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the new school of super podcast series

Episode 24

Financial market performance – looking back on the last 10 years and our expectations for the next 10

December 2019

Over the last decade, super fund members have enjoyed especially strong returns. But are the good times over? Sunsuper's Chief Economist Brian Parker and Head of Advice and Retirement Anne Fuchs define "real returns", explain Sunsuper's future return expectations, and break down why – in the words of Barack Obama – "the only thing that's the end of the world ... is the end of the world".

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.

Anne Fuchs: Hello and thanks for listening. Welcome to the New School of Super - Sunsuper's podcast series covering investment markets, money matters, your superannuation and making sure you live your retirement dreams. The fabulous Brian Parker is back in the house.

Brian Parker: Anne, it's good to be here as always.

Anne Fuchs: Chief economists of Sunsuper, who's always just amazing us with stories and his intellect and knowledge around money markets and the like. Yes, I know I'm really laying it on thick today, Brian. I couldn't help it sorry. And for those listeners who don't know me, my name's Anne Fuchs, and I head up advice and retirement here at Sunsuper, and I love coming to work, as does my team, because we get to hear all of our members retirement dreams and help them make them come to life. So, Brian, what are we talking about today? Before you do the necessary general advice warning.

Brian Parker: I should do that first shouldn't I?

Anne Fuchs: Yeah, you probably should.

Brian Parker: Keep the compliance people happy. Yes, thank you Anne. It's great to be here again. And thanks everybody for listening in. As always, before we start, I need to let you know that what we're going to talk about today is general information only. Any advice doesn't take into account your personal situation. You should consider your circumstances and think about getting personal advice before acting on anything we discussed today. You can also get a copy of the product disclosure statement from our website or by calling us on 13 11 84.

Anne Fuchs: Beautiful. Brian, I think we've had a year of- we were doing lots of different member events and seminars and the like, and the one thing that came through loud and clear certainly, from my perspective, is that our members are worried about what does the future look like in terms of investment returns. They know that we're heading into uncertain times, and maybe the good times that we've known through the last couple of decades are over. That's what we're talking about today.

Brian Parker: Look, I think that's true. One of the things that it's important to bear in mind, is that we have had now over a decade since the worst- since the end of the GFC, since the end of the global financial crisis. And make no mistake, that global financial crisis was the worst financial crisis the world has seen really since the 1930's it was absolutely dire. But since then we have had over a decade of recovery, not just in the world economy but also in world financial markets, in particular sharemarkets. So in short, it's been a very, very good decade to be a superannuation fund investor and in particular been a very good decade to be an investor in higher risk or growth funds, because share markets in particular have been very, very kind.

Anne Fuchs: Are you able to take us through the concept, Brian, of when you talk about investment markets taking risk and return, this concept off real return and and inflation - these are things that are really important for our members to understand, when we're talking about what stock markets are doing and how it impacts their retirement savings.

Brian Parker: I think the most- if you pick up a product disclosure statement from Sunsuper or indeed from any major superfund, one of the most important lines in that document is when we describe the range of diversified investment options that we run. And again, a diversified option is just a portfolio that mixes a range of different asset classes, such as shares and bonds and cash and property, et cetera. And for each for each of those portfolios, with one of the things we describe is what is the real return objective, what return always seeking to achieve for our members over the coming decade? And that, at least for a balanced option, which is probably a largest single investment option, what sort of return do we expect to achieve over the coming decade? And we describe that return in terms of what sort of return will we achieve, or do we aim to achieve, after inflation, after a superannuation tax and after investment fees?

Anne Fuchs: So those three components.

Brian Parker: They are crucial.

Anne Fuchs: And that means that they're the real return?

Brian Parker: It's pretty much what ends up in your pocket. So that really determines what your nest egg is gonna look like 10 years down the track in terms of, you know, what would you be able to buy with it? It's a good way of thinking about what sort of standard of living am I gonna be able to enjoy in retirement. I'll look at what sort of real return I'm likely to get over the coming decade. And we don't put that out there lightly. When we actually put that return estimate in the document, that is not a decision that I make or my colleagues make. That is a Sunsuper board level decision and we change it infrequently and reluctantly, because we also treat it as a very powerful signalling tool. It is our best estimate of what sort of returns are achievable and sustainable over the coming decade. And it's basically the prime function of the investment team to meet and preferably exceed that objective.

Anne Fuchs: I think if I could just reiterate that point or if we can labor the point almost if I dare to; But certainly in challenging economic times there are these - again dare I say it shyster organisations that might pop up and promise these great investment returns. And they're not talking about what the fees are, the taxes, all of the inflation and the like and the assets that they're invested in and the risk that members take. If something looks too good to be true, it generally is.

Brian Parker: Correct, that's really, really important that anybody out there promising you a much higher return then you can- than your superfund is aiming to deliver or a much higher return that your bank is offering you on, say, a longer dated term deposit. And if in the next breath they even imply that you didn't get those higher returns without taking any extra risk, then frankly, the people making those claims are either fools or charlatans or both.

Anne Fuchs: And you'll see them on A Current Affair. shortly.

Brian Parker: At some point yes, at some point you will see potentially their customers ending up looking mournful on A Current Affair. That's not a place you want to be as an investor.

Anne Fuchs: Yeah, this real return concept; so if you could just reiterate those three components that determine the real return, Brian.

Brian Parker: Absolutely. It's the rate of inflation, so how fast the price is rising on an annual basis. It's the superannuation tax that your superfund pays on your behalf. And it's the investment fees that we charge to actually invest your money.

Anne Fuchs: Thank you. And so you spoke before Brian, about our trustee board that sets the level of risk they're prepared for the investment team to take and what return they want you to achieve for our members. And that we have- the board have changed the expectations for the coming 5 to 10 years around what markets are going to do. Are you able to explain this to our listeners?

Brian Parker: I am. Let me go back a little bit into history though, if I was leaving school, leaving University in 2009. And as part of that, I was starting my employment journey, but it was also starting my superannuation journey, and I picked up a product disclosure statement and I looked at the return objective, what would I have seen? Well, just by way of example for the Sunsuper Balanced option, we would have told our members back then that we could deliver - after fees, after inflation, and after tax - a real return of 4%. So 4% in excess of inflation. Now, over the subsequent decade, what sort of returns were actually achieved? And the answer is a lot higher than that. In fact, just the typical superfund delivered returns much higher than that. Sunsuper delivered returns that were a little bit higher again, which is pleasing. But the bottom line is that the real returns have been much, much higher, than that More like 7% per annum above inflation, not 4% above inflation. So it's been a very strong period. And why was that the case? Because 2009 ended up being a very good time to start your investment journey. We were at the tail end, we were just starting to recover from the worst of the GFC. So markets were still depressed, assets were cheap. You could buy cheap assets around that time, and the best way to deliver very strong returns from your assets over the long term is to pay a low price for them. If you overpaid for assets, you tend to get lower future returns. So 2009 was a good place to start. Strolling forward 10 years, the returns have been brilliant. Well, that was then. But what about now? Well, now, if you start your investment journey and pick up a product disclosure statement, we've marked that return down. We now think instead of 4% or so above inflation, we think the balanced options should do about three and 1/2 percent above inflation and again after fees and after superannuation tax. And the reason we say that, it's not necessarily us making market predictions. What we're doing is saying, well, look - where do returns ultimately come from? Returns ultimately come from the economy. So think about the economy is a giant pie. If the pie is going to be growing at a slower rate, our share of the pie is also going to be growing at a slower rate. And over the next decade, we think the world economy from which returns come from is not gonna be growing at the kind of rate we've seen in the last 10 to 20 years. And a big part of that is, the world is seeing- across the globe we're seeing populations age. We're seeing the rate of growth in the labor force - in other words, the people who actually produce the stuff - the rate of growth in the labor force is likely to be substantially lower. And even in countries like Japan and China, for example, the size of the labor force is actually likely to be shrinking as the population continues to age. So slower growth in the economy to us means lower investment returns. And that's why we've reduced that objective.

Anne Fuchs: And certainly in more uncertain times, if any of our listeners, we've obviously got looking into, I guess in a global sense, some really extraordinary things happening overseas and in the UK and the like, and which our listeners, if you're interested in that, can listen to some of our other episodes on the New School of Super. But does that also have an impact too - these uncertain times, from a geo political perspective on investors and the exuberance with which they approach investing?

Brian Parker: I think it is. It's going to be an ongoing source of volatility, and an ongoing source of uncertainty for investors. But let's bear in mind, over any 10 year period, there are going to be events that will shock the system. That will cause members a lot of concern. You know, we've gone here in Australia 28-29 years without a recession. At some point, will we have a recession here? Yes, we will. But the important thing to bear in mind, if you are a long term investor and you're thinking 10, 20, 30 years ahead depending on where you are in your life, you know, every crisis, every bare market, every major downturn, every recession comes to an end bar none. In the words of Barack Obama, after Donald Trump was elected, you know, the only thing that's the end of the world is the end of the world. Despite all the sort of crises and uncertainties that occur, you know, life and business and the economy goes on. And a whole bunch of businesses and a whole bunch of assets, both here in Australia and around the world will still be in operation and will still be meeting the needs that we all have is consumers, and they'll make a profit by doing it.

Anne Fuchs: However, I think it's important to and I reflect on - we were in Sydney or Melbourne? I can't think. At one of our member seminars, Brian?

Brian Parker: Sydney had the harbour. Is that it?

Anne Fuchs: Ha ha ha. That's all it's got going for it. No, sorry to our Sydney listeners, I'm joking. I love Sydney. Great town. That a member was talking about their concern about eating into their capital into retirement with these lower growth expectations. They're worried about not leaving an inheritance of sort of a big pile of money for their children. And you spoke really plainly about that particular matter Brian. Do you want to do that for our listeners?

Brian Parker: This is important to bear in mind. Now for large chunks of the- if I think about the last 20 years or so, yes, we've had, you know, we've had downturns and we've had crises. But generally speaking, it's been a very good time to be an investor, that overall investment returns have been quite solid and especially over the last decade. So anyone who has retired from 2009 onwards and they retired with a certain sum of money, they've been drawing down a pension to live during retirement-

Anne Fuchs: And retain their capital.

Brian Parker: But it's almost like the portfolio has been a magic pudding; that they've drawn down on it and it hasn't moved or it might have even still gone up. But that's not normal. That simply reflects the fact that the markets have been very, very strong and very kind. That won't always be the case, and it's important to remember superannuation is not a strategy for estate planning. It's not designed to be a way of accumulating wealth that you hand on to your children and grandchildren. If you're fortunate enough to be in that position when you eventually pass away, well, that's a lucky outcome. It's not a feature of the system. It was never the aim. It's a retirement strategy, it's not an estate planning strategy.

Anne Fuchs: A retirement strategy to draw down on that capital.

Brian Parker: Exactly. When we talk about the phases of retirement planning, we talk about the accumulation phase when you're working and it's called a drawdown phase, and it's called drawdown for a reason. The capital is meant to help fund your retirement, and I think it's important for people to bear that in mind. The last decade, because of those strong returns, I worry the perhaps in some circles it's created an unrealistic view of what superannuation is meant to achieve.

Anne Fuchs: And I think to end, that's why quality financial advice is so very important here. So, for all of our listeners, if you have a financial adviser, make sure that you were checking in with them regularly, constantly checking on your financial situation is so important, just like doing regular exercises. No point just doing it once and in forgetting about it. And if you don't have a financial advisor, contacting us as a starting place is going to be a wonderful thing to help you achieve your retirement dreams. Thank you very much, Brian. It's been fun, as always.

Brian Parker: It's been a pleasure, see you next quarter.

Anne Fuchs: Yes, see you next quarter.

Outro: This has been the New School of Super. For information and inspiration to help you plan your future, manager 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.

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