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The New School of Super podcast series

Join Sunsuper’s Dream Team Chief Economist Brian Parker and Head of Advice and Retail Distribution Anne Fuchs in our podcast series as they discuss money matters, your super and the things that could affect your financial dreams now, and in the future.

The Sunsuper Dream Team

Anne Fuchs is the Head of Advice and Retail Distribution at Sunsuper. She has worked in the financial advice industry for more than 20 years, and passionately believes great financial advice can change people’s lives. Prior to joining Sunsuper in February 2015, Anne was the Chief Commercial Officer at the Association of Financial Advisers where she was responsible for income generation and servicing of their commercial stakeholders – members, licensees & corporate partners.

Brian Parker was appointed to the role of Sunsuper’s Chief Economist in 2015. In a career spanning more than 25 years, Brian has worked in a series of economics, portfolio management and communication roles with a range of organisations including Rothschild, JP Morgan, Citigroup, MLC and the Reserve Bank of Australia. Brian has an honours degree in economics from the University of Queensland, where he also taught macroeconomics. Additionally, he is a Charted Financial Analyst.

Episode 1

Listed vs unlisted assets

14 July 2018

For our first-ever episode, Sunsuper’s Dream Team breaks down the difference between listed and unlisted assets and why Sunsuper members should be extra-interested when they take off on a flight from Brisbane Airport.

Voice-over: 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 Retail Distribution, Anne Fuchs.

Anne: Hello and thank you for listening. Welcome to the new school of super – Sunsuper’s podcast covering all things money, investments, superannuation and most importantly, how to help you reach your retirement dreams. My name's Anne Fuchs and I head up financial advice at Sunsuper and I'm sitting here today with someone who’s pretty special, the Chief Economist from Sunsuper. His name is Brian Parker and what this man doesn't know about investment markets isn't with knowing. Brian it's so great to see you.

Brian: Thanks Anne, it’s good to be here.

Anne: So today we're talking about unlisted assets versus listed assets and you know, helping our listeners understand what this means and why it's important to their superannuation and retirement savings. But, I think before we start doing that the people upstairs in compliance need us to say something, don’t they?

Brian: Yeah, they do. I think they want me to say that this is general information only and that we're not providing personal advice, and that if what we say today does actually spark an interest and does lead you to think that you need to do something, to change something about the way you invest your money, either in super, or outside of super, then

do get some personal financial advice. Because as you say Anne, you know very good personal financial advice can change people's lives.

Anne: Thank you Brian. So, we're talking about listed and unlisted assets. Listed assets I think are pretty well understood, aren’t they Brian? They’re just the stock exchange simply. How would you describe it?

Brian: Yeah, I think that's right Anne. I mean I think a lot of people can understand that their superannuation fund invests at least a portion of their assets, perhaps a large portion of their assets in shares. In other words, you’re buying a piece of the business and that piece of the business, that share is actively traded, day to day on world share markets. And so, the value of that asset on any given day, in fact any minute of the day, can go up or down quite dramatically.

Anne: And highly liquid, so you can get your money at any given time.

Brian: Absolutely, if you go online or get on the phone and I can basically sell my shares in BHP or Commonwealth Bank. Literally within days.

Anne: Okay and so an unlisted asset means what?

Brian: Well it means I can’t actually get on the phone or get online and actually sell my equity in an unlisted asset immediately. I’m effectively locking money up for a period of time. So, in other words, the value of these assets is not determined day to day in world markets. The value these assets is priced periodically by independent valuers.

Anne: Okay, so if that's still a bit of investment gobbledy-goop.

Brian: Oh, thanks for that.

Anne: Let's break it down even more. So, bring it to life. Like what does that mean? What are you talking about?

Brian: That’s a very good question. It's interesting, I think a lot of people, when they look at their super fund, apart from saying I think there's some shares in there, I think that a lot of people actually don't really have a lot of understanding about where their money is invested. When we talk about unlisted assets, we're talking about primarily unlisted property assets, so direct property. We’re talking about infrastructure assets, such as airports and ports for example, or what we call private equity. So, in other words, we’re buying shares in businesses, but those shares are not traded day to day, on world markets, they’re unlisted businesses.

Anne: It’s still too abstract. How would I describe it to my mom?

Brian: Yeah absolutely, in words, I’m buying equity. I’m taking a stake in an asset say like Brisbane Airport, or if I look overseas, I'm taking a stake in the electricity distribution network in Finland, or I’m taking a stake in the gas distribution network in the Czech Republic. So, in other words, whenever anybody lands or takes off from Brisbane Airport, anyone in Finland turns on a light switch, anyone in the Czech Republic who turns on their gas stove, we will make money.

Anne: So, is this just something that Sunsuper does or do other super funds do it? How does that work?

Brian: Yeah look, a lot of the profit for member super funds and, in fact, I’d probably say most of the profit from member super funds in Australia, and indeed a lot of the big sovereign wealth funds and pension funds overseas, do invest a substantial part of their portfolio in unlisted assets. So, it’s not just a Sunsuper thing. Why we are able to do it, is a more interesting question perhaps. We're able to do it because our members are overwhelmingly young. They’re overwhelmingly investing in compulsory superannuation, which means that our members are not going to be drawing down on the fund, on average, anytime soon.Which means we can afford to worry less about day to day liquidity, than perhaps some of our competitors can.

Anne: So, what if you were describing it to some of our members or you know the listeners here today, what is the main big draw card about this asset class, the big why, behind why we do it? Why is it good for members?

Brian: Very, very simply – higher long-term returns. In particular, higher long-term real or after inflation returns, that are a smoother ride along the way.

Anne: So, does that mean when you say a smoother ride along the way, does that mean it doesn't follow what the stock market does? And that I lose less money? Is that what you're saying?

Brian: It means that the value of the assets we hold, by virtue of the fact that they not traded every minute of the day, it means the value doesn't move around dramatically, so you end up with the returns generated by Sunsuper or a similar profit from a member fund, being somewhat less volatile than a lot of other funds.

Anne: But the downside, risk side of it, does it help with managing that downside risk?

Brian: It does somewhat, yes. Because what you tend to find is during a major share market down turn, especially if that share market downturn is really prolonged, eventually the value of your unlisted assets, is going to be affected by that. But, what we find is the jury major share market downturns, the value of unlisted assets, doesn't decline anywhere near as much as share prices do.

Anne: So, what do you, as the investment managers, worry about? What can go wrong? Because it sounds just fantastic, but nothing's ever perfect. So, what do you worry about? What should we be looking out for to protect our members money?

Brian: Key things: One, is doing a due diligence on these assets. So, we make sure that we have really, really good managers, that are managing these assets day to day. Two, that we do our own due diligence, before we put a single dollar of members money into an asset. We also make sure that we and never, never exposed heavily to one single asset. We'd make sure that we build very well diversified portfolios of these assets and let me give you an example. One of our major assets, if not our largest single asset, is our shareholding in Brisbane Airport. That's a very, very major investment and a very major airport. The value of our equity in Brisbane Airport accounts for less than one percent of the fund. So we're talking about investing in literally a couple of dozen different infrastructure assets around the world. We're talking about in investing in perhaps about a hundred to two hundred individual property assets around the world. And literally thousands of unlisted businesses as part of our private equity folio.

Anne: So, what I'm fascinated by and I guess this is my last question, is how does a fund, look Sunsuper is an iconic Queensland brand, it's for a national fund, one point three million members around the country and all of that, and yes for a big player in Australia. However, how in earth does a fund like ours, get to buy the gas that goes into the Czech Republic, or turning on the electricity network in Finland? How do they even know we have the money to invest in these types of things?

Brian: That’s a really good question. It means that you need to burn a lot of shoe leather and you need to spend a lot of time in international markets talking to the key players and making sure you have really good investment contacts all around the world. So that when these opportunities do arise, you’re well placed to capitalise on them. We also have an advantage, in the sense that we can move quite quickly. The way Sunsuper is governed, a good deal of day to day investment responsibility, is delegated to the investment team, the internal team of professional investors. Which means that if an investment opportunity comes up to invest in a particular infrastructure asset, we can move quickly, and we can actually make decisions, perhaps more efficiently and faster than many of our competitors. That makes us a reliable investment partner for a range of global investment houses.

Anne: So Brian, before we finish up, for our listeners, one final tip around this particular asset class. How would members know how to access this investment class? How to find out whether their money is invested in unlisted assets?

Brian: That's a good question, Anne. If you look at Sunsuper’s range of diversified investment options, the growth option, the balanced option, retirement and conservative option, all of those options have an allocation to unlisted assets. I should also point out though, it’s important to realise that we're not talking about having eighty or ninety percent of the fund invested in these assets. We're talking about a third of the fund actually invested in alternative assets and unlisted assets in particular. We do worry about liquidity, we need to make sure we have the lion’s share of the portfolio invested in liquid assets. So all of our diversified options have exposure to unlisted assets. For those members that want a particular discrete exposure, we also offer diversified alternatives option and we also offer a property option. That diversified alternatives option, it's been on the market now for a few months. That consists of a small amount of cash, but it also consists of our hedge fund alternative investment strategies and our infrastructure and private equity strategy. Now, our property option includes an allocation to liquid property or listed property, but it also includes a substantial allocation to Sunsuper’s unlisted property portfolio. So our members can access it via our diversified options, but they can also access our diversified alternatives directly.

Anne: So, I guess the advice is, talk to your super fund. If you’re a Sunsuper member call us. If you're a member of another profit for member super fund and you're really interested in this asset class, have a look online, give them a call. This incredibly fascinating asset class, I really love it and I've loved listening to you speak about it today Brian. Thanks so much.

Brian: Thanks Anne for you time.

Voice-over: This has been The New School of Super. For information and inspiration to help you plan your future, manage you 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 the schoolofsuper.com, for it to feature in one The New School of Super podcasts.

Episode 2

Understand your investment options

21 July 2018

In this episode, Sunsuper’s Dream Team explains the broad range of investment options Sunsuper offers members, including diversified and single asset class, and active versus passive options, and what you should consider in choosing the right investment strategy for you.

Voice-over: 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 Retail Distribution, Anne Fuchs.

Anne: Hello and thanks for listening. Welcome to the New School of Super, Sunsuper’s podcast covering all things investment, money, superannuation and most importantly, making sure you reach your retirement dreams. My name's Anne Fuchs and I head up advice at Sunsuper for our 1.3 million members and we're all about making sure our members make the most of what they have, so that they can live the life that they want. Now sitting opposite me is a pretty special man, who's been around a very long time, though he does not look it. He knows everything about investment markets and the economy, he's our Chief Economist and his name is Brian Parker. Brian, nice to see you today.

Brian: Thanks Anne and what a lovely introduction.

Anne: So, we’re here to talk today, about all things investing and what really is the right investment for you. There's so many products out there, how do you decide which one is the right one for you? So Brian, before we get started and you share your pearls of wisdom, what do those people upstairs need us to say, those compliance people upstairs.

Brian: Anne, they need us to inform the listeners, that this is general information only, it doesn't represent personal financial advice, it doesn't take into account your particular personal circumstances. But if something we say sparks an interest, it sparks something in you, which says I need to make change, we strongly recommend that you seek personal financial advice.

Anne: And great financial advice, wonderful financial advice, can profoundly change lives for the better.

Brian: Indeed.

Anne: So, if you're sitting here today, as a listener and wondering how on earth do you possibly pick the right investments for you, you’re listening to the right session, because we’re going to be unpacking all the different options available within superfund world and I think my one observation before we get started, Brian, is the one thing I've learnt, after twenty years of being in superannuation financial advice, is that members always remember if you've lost them money. They never remember as much if you've made some money. So really this is the most important decision they make around their retirement savings. So, I think a really good place to start, is single class assets versus diversified options, and that is for the ordinary member, I think a bit of jargon. We need to break this down, diversified single asset. What does that mean Brian?

Brian: Okay, a diversified option basically means that if I invest in a diversified option, I’m letting my super fund basically spread my assets across a range of different asset classes. Whether it be shares, cash, or bonds, or property, or infrastructure. Whatever, but it's basically letting the superfund do the work. They spread the assets across a diversified portfolio of assets for me, with a single asset class option, I’m making a decision to put my money into one particular asset class. Be it shares or bonds, or whatever. So, that's really the difference. It’s whether, I suppose the best way to summarise it is, do I want the superfund to do the work, or do I want to do the work?

Anne: So, if I can ask a silly question, why is diversification important? I mean Australia has a great economy, why would I not just put all of my money in Australia shares? You know, there’s a lot of craziness overseas, geopolitical risk. You know, maybe it’s safer just to put it all in Australia?

Brian: It’s really a good question and you think about the way Australian investors behave, we tend to actually favour the home front, a lot more than counterparts overseas. We tend to have what investors call a home bias and that's kind of unusual, given that we are one of the smaller economies of the world. You know, the Australian economy is only a few percent of global GDP. Our share market is only a few percent of global market value if you like. So, most of the investment opportunities, most of the universe of investment opportunities are beyond our shores. You raise diversification, there's an old adage that you shouldn’t put all your eggs in one basket and that's really what it comes down to. It’s that yeah, the Australian economic story is relatively solid, but I still don't want to put all my eggs into a basket labelled Australia. I want to try and pick the best universe of investment opportunities I can find, which means inevitably, I’m going to have to have some global exposure.

Anne: So why would somebody pick a diversified option, so I’m guessing that's a balanced option?

Brian: Well it could be a balanced option in other words, but there's a range of different diversified options that super funds offer. In the case of Sunsuper, we offer a conservative option which is, again, designed for more cautious investors. We offer our retirement, a balanced and then a growth option for those investors that are prepared to take more risks in search of higher returns.

Anne: So what does that mean it does that mean in terms of the exposure to these riskier assets of the further you go up the spectrum from conservative to growth the more exposed you are, and if you're doing that what's the stuff you need to be worried about? What should you be thinking about if you going to make that decision?

Brian: That’s a really good point, and in fact it's a crucial point. I call it the sleep at night test. If you're doing something with money, anything at all, whether it's your super, your mortgage, any other investments you’re making. If you're doing something with money which is causing you to lose more than about five minutes of sleep at night, it means you’re probably taking too much risk and you’re doing the wrong thing. Sleeping at night can never be overrated. Why would I want to take high risk? I take high risks because I’m prepared to do that because I believe I’ll get higher long term returns. If, in search of those higher returns, I’m losing sleep at night, well something's got to give. Half the battle with the deciding where to put your money is working out what kind of investor you really are. What investment returns do you need in order to achieve your retirement dreams. What risk are you prepared to take in search of those dreams. And understand that that there's often a trade off.

Anne: So, the sophisticated investor would have heard of this term of alpha, which is the you know out performance, and there's a lot of talk around, certainly in financial advice circles, about just how expensive it is to invest these days with fees and everything else and try to find that great return that you were talking about and where is the alpha and there's a lot of financial advisors out there that are a big believer in passive investments because it's all about keeping fees low and that's where they believe they can find alpha. But Brian, you’re the Chief Economist, what's your expert opinion on this concept of passive investing versus active investing.

Brian: Look, let’s start by defining some terms, and you raised the point about active versus passive investing. If I'm a passive investor, what I’m essentially trying to do is to replicate the performance of a particular market index or benchmark. So let's take Australian shares as an example. Let's say I just don't believe that there are people out there who can do better than the market, so I'm going to give my money to an investment manager who’ll basically give me a return which replicates the return of say these S&P ASX 300 index, and they'll do that for a very small fee. On the other hand, what if I believe there are managers out there who are genuinely good at what they do, who can actually add value over and above the performance of the index. Now I know that's going to cost more but if I could be convinced, if I could be really confident that those managers can deliver enough outperformance to justify their fee, then I’ll invest in an active manager.

Anne: Ok, and that out performance is that alpha that I was mentioning earlier.

Brian: Correct, exactly. So if you deliver alpha you deliver a certain amount of outperformance over and above a particular market benchmark.

Anne: So we've spoken about passive, active, single asset classes, diversified – it's pretty overwhelming. How would you possibly begin to decide what is the right option for you.

Brian: Look, that's a really good question and it is hard. At Sunsuper, for example, we offer twenty different investment options. We’ve deliberately kept the size of our investment menu relatively small. What we found from a lot of the academic literature on what we call behavioural finance, is that if you give people too much choice people just find it overwhelming so what we're trying to do is provide our members with a nice range of options which will enable them to build a diversified strategy that will suit their particular needs, and what we also do is make sure that we provide our members with a range of both active options but also passive options so that they can choose whether their prepared to pay a higher fee in search of higher returns or not. There are certain asset classes also where we don't offer an active option and that's really come down to two things. One is demand and the other is our view of value for money. If we have an asset class where we don't believe that investment managers can deliver reliable outperformance to justify their fee, then we think members are best going passive and so we only offer a passive option in those particular asset classes.

Anne: So I still think that it's incredibly confusing. As much as you're an extraordinary communicator, Brian, I still think it's incredibly confusing and for the ordinary person they think it's too hard, I'm just going to put my superannuation statement in the bin every year that it comes in because I would rather stick my fingers in my ears, close my eyes and sing ‘la la la’. So how do we make sure as investment professionals we’re helping those members.

Brian: Well that's a really good question and if you think about it most of our members, and I suspect most of pretty much every super fund’s members are what we call default members, that they have chosen or have just literally defaulted into their particular super funds My Super default option, and that means it's really really important that your super fund constructs a default option that works for the majority of those members. And so at Sunsuper we've gone for what we call Sunsuper for life, it's what we call a lifecycle option and we think it's quite unique in the Australian market. Up until the age of 55 investors in a lifecycle option will basically be invested in our balanced option, in other words they will have about 70% of their portfolio invested in what we call growth assets, and that means somewhat higher risk but also a higher returning assets such as shares. At the age of 55, on the day of the 55th birthday the system starts to crank into action. Over the next ten years every month we will very very gradually reduce our members’ exposure to growth assets such as shares, and we’ll do it in 120 discrete monthly steps so that by the time our member in the default option reaches the age of 65 they'll no longer be invested in balance. They won't be anywhere near as exposed to share markets, they’ll actually have 10% of the portfolio in cash and they'll have the other 90% of the portfolio invested in what we call that our retirement option. What is averages out to is that you'll end up with about 45% of your portfolio in growth assets. Why do we do this? We do this partly because we can. We have the administration systems to allow us to do this for members but also and more importantly we want to make sure that our members are not going to be as exposed to a major market downturn either when they’re about to retire or just after they retire. Because if that happens and you're heavily exposed to the stock market, that can really put a serious dent in your retirement plan.

Anne: Certainly I know Brian, I couldn't agree more. In 2008, you know, a number of people that were too heavily exposed to stock markets and we're planning on retiring and then all of a sudden 40% of their portfolio vanished overnight.

Brian: Exactly, and they drawing down on that portfolio, they’re drawing down on a pie that is shrinking.

Anne: Well they had to work longer and then that causes other impacts, you know, whatever else, and I think this is such a great feature for those people that choose just to leave it to the investment professionals. So Brian, we've had a really good natter today haven’t we?

Brian: We indeed, we always do, Anne.

Anne: We do indeed. Well thanks again. We'll see you next time.

Brian: Thanks Anne.

Voice-over: This has been The New School of Super. For information and inspiration to help you plan your future, manage you 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 the schoolofsuper.com, for it to feature in one The New School of Super podcasts.

Episode 3

The world economic wrap

28 July 2018

We’re living in strange and interesting times, but what does it all mean for you and your super? Sunsuper’s Dream Team takes a look at economic growth since the GFC, how current geo-political and other events are shaping the world economy, and what it all might mean for your super investment.

Voice-over: 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 Retail Distribution, Anne Fuchs.

Anne: Hello and thanks for listening. Welcome to the New School of Super – Sunsuper’s podcast covering all things investment markets, money, and you know that thing that helps you achieve your retirement dreams – superannuation. My name's Anne Fuchs and I head up financial advice at Sunsuper and sitting opposite me is the Chief Economist of Sunsuper who knows everything when it comes to the economy and investments. Brian Parker, it's so wonderful to see you today.

Brian: Thanks Anne, good to be here.

Anne: So Brian, we’re going to be looking at the world and the economy and how it impacts members’ money, but before we start having a bit of a natter about that, the people in compliance upstairs want us to say something don’t they?

Brian: Yes, they do, Anne. Every time. This is just general advice – but if what we say prompts you to think about taking some action with the way you’re investing money either within your super or outside of it, then please seek personal advice.

Anne: Great financial advice can change things for the better. That’s my little infomercial in this podcast today. So, Brian, we’re living through extraordinary times, I think about 2008 and they were dark, dark, days but it seems like a lifetime ago and we’ve experienced this extraordinary growth. What’s happened?

Brian: It’s a really good question. And I remember 2008 and early 2009 well, and back in early 2009, let’s make no mistake about this. We really were standing on the edge of financial abyss. We really were on the edge of Great Depression part 2. The world financial system was going into meltdown and policy makers at that point seemed to be clueless. However, they did actually take steps which not just brought us one or two steps back from the abyss, but many steps back from the abyss. You know, just when you think things couldn’t get any worse, they don’t, they actually get better. And it’s worth remembering that if you look at the history of these things, every crisis, every downturn, every bare market, every recession bar none comes to an end without exception. At the end of the day, life and the economy and business goes on – the only uncertainty is the timing. And clearly since the end of that time, we have seen some very, very strong returns from world share markets in particular and that’s really helped propel superannuation fund returns over the past 5 to 7 years.

Anne: So what have been the themes in terms of those bright pockets of growth, where I’ve got my superannuation statement and I’ve seen year upon year is growing and growing, what are the themes underlying that? What are the sectors, what are the countries? Where are those bright pockets?

Brian: Let’s talk more broadly. Back then, if you started your investment journey in February 2009, you were starting from a point where global share markets looked unambiguously cheap. Where there was so much bad news, not just in the headlines, but so much bad news factored into the price you paid for shares here in Australia and all around the world. And a lot of the future returns you generate from any asset you buy is really determined from how much you pay for it upfront. And if you overpay for an asset, any asset, the future returns are almost by definition going to be lousy. But if you buy cheap assets that deliver you a reasonable income then your future returns are probably going to be pretty good. and that was one of the overarching lessons, I think, in February 2009, that there was so much bad news factored into share prices already. In addition, a lot of the steps that policy makers took during 2008 and early 2009, both the world’s major central banks, but also governments, actually did bare fruit. They did actually help drive a recovery in the world economy. That recovery helped drive a recovery in things like employment and corporate profits and share prices, and that really helped underpin very good returns over the last 5 to 7 years.

Anne: The growth in particular, if I can ping you, and say looking at the emerging markets versus developed countries, the European Union, the USA versus Brasil or China, how has that played out over the last 5 years and are you game enough to make a prediction about the next 5 years?

Brian: Look, a lot of what I’m about to say, it really does depend on where markets have gotten to today. If I look at valuations, if I look at what I am being asked to pay to buy assets in a range of markets, in particular to buy shares in major world share markets, there are very few bargains to be had. Back in early 2009, there were plenty of bargains to be had. You know, we were in crisis and so there were plenty of good quality assets, good quality businesses trading at very, very cheap prices. And so, when prices return to what you might call fair value, and in many cases beyond fair value, you made a great return. Today, if I was starting from scratch and putting money to work today, I’d look around and say well, where are the bargains? And there are not many out there. Because past returns have been so strong so it’s very, very hard to buy quality assets at a genuinely cheap price. Now what does that mean? It means that overall, future returns are probably going to be lower than the returns we’ve seen from share markets in general and super funds in particular in the last 5 to 7 years. And you mentioned emerging markets.

Anne: I was going to say I wasn’t letting you run away

Brian: You thought I was going to avoid that, no. Look, emerging markets are interesting. If I look at the rate of growth in emerging markets as a group, so these are markets in Asia, in Latin America, in Eastern Europe, and parts of Africa and the Middle East, generally speaking these economies have grown faster than economies in the developed world. And that’s what you’d expect to see because they have more upside, I mean, they are developing, so you’d expect them to grow faster. But another lesson we’ve learned from a very long span of history is that just because an economy is doing well does not mean that the share markets will do well. There’s not a lot of linkage between the performance of an economy perse, and the performance of their share market. Now, for most of the last 6 or 7 years emerging share markets have done alright, but they’ve tended to actually lag the performance of the major developed markets, in particular the United States. That’s changed in the last 12 months. In the last 12 months, emerging share markets have performed very, very strongly. In fact, if we were recording this podcast about a year to a year and a half ago, and if you asked me, where do you see value, where do you see opportunities, I would say look, you know what, emerging share markets look to be one of the few places that offer real value. In other words, where I could buy quality assets at cheap prices. The trouble is, that was about 30% ago, because that’s the kind of returns we’ve seen from these markets. So, even there it’s hard to find value.

Anne: So Brian, you said that there might be some grey clouds out there on the horizon. As a super fund, that’s incredibly important that we manage that, worry about that, and protect our members from those grey clouds. What are we doing?

Brian: Look, that’s a really good question. Let me rephrase your question a little bit if I may.

Anne: Yes.

Brian: Where the hell are returns going to come from? If you look at our product disclosure statements, you know, we tell our members that over the longer term we expect to deliver returns that are CPI plus 3 and a half or CPI plus 4 depending on the particular investment option. What assets are going to deliver those sort of returns, or at least, where can we be most confident of achieving the kind of returns that our members need to fulfil their retirement dreams.

Anne: But also where are we avoiding as well.

Brian: Well partly that too. Firstly, where are we avoiding? We’re tending to avoid, at the moment, sovereign government bonds in particular because if you look at the level of interest rates around the world, you look at the level of bond yields around the world. In other words, future returns from fixed income are lively to be quite low. So we actually tend to have a lower allocation to those assets to many of our competitors. What are we favouring? I mean, I suppose if I go back to my question before, where can we be most confident of generating the return members need? Look, there’s some chance the share markets will still do ok. I’m not saying that the share markets are going to fall into a heap tomorrow, I’m simply saying that future returns are going to be lower, but I need to do what I can and Sunsuper needs to do what it can to maximise the chances our members have of living their retirement dreams – and that means, where can we get the most reliable returns? And the short answer is, it’s in the alternative asset space. It’s investing outside of traditional assets like shares, and by that I mean carefully selected hedge funds or absolute care orientated strategies, but also unlisted asserts. Things like direct property, infrastructure, private equity. We’re still seeing opportunities coming across the desk every week. We’re still seeing deal flow come into our office where we do the math and say yes, this investment is capable of delivering more than adequate returns to justify the risks involved and justify the costs incurred. And more importantly the returns that members actually need to meet their objectives, but I must say that even the returns from those assets classes in the clast 5 to 7 years have been very, very strong, which means it’s very hard to find bargains even in that space. So, future returns there, while still very very attractive, especially when I compare it to the returns from traditional markets like shares. But, future returns from there have also come down. If I looked at say, an infrastructure deal or a property deal 5 years ago and if I did the math it might have said I can get 15% per annum out of this. Well if I looked at exactly the same deal today I might do the math and come up with a return of 9%. Now, I’ll still take 9% every day of the week, it’s just that 9% is not 15. Even in that space we’ve seen returns come down because a lot of money has forced up the price of these assets.

Anne: But I think that there’s this other thing that we haven’t spoken about, and I know we don’t have much time Brian, but I think we’ve got to say the word. It starts with ‘T’.

Brian: And it ends in ‘rump’.

Anne: Yes, Trump. But there are a lot of investors, where it’s just the sheer…

Brian: The unpredictability.

Anne: Yeah, unpredictability and one minute he’s meeting with Mr rocket man, and then he’s not. And it makes people very nervous. And I wondered what is Sunsuper doing to manage that risk?

Brian: Let me take it more broadly. Geo-political risk, if I can use that kind of term, is elevated and it’s going to stay elevated. Geo-political developments are going to remain a source of volatility for markets. But if you think about a longer span of history, geo-politics has always been a source of uncertainty for markets. Trump is just the latest manifestation of it. But I think it’s important to realise that regardless of what happens in the Whitehouse, regardless of what happens in North Korea, or in Italy or in the Middles East, it’s a very uncertain and volatile world. There’s lots of awful stuff happening out there, but I have to say there almost always is. And yet, life and business and the economy goes on. From Sunsuper’s perspective we take the view that, yes, this is a source of volatility, but regardless of that, people are still going to land and take off at Brisbane Airport and we will make money. A whole range of companies listed on the stock market will still make money by meeting our everyday needs as consumers and we will benefit from them making money. People in Finland will still need to turn on an electricity switch to light their homes and we will make money. People will still, in the Czech Republic need to use gas to cook their evening meal on their stove. It’s about investing in a wide range of assets which generate income that we can pass on to members. That doesn’t change regardless of who is in the Whitehouse.

Anne: Ok, so Brian. Final question before we wrap up. China and Australia and the impact China has on our economy, and the impact that China as a country has on our portfolio of investments. Any thoughts? Any advice for our members? Because I know certainly lots of people worry about that.

Brian: Look I think that the worry is real. I mean, China will remain a source of uncertainty and China’s emergence as an economy has been an unambiguous positive for the Australian economy, for the world economy, for global trade and for the hundreds of millions of Chinese that have been lifted out of poverty. But that doesn’t mean that China is not going to be a source of uncertainty, both geo-political and economic. It’s fair to say that the Chinese authorities, certainly in the region, have not been behaving terribly well. And I don’t think that’s a terribly controversial view. And so China will remain a source of uncertainty, but it’s just one of many sources of uncertainty. Now what do you do about it as an investor? It means that an investor, I certainly don’t want to put all my eggs into one basket labelled ‘China’ and I certainly don’t want to put all my eggs into a basket labelled ‘Australia’, because the Australian market and the Australian economy, yes, is quite heavily dependent on the performance of China among other things. I just want to make sure that our best defence against an uncertain world is to build portfolios that are as widely diversified as possible, and that’s exactly what we do.

Anne: Brian, I think for our listeners today what we’ve spoken about, it’s so important that maybe they overlay that with a former podcast we’ve done where we spoke about all the investment options out there, and if you look at the political landscape, the economic landscape and then look at the options that Sunsuper has available, to consider what is the right investment for you. We’ve got a great team of people here to help. You can jump online, visit us at Sunsuper.com.au/newschoolofsuper. There’s a wealth of information to help you make the right decisions about where your money’s invested, make informed decisions after listening to Brian, assessing all those things he’s spoken about, you have to remember, this is your single biggest asset. Think of it like your home, think about what Brian said. Come and have a chat to us if you need to. Brian, thank you so much for talking today. Always a pleasure.

Brian: Thanks very much Anne.

Voice-over: This has been The New School of Super. For information and inspiration to help you plan your future, manage you 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 the schoolofsuper.com, for it to feature in one The New School of Super podcasts.

Product issued by Sunsuper Pty Ltd (ABN 88 010 720 840, AFSL No. 228975). This podcast contains general advice only, consider the Product Disclosure Statement before making a decision. Call 13 11 84 or visit sunsuper.com.au for a copy.

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