year % 3 year % p.a. 5 year % p.a. 10 year % p.a.
Cash (Bloomberg AusBond Bank Bill) 0.3 1.2 1.7 1.8 2.8
Australian Diversified Fixed Interest (Bloomberg AusBond Composite Bond) 3.0 6.8 5.7 4.2 5.9
Global Diversified Fixed Interest, hedged to $A (FTSE WorldBIG) 1.7 6.2 4.5 4.0 6.1
Australian listed property (S&P/ASX 300 A-REIT Accumulation) -34.3 -31.3 -4.8 0.5 7.2
Global listed property (FTSE EPRA/NAREIT Developed, hedged to $A) -28.4 -23.7 -3.0 -0.6 7.4
Australian shares (S&P/ASX 300 Accumulation) -23.4 -14.5 -0.6 1.4 4.8
Developed market shares, in $A unhedged (MSCI World) -9.2 4.6 10.3 8.5 11.6
Developed market shares, hedged to $A (MSCI World) -21.0 -10.7 2.1 4.4 9.4
Emerging market shares, in $A unhedged (MSCI EM)  -12.2 -4.1 6.3 4.5 5.2

Sources: Refinitiv, Bloomberg. Past performance is not a reliable indication of future performance.

World share markets fell sharply over the quarter, with the bulk of the falls occurring in the month of March. Listed real estate securities were among the worst performing markets as their underlying assets bear the brunt of widespread shutdowns in business activity. The COVID-19 crisis and the measures to deal with the spread of the virus are causing enormous disruption to economies across the world. The Australian dollar declined in value against a range of currencies which greatly reduced losses on unhedged international share investments. 

A flight to the safety of government bonds ensured that bond markets produced strong returns over the quarter, despite government bonds coming under some selling pressure during March in response to a need to raise cash holdings. The rapid deterioration in the economic outlook significantly undermined the performance of non-government bonds.

The COVID-19 outbreak and the authorities’ response to it are causing massive disruption to the global economy. The initial shock to the Chinese economy early in 2020 spread across the globe through its impact on travel and tourism and global supply chains. This disruption was exacerbated as authorities across the world took increasingly draconian measures to contain the outbreak in their countries; measures that have had a dramatic impact on employment, spending and output and in many instances effectively shut-down economic activity. 

While the aggressive response by health authorities to contain the virus has virtually ensured a global recession in the first half of 2020, it has been critical: both to contain the virus and to facilitate an economic recovery sooner rather than later. The timing and speed of recovery will vary across countries, depending on the timing and severity of the initial outbreak; the speed and efficacy of the health authorities’ responses; as well as size and effective implementation of fiscal and monetary policy efforts. In many countries, governments and central banks have adopted often unprecedented measures to support households and businesses, including direct payments to households, tax and interest rate cuts and expanding the supply of credit to businesses. While those measures cannot stop the sharp fall in economic activity currently underway, they can support the eventual (and inevitable) economic recovery. Encouragingly, infection rates in some of the worst affected countries such as Italy and Spain are beginning to decline. In the case of China, infection rates have virtually stalled, and economic activity is gradually improving, but it will likely be many weeks or months before activity returns to the kind of levels that prevailed prior to the crisis.  

Here in Australia, as elsewhere, the economic impact of the virus outbreak and measures to limit its spread have seen dramatic falls in employment and activity, particularly in tourism, travel, hospitality and large sections of the retail industry. During March the Reserve Bank and the government announced a series of measures to mitigate the economic impact of the COVID-19 crisis. The Reserve Bank announced plans to inject substantial amounts of liquidity into financial markets, reduce official interest rates to the bank’s self-imposed floor of 0.25 per cent, provide long-term funding facilities to banks for small to medium business lending, and to cap longer term market rates. The government’s efforts included measures to increase the flow of credit to small and medium enterprises, boost payments to welfare recipients, and culminated at the end of March with the announcement of JobKeeper: a massive wage subsidy scheme worth some $130 billion. This measure is likely to curtail the rise in unemployment over the coming months, as employees can continue receiving income from and retain a link with their current employer rather than becoming unemployed. 

What is Sunsuper doing?

We have no way of knowing with any certainty how the COVID-19 outbreak will evolve from here, or how the economy and financial markets will evolve over the course of this year. And, at Sunsuper, we do not invest money based on our own, or anyone else’s short-term economic or market forecasts. 

Despite this uncertainty and volatility, we are not reducing our exposure to shares or other growth assets. In fact, we have taken the opportunity to modestly increase our exposure to domestic and international share markets across our diversified options in a careful and risk-controlled manner. We took this step because after their recent falls, share markets are now much more attractive value than either fixed income or cash investments. 

Sunsuper continues to hold a significant allocation to alternative asset classes, particularly the key unlisted asset classes – property, infrastructure, private equity and private credit. As a large superannuation fund we have well-diversified portfolios of these assets that deliver strong, long-term returns, while reducing our members exposure to share market volatility – particularly in times such as these. Maintaining significant allocations to alternative asset classes requires careful risk management and even though we have seen an increase in members’ demands for liquidity – both from members’ switching activity and the government’s decision to allow the early release of superannuation for members adversely impacted by the COVID-19 outbreak – we continue to maintain a strong liquidity position ensuring our members can realise the long-term return benefits of investing in alternative assets.

In the interests of providing members with transparency around the performance of their investments, the performance of our unlisted assets and our alternative strategies portfolios over the March quarter is shown in the table below. 

Sunsuper’s alternative asset classes* Returns to 31 March 2020  3 months %
Property -6.3
Private capital -10.1
Infrastructure -6.2
Alternative strategies -7.9

Sources: Sunsuper. *All international exposures are hedged into A$. Past performance is not necessarily an indication of future performance.

Given the state of the world and Australian economies, the value of these assets has declined, and this has been reflected in the unit prices and performance of all Sunsuper’s diversified options. In the current environment, some assets are likely to be more affected (e.g. airports and shopping centres) than others (e.g. gas and electricity networks and logistics warehouses) to what will undoubtedly be a sharp downturn in the business cycle. However, in a crisis such as this, these assets tend to hold their value to a greater extent than Australian and international shares and listed property and infrastructure vehicles, often as they have not had the same level of debt in their capital structures. That has been Sunsuper’s experience over recent months and mirrors our experience in previous market downturns. 

Help to choose your investments

There are a number of Sunsuper investment options that give exposure to a diversified range of asset classes, including both public market and unlisted investments. In fact, Sunsuper offers members a range of 20 investment options to allow you to tailor your investments to your needs. 

If you want more information or advice to decide which investment option or group of options best meets your needs, our financial advisers are here to help. Please give Sunsuper a call on 13 11 84.

Past performance is not a reliable indication of future performance. Sunsuper employees provide advice as representatives of Sunsuper Financial Services Pty Ltd (ABN 50 087 154 818 AFSL No. 227867) (SFS), wholly owned by the Sunsuper Superannuation Fund.