Published: 17 Apr 2020
Energy Super has implemented investment strategies to allow members to maximise outcomes for their retirement needs. These strategies recognise that there will be market downturns (sometimes severe) during this time and have been designed to ride the inevitable ups and downs of investment markets.
Whilst the Balanced member option has experienced a negative return of around 5.6% over the year ending 31 March 2020, the annualised return over the ten years ending 31 March 2020 is around 6.5%^, illustrating that the investment strategies continue to meet or exceed the stated objectives of CPI + 3% over a rolling ten year time horizon. This has remained true even during recent times of extreme market stress.
One of the many benefits of membership of a superannuation fund like Energy Super is that members are provided with services that they may otherwise feel they are not best equipped to provide for themselves. Setting and implementing investment strategies is one example.
An insight into Energy Super’s investment strategies
Australian superannuation funds, in common with their overseas peers, are uniquely placed to be able to define and implement their investment strategies. Unlike saving for a deposit on a house or to buy a car, the investment horizon for superannuation fund members is over sixty years for members entering the work force today, and twenty years or more for members approaching retirement at age sixty five1. Energy Super recognises that the members’ investment needs extend not only up to the point of retirement, but also for many years after that. In the context of these time horizons, assets that are likely to produce higher returns, albeit with higher risk (growth assets), will form an important part of the investment strategy. Energy Super also provides access to long-term investments which aren’t ordinarily available to members such as airports, seaports, toll roads, prime offices and the like.
The table below illustrates a superannuation fund member’s investment time horizon. For example, members aged around 50 may be less than half-way through the total journey.
1 Australian Bureau of Statistics using World Health Organisation data
A fundamental decision when investing is the trade-off between risk and return. Asset classes that are expected to produce higher long-term returns have higher risks such as increased volatility, illiquidity or loss of the investment. Conversely, asset classes that carry lower risk are expected to produce lower returns. For example, cash investments have generated returns many times lower but more predictable than investments in equities. However, equity returns have exceeded cash by significant margins over the long horizon, the returns are more volatile and may produce negative returns (sometimes significant negative returns) over shorter periods of time.
Knowing that the time horizon for many of our members is decades and not months or years, Energy Super has implemented investment strategies focused on maximising long-term performance with options for those nearing or in retirement. A key component of these strategies is diversification, or blending higher return/higher risk assets with lower return/lower risk assets to produce an optimal balance of higher long-term returns whilst smoothing the effects of short-term market down turns. For members in pension phase, the investment profile would include a higher amount of lower risk assets to allow for a smoother return. Even though the exact cause of the current market shock could not have been foreseen, the Fund’s investment strategies have been designed to cater for such circumstances. Nobody knew when or why we would experience these circumstances, but everybody knew that at some time we would.
These strategies have carried members through the GFC, the ‘tech wreck’ of the late 1990s, the stock market crash of October 1987 and other market shocks. We know that there will be more market shocks, even though nobody knows when!
An insight into Energy Super’s investment strategies
There seems little doubt that markets have been behaving sometimes irrationally over recent times. Perhaps some insights into the reason why can be gained from John Maynard Keynes, arguably the greatest economist of the last century, who believed that people priced shares not based on what they thought their fundamental value was, but rather on what they thought everyone else thought their value was. Keynes’ view was that share prices are based more on speculation than fundamental facts about the companies people are investing in.
The founder of Vanguard investments (one of the world’s largest and most successful investment management companies), Jack Bogle, wrote:
"Investing is all about the long-term ownership of businesses. Over more than a century, the rising value of our corporate wealth – the cumulative accretion of dividend yields and earnings growth – resembles a gently upward-sloping line with, at least during the past 75 years, precious few significant aberrations."
The point Bogle is making is that investment in shares has always delivered long-term positive returns regardless of short-term (often irrational) aberrations.
Markets can be volatile during periods of uncertainty and it is during these times that investors can behave irrationally and do not adhere to their long-term strategy. Prices are not always based on company fundamentals but can frequently be based on rumour and speculation.
What to consider if you wish to change your investment strategy
Energy Super has developed its strategies based on the experience and advice of investment experts over an extensive period of time to guard our members’ best interests, particularly during times like this.
Naturally, some members may have specific circumstances which mean that their investment strategy may need to be reviewed and Energy Super is here to help you review your strategy. Energy Super’s role is to use our experience and expertise to guide our members through their superannuation investment lifetime.
Every member has the option to adopt their own investment strategy should they choose not to leave it in a default option. We have listed below some of the important considerations to bear in mind should you choose to formulate your own strategy, for example to move into lower volatility asset classes.
We have talked about this in a previous communication to members. In the short term, it is impossible to predict when markets are going to rise or fall or by how much and so it’s impossible to predict the best time to sell (or buy) investment assets on a regular basis. Shares are perhaps the most liquid investment assets in the market. Except for a number of small and illiquid companies, every parcel of shares offered for sale in the markets will attract those willing to buy those shares at a price.
Warren Buffett who is considered one of the most successful investors the world has seen was quoted in respect of how long you should hold onto your shares: “Our favourite holding period is forever.” His point is that whilst no one can accurately time when to enter or leave the market, when your investment horizon is long term, you can ride out the waves.
Historically, over any period of twelve months, investment markets have risen far more often than they have fallen and rises have often been at their steepest in the years following a market crash.
Paradoxically, the current circumstances may provide significant opportunities for Energy Super members as we have indicated in earlier communications. Another Warren Buffet quote is relevant here: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” In other words, the best time to buy is when others are rushing to sell.
Superannuation fund members invest on a regular basis through their Superannuation Guarantee contributions over a period of decades. Prices are reasonable by historical comparisons and may present an opportunity for members to add to their investment portfolios with their regular contributions at prices that are likely to appear very attractive over time. Remember that even for members approaching retirement, their investment time horizon may be in excess of twenty years.
In assessing the long-term impacts on financial markets of the Covid-19 outbreak, it is important to consider actions being taken by governments around the world to retain the infrastructure required to enable people to return to work when the crisis has ended. The economy is not broken but simply hibernating. Factories, office blocks, retail shopping centres, transport links, and of course an abundance of skilled workers will be available to resume activity as restrictions are eased.
In managing risk, it is imperative to define what is meant by ‘risk’ for each member.
If ‘risk’ to an individual member means not having enough money to finance the retirement lifestyle they seek, cash would historically have proven to be far more ’risky’ than shares because cash investments have historically yielded far less money for a member to rely on during their retirement over the long term. Of course, this may not be true over shorter time frames and a member’s specific investment time frame is a key consideration.
When a member reaches the point of retirement, relatively few would take their retirement savings out in cash, especially with the cash rate at its lowest rate ever. Leaving it in cash would not allow you to keep up with inflation. Many would stay invested in the market (usually in the form of an account-based pension) for the next twenty years or so. Regular withdrawals in the form of a pension would be made in very small amounts periodically over that period. The probability of the money running out in less than twenty years would be far higher if invested in cash rather than a degree of growth assets.
What can you do next?
For members who are unsure of what actions they should take, comfort can be taken in the knowledge that decisions regarding their investments are in the hands of a superannuation fund that provides options to manage the highs and lows of investment markets appropriate for your retirement needs.
Members who wish to adjust their investment options within the Fund are free to do so and we are happy to assist in any way we can.
If you don’t have a financial adviser, it might be a good idea to speak with one of our financial advisers provided through ESI Financial Services*. Depending on your needs, this may be at no cost to you. To arrange an appointment for a phone consultation, contact us.
* Energy Super has appointed ESI Financial Services Pty Ltd (ESIFS) (ABN 93 101 428 782) (AFSL 224952), a wholly owned entity of Energy Super, to provide financial advisory services to members.
^Investment returns are not guaranteed. Past performance is not a reliable indicator of future performance.
SelectingSuper Fund Quality Assessments review a super fund against a combination of industry best practice benchmarks and the wider market. Rainmaker Information Pty Ltd (ABN 86 095 610 996) is SelectingSuper’s parent company. SuperRatings Pty Ltd (ABN 95 100 192 283, AFSL 311880) is an independent superannuation assessment and superannuation ratings research organisation.
This article was prepared in April 2020 by Electricity Supply Industry Superannuation (Qld) Ltd (ABN 30 069 634 439) (AFSL 336567), the Trustee and Issuer of Energy Super (ABN 33 761 363 685), and may contain general financial advice which does not take into account your personal objectives, situations or needs. Before making a decision about Energy Super consider your financial requirements and read the Product Disclosure Statement, available at energysuper.com.au or by calling 1300 436 374.