COVID-19 and your super

[00:00:03] Intro: Welcome to the new School of Super. A fresh look at money matters, your super and the things that could affect your financial dreams now and in future with Sunsuper's Chief Economist Brian Parker and Head of Advice and Retirement Anne Fuchs.

[00:00:18] Anne Fuchs: Hello and thanks for listening. Welcome to the New School of Super, Sunsuper's s podcast series covering investment markets, money matters, your super and helping you achieve your retirement dreams. Today with me is Brian Parker, Chief Economist here at Sunsuper and the man who knows so much about economic markets. And it's incredibly important that you do, because we have a very special episode today, Brian.

[00:00:41] Brian Parker: We do indeed, good to be with you Anne.

[00:00:43] Anne Fuchs: For those listeners who don't know me, my name is Anne Fuchs, and I head up Advice and Retirement here at Sunsuper. So, as I said, we are talking about COVID-19, coronavirus today for our members and listeners. Before we do that, though, Brian, you need to give your very special general advice warning.

[00:01:00] Brian Parker: I do. And as always, before we start, I need to let you know that what we're gonna be talking about today is general information only. Any advice does not take into account your personal situation. You should consider your circumstances and think about getting personal advice before acting on anything we discuss. You can also get a copy of their product disclosure statement from a website or by calling us on 13 11 84.

[00:01:22] Anne Fuchs: Thank you, Brian. Look, if you that what you just said then about seek advice before acting, I couldn't stress that enough. Right now, I know that many of our members are moving more than I'm certainly comfortable with moving to cash as a reaction to what's happening in the economy before seeking financial advice, which worries me a lot. So should we just recap where we are as at the start of March in what a very uncertain economic times. Brian, could you recap for us?

[00:01:49] Brian Parker: Okay, the coronavirus that started in China, is continuing to spread across some other countries around the world. Firstly, the I think it's important to acknowledge that the economic impact of this is going to be severe, certainly in China, but not just in China. Through impacts like the impact on supply chains across the world, impact on travel and tourism and in Australia's case, for example, education exports. The impact outside of China is also going to be quite severe. Now we have seen infection rates for coronavirus actually start to come down, actually come down very, very sharply in China that the latest figures show that infection rate, virtually stalled, which is clearly very,

[00:02:30] Anne Fuchs: however, in Italy, they're going up and the country's shut.

[00:02:32] Brian Parker: But exactly, but slowly, slowly, slowly the country is actually coming back to work. So when you look at the

[00:02:38] Anne Fuchs: China or Italy?

[00:02:39] Brian Parker: China, let's talk about Italy and Iran elsewhere, but for the time being, if you look at what's happening in things like property sales, if you look at things like the consumption of coal for electricity, you are starting to see activity come back online. You started to see people go back to work. This is gonna be a drawn out gradual process. But it seems to be the case that the worst of the economic impact in China at least, um, has come to an end, and we're starting to see this gradual recovery.

[00:03:09] Anne Fuchs: And if I could booknote that before we go to the other countries that obviously Australia has a vested interest in the economic prosperity of China because that was what gave us the stimulus to claw away out of the last recession.

[00:03:21] Brian Parker: Well, there are other factors in play that back then backed up. But the bottom line here is that yes, Australia is quite severely affected as a China is a major export destination. It's a major source of tourists. It's a major source of students for universities and other schools. So clearly the Australian economy is gonna be very adversely affected by this, especially during the March quarter, but that we think that impact is likely to persist for some time.

[00:03:44] Anne Fuchs: Okay, so if we go to the impact on Italy, Iran and the United States and there are varying degrees of responses here, extreme responses in some respect. The United States doesn't appear to be much that President Trump is acknowledging it's that much of a problem yet, while Italy is in lock down.

[00:04:04] Brian Parker: Yeah, it's look, the responses have been, have vary from country to country. I think the important thing to bear in mind here, though, is that the bad news, if you'd like, is that I think infection rates are going to get worse before they eventually get better. So when we look at what's happening in Italy, where you know, Italy has shown, Ah, big surge in infection rates on you've also seen the surge on fatalities there. But make no mistake about this. The official response has been in some countries has been very aggressive and appropriately so. In my opinion, the response in the United States has been has been slow up that it is getting underway, and when you put all that together, it does. It kind of reinforces the point that this crisis is going to come to an end. At some point you will see infection rates decline not just in China, but you'll see infection rates declining elsewhere as the response from the health authorities actually does take effect.

[00:05:01] Anne Fuchs: it's obviously, the Northern Hemisphere is coming out of their winter, which means that people generally start becoming healthier. Is things warm up a bit, however, were just about to hit into our flu season in the southern hemisphere and in Australia, so surely they might be in some parts going through the worst of it, but we're just heading into it.

[00:05:22] Brian Parker: Well, that's right. And certainly the Northern Hemisphere moving into summer actually does is good news for them. Thea Other piece of good news out of that is that we have clearly been forewarned about this, that we've had plenty of early warning. We've seen what's happened in the Northern Hemisphere, and so we've We've been, well, forewarned to actually do something about it ahead of our winter. If you look what I think, what the authorities here in Australia we're doing. It's pretty clear that the authorities are taking some pretty significant steps to try and make sure this is controlled.

[00:05:53] Anne Fuchs: I do feel very much for communities all around the country in regional Australia who rely on tourism and have also had their their environment ravaged by its by bush fires or by floods. And the compounding impact on all of this is absolutely devastating for regional Australia.

[00:06:12] Brian Parker: Yeah, very much so, and it's important to bear in mind that at least, and I know this is gonna sound a little harsh, but please bear with me in an economic sense. coronavirus is a much bigger deal than the bushfires were. But certainly for a lot of these regional areas to be faced with coronavirus and the impact that has on tourism and on the economy in general at a time when they're really just starting to get out, get out of the impact of the bushfires is it is a double whammy. There's no doubt about it.

[00:06:37] Anne Fuchs: that. So just over 10 years ago, we had the collapse of Lehman Brothers and then that global financial crisis and Australia avoided a recession. Uh, there is talk that this time around, we're not going to be able to avoid the recession and certainly with well and truly kissed the surplus goodbye. What do you Are you brave enough around making any predictions which I know is very challenging at the moment around whether we will head into a recession and how long and what the impact on the deficit will be.

[00:07:05] Brian Parker: Okay, well, firstly, I think it's fairly clear that we will end up with a negative result for Australia's economic growth for the March quarter. The economy has taken such a hit that we are likely to see GDP shrink during the March quarter for the June quarter, and really, it's just so uncertain. It's just depends on the speed of the recovery and global growth. It depends on just how fast the government can get assistance out to affected industries and to workers, for example, who have to be either laid off, people who have to go to quarantine or whatever. These people are going to need financial help in order to maintain a level of spending and and to live

[00:07:44] Anne Fuchs: well to pay the rent.

[00:00:03] Intro: Welcome to the New School of Super. A fresh look at money matters, your super and the things that could affect your financial dreams now and in future with Sunsuper's Chief Economist Brian Parker and Head of Advice and Retirement Anne Fuchs.

[00:00:18] Anne Fuchs: Hello and thanks for listening. Welcome to the new School of Super Sunsuper Podcast series covering investment markets, money matters, your super, and helping you achieve your retirement dreams. Today we have a special guest. Andrew Fisher Sunsuper's, Head of Asset Allocation one of our most important roles here at Sunsuper when it comes to managing and growing your retirement savings. And here today he is talking about how is a fund we are responding to this extraordinary event of coronavirus and your retirement savings for our listeners who don't know me. My name is Anne Fuchs, and I'm the Head of Advice and Retirement here at Sunsuper. And our job is to help our members achieve their retirement dreams through great quality financial advice before we get into it, Andrew, welcome, firstly -

[00:01:05] Andrew Fisher: thank you very much Anne

[00:01:06] Anne Fuchs: now I'm gonna let you off the hook because you're sitting in the illustrious Brian Parker, Chief Economist chair today. And he would normally do our general advice warning. But I won't subject you to it, I might do it for you. So before we begin is always just to let you know that what we're talking about today's general information only Any advice that we give does not take into account your personal situation. And you must consider your circumstances and think about getting personal financial advice before you act on anything we discuss. You can also get a copy of our product disclosure statement from our website or by calling us on 13 11 84. Welcome, Andrew.

[00:01:47] Andrew Fisher: Thanks very much Anne, pleasure to be here.

[00:01:49] Anne Fuchs: well look. Yeah, I've been wanting you on the New School of Super for some time. So, the timing of you coming with asset allocation and in this very challenging economic climate is, um is great to have you here because arguably, asset allocation is one of the most if not most powerful lever when it comes to growing in protecting a member's retirement savings.

[00:02:12] Andrew Fisher: Yes, it is. So it is a It's a pleasure to be here. I wish it could be in a better scenario than we are in right now. It's a challenging environment that we're in right now, and I guess I want to talk a little bit about what asset allocation is and what we do in asset allocation. So asset allocation is how we put together a multi asset portfolio, so out diversified portfolios, whether that be balanced growth, retirement or conservative. This is where most of our members invest their money, and this is where they trust us to invest their money on their behalf and myself in my team, what we do is we put those portfolios together.

[00:02:47] Anne Fuchs: so it's kind of like baking a cake where you've got all of these ingredients and that the quality of those ingredients and the quantity of those ingredients is really comes down to how delicious the cake is. And I guess at the end of the day there are only a a small number of assets that you can use to deliver the returns for our members. How do you? I guess if I can start with how are you sleeping? What's keeping you awake at night in times like this?

[00:03:11] Andrew Fisher: It's a very good question and on a day like today where we've had some really violent market moves overnight. I do typically sleep fairly well, but I must admit, I was awake at about one o'clock two o'clock this morning checking markets to see how things were going. So it is. It is a really challenging time, and I can understand some of the anxiety that people are feeling with the way markets of behaving. You couple that with what you're reading in newspapers on a daily basis. This is a tough time, and this is why people like myself this is why we're here, where he had to actually look after your investments. I'm getting up in the middle of night so you don't have to. That's that's what I'm here for.

[00:03:47] Anne Fuchs: So how does it work with strategic asset allocation? Because strategically implies long term decisions to achieve a certain goal. But in an environment, where, as you said the market is reacting violently every day. There's got to be some tactical responses. How do you deal with that from a decision making perspective?

[00:04:10] Andrew Fisher: Looks, I'll give you. Let me give you an example of something we've done recently. So if you think about Australian equity. So as of today, I think Australian equities are roughly down about 20% in a very short space of time. It's a big change now. The question we sort of ask ourselves is, if you think about what equity market is, it's what you're paying for is all the future earnings that that market will deliver now. Has that changed in the last two weeks by 20%? Is the future earning capacity of the whole Australian economy effectively 20% lower? We don't think that's the case. So then the question is, well, two weeks ago, we have it wrong or today that we have it wrong or is it somewhere in between? So the way we think about it, we're making a long term, forward looking decision. But when the market moves by 20% that long term, forward looking decision has changed an awful lot in a very short space of time. So what we're thinking about in response to this is not should we be selling, but everything just got 20% cheaper. Are if we look forward by 7 to 10 years from today, a 20% discount on an asset in a two week period is really attractive now in terms of why's that anxiety driving is that you gotta make a decision to buy when everybody else is screaming at you "Sell"

[00:05:23] Anne Fuchs: intuitively. I think Andrew, that concept of buying and when markets are cheap that logic applies, Australians would get it when it comes to property. But it is more challenging for every day Australians to get that logic when it comes to buying with shares and people are doing the opposite. Where are you seeing, if you're looking 10 years from now, where do you see from an asset allocation perspective, opportunities around the globe? What types of investments do they look like?

[00:05:53] Andrew Fisher: So in terms of sort of the shorter term responses that we're having now, that's really driven by what you're saying in share markets, so that will be share markets around the world; the other thing that's been responding really sort of severely in recent weeks has been bond yields, bond market. So we've been reducing our exposure to bonds and increasing to equity markets all around the world, and that's that's pretty consistent. I mean, we've been doing more in European markets, for example, less in the US but on the margins were pretty much buying everything when it comes to equities, I guess one of the one of the difference differences between sharemarket's and property market, for example, is you don't often see on the front page of every newspaper that $60 billion was walked out in a day in share market. Would you get that in sharemarket's all the time you hear there's a trillion dollars has been wiped out across the globe in the last two weeks. Like these sorts of huge stats come in really hard and fast, and they confront you in really big, bold font on the front page of a new and terrified people. Yes, properties are much slower moving market, so that can't happen in a very short space of time. Um, that's not to say that we haven't had property corrections here before as well. I mean, you have to go back a fair way, probably to our last big recession, to remember the last one of those. But those can be quite damaging as well. But when it comes to property, we would call that an unlisted market. It's a direct market. And so you're waiting for a market to be created, whereas in shares things will repriced every single day. What we will think about is in different times, when is the right time to say perhaps move from listed markets shares into unlisted markets. So we do a lot of investing in alternative assets. He sort of mentioned before the concept of the cake and the ingredients. One of the great advantages in my life is I have some of the best ingredients out there to make my cake with. When it comes to putting together a multi asset portfolio using those ingredients, one of the big things you think about over the long term is diversification. So how many different different ingredients can you put together in the cake? More ingredients more diversification. You have a better tasting cake. So that's one thing we have, and the other thing we think about is when is the right time to use those alternative assets more or less than the traditional equity and bond markets at a time like right now, equity markets have fallen quite substantially, so we wouldn't want to be selling equities to go out and buy alternative assets necessarily. But in a place like bonds, where bonds are really increased in value, they're really quite expensive. Opportunities to use alternative assets in the fixed income as a replacement fixed income. That's really attractive to us.

[00:08:29] Anne Fuchs: So Andrew, from an asset allocation perspective, we've just spoken with Brian about the concept of like lifecycle investing in how we de-risk our members portfolios as they head towards retirement to protect them from these market shocks. Are you able to explain how you and the team use asset allocation to achieve this risk protection for our members

[00:08:51] Andrew Fisher: when it comes to risk protection that key levers diversification. So at a fundamental level, what we what we do is we actually take investment risk. So the idea rested allocations to put together a logical collection of risks that we want to take that we think will be rewarded going forward. Diversification is the process of picking different risks. So when one of them is perhaps going when one asset is going up, one might be going down over the long term. These are all things that are going to go up over the long term.

[00:09:19] Anne Fuchs: Some assets have a greater amount of the, greater upside and greater risk at which I think our older members dare I say our 50 plus members might be feeling particularly anxious about

[00:09:28] Andrew Fisher: I guess so. Something like equity. For example, Equity is what we would call that a high risk asset. So that's what the

[00:09:36] Anne Fuchs: Equity being the stock market

[00:09:37] Andrew Fisher: Yes, so investing in shares. So that's what the higher end of risk to try and quantify what that risk looks like. One in sort of five years, you're expecting to get a negative return from equities. That's one way of thinking about it. But in return for that, you get much higher returns. So, I mean, if you compare bonds and equities, for example, bonds are sort of the lowest risk asset equities the highest risk something like equities, you'd expect 4 to 5% extra return over the very long time versus bonds. So if today bond yields, or something like 1% or less even actually overnight, I say, expecting 1% return from bonds, you should be expecting 5 to 6% return from equities

[00:10:18] Anne Fuchs: and and the unlisted assets that you spoke about, things like the infrastructure and property that aren't on the stock exchange?

[00:10:26] Andrew Fisher: So this is we use the term and illiquidity risk premium, which sounds really complicated -- Yes -- Basically, what we say is, if you tie your money up, you must be rewarded for that. So one of the advantages of, and I was speaking about this earlier in terms of last night, we can respond to what's happening in private into public markets. So in shares and bonds, we can act on information immediately if we are in property or if we are in infrastructure and airport, we can't respond immediately. There isn't a market there. So we need to be rewarded because it takes away opportunity. So that's what we call an illiquidity risk premium. You get paid when we typically demand somewhere in the range of 2% roughly speaking as an extra return to time on the up over long term like that.

[00:11:10] Anne Fuchs: But even some of those assets do you have a higher elevated risk than normal, particularly airports. If you think about the extent of everyone being grounded?

[00:11:18] Andrew Fisher: absolutely, absolutely So I think when we so I mean, I get to see all of the internal stress testing that we do. For example, the number one stress test that we run on airports, is SARS, so SARS and 9/11 Those are sort of the big stress tests that we run on the airport portfolio and we So we understand. How our airports are going to behave through this crisis way also understand it's a temporary effect. So would there will definitely be an impact on earnings on those assets in the short term. But at the same time, we own those assets for the next 30 years of earnings and that temporary blip. Basically, this year we also have evidence of what happens after those blips, and you go straight back to a trend earnings profile very quickly. I don't think this is going to fundamentally change the way people move around the globe. It's gonna temporarily ground people.

[00:12:10] Anne Fuchs: before we conclude the episode, I think, would be really useful for our listeners to understand from an asset asset allocation perspective, the difference of what? How is asset allocation different for a 30 year old versus a sixty year old when you're pulling together or constructing a portfolio for our members

[00:12:28] Andrew Fisher: s. So I used the example of shares and sort of you might expect shares to give you a negative return once every five years. So I think the first question the first thing we think about when we put together these portfolios is what is the investment horizon? So what is the investment horizon someone has? And someone who's 60 years old versus someone who's 30 years old has a much different investment horizon. When you're younger, you can invest for much longer period of time. And that is an advantage, because if you think about what illiquidity looks like, illiquidity risk premium, you get paid to look assets you paid to lock your money up. And so if you have a longer investment horizon, you can invest with a longer term, and you can earn higher return in response that you're gonna be taking more investment risks. So you need to be able to tolerate the ups and downs of markets over that long horizon.

[00:13:14] Anne Fuchs: So what's the difference of - I'm being pointed - If I'm being pointed with you from a shares perspective, a 30 year old has what sort of percentage of their portfolio exposed to shares in the stock market versus a 60 year old in the default life's lifecycle product?

[00:13:30] Andrew Fisher: There's a lot of alternative assets in there, but if you sort of look through all of that and you ask yourself on balance, if you just thought of the whole portfolio was just being shares and fixed income, it would be roughly 70% shares, 30% fixed income. You compare that with someone who's aged 65. At the end of their life cycle, they would have around 45% shares and 55% defensive assets. Be that fixed income cash or other alternative defensive us.

[00:13:57] Anne Fuchs: And we do that because

[00:13:59] Andrew Fisher: we're managing that default member or managing our members into a position of lower risk because we recognise our investment horizon is getting shorter. Their needs are shorter, and their balances are getting larger as well. So the risk around that balance is getting bigger. So as you as you go through your lifecycle when you're younger, it's all about future earning potential. But as you sort of reach maturity in superannuation. You have a large sum of money. There you're in the drawdown face, potentially a drawing from it. There's a concept of sequencing risk, which is the idea that when you're putting money in your you're always buying, markets fall. Actually, it's an opportunity to put money in cheaper. The alternative to that is, though, if you're taking money out of your super and markets are falling, then there's a risk that you're locking in losses. So taking more investment risk when you're younger is a lot easier. But as you get later in your retirement planning journey are you really need to think about how much risk you're able to bear and your capacity to do that, Given what you need to draw out of your super as well.

[00:15:00] Anne Fuchs: So final bits of advice sitting in your chair. A man that's responsible for the allocation of $75 billion worth of Australians' retirement savings. It's a huge responsibility.

[00:15:13] Andrew Fisher: So, I will go back to your earlier comment and that I do not give personal advice, but it's so this is very general advice, I think look forward, don't look backwards. So when you're investing money today what happened yesterday has got absolutely no influence on what you should be thinking about looking forward. So don't change your investment strategy. Based on the last two weeks of performance, what was your investment horizon? What is your investment horizon and what is your investment strategy. Set up consistently with that. If you look at Sunsuper's returns over the past five years to yesterday. Um, over the five years to yesterday, the returns have been somewhere in the order of 6 to 8%. Now the returns over the two weeks to yesterday may have been minus 5%. But you shouldn't make a five year investment decision based on a two week performance outcome. You need to be able to accept it from time to time. You might have good and bad weeks. You're investing for the long term, and I think any member, any member, any investor anyone out there should really be thinking about what it actually what is a realistic return expectation And what should I be aiming for going forward? And am I comfortable there?

[00:16:21] Anne Fuchs: And that's where financial advice comes to the fore because five years from out, we can start helping you plan for what your goal looks like, taking into account all of the factors going on in your life and your desire to maybe scale back hours, your cash flow needs and the like. So if you're five years out from retirement and you want comfort that your money is going to be there and provide you that secure and dignified retirement, you should definitely call us on 13 11 84. Andrew, it's been an absolute pleasure having you on the New School of Super

[00:16:49] Andrew Fisher: thank you very much Anne, the pleasure has been all mine.

[00:16:51] Anne Fuchs: Thank you yo our listeners and we look forward to you joining us again soon.

[00:16:53] Outro: This has been the New School of Super. For information and inspiration to help you plan your future, manage your super, and enjoy your retirement, visit sunsuper.com.au/thedreamproject. Or if you've got a superannuation or investment question, you'd like Brian and Anne to discuss, then get in touch at newschoolofsuper.com for it feature in one of our future New School of Super podcasts.

You can also speak with us via our live online chat. Simply visit Sunsuper dot com dot au forward slash contact us. and click start chat button to begin.