Episode 1: Investment market update October 2022: Interest rates, investment markets and super

19 OCT, 2022

Investment market ups and downs are becoming the ‘new normal’ and continue to impact super fund performance, including that of Australian Retirement Trust.

Don’t miss Australian Retirement Trust’s Chief Economist Brian Parker in conversation with Anne Fuchs, Head of Advice, as Brian discusses what’s affected markets in the last quarter, how this has impacted super returns, and what it could mean for your super investment and retirement savings.

Hello everyone and welcome to the first ever Australian Retirement Trust Super Insider podcast. I love saying Super Insider. It sounds like we’re insiders Brian, it's pretty cool.

Absolutely, a change is good as a holiday. Great new title.

So, what is Super Insider? As you would expect from the title, it's the inside word and knowledge about all things super, investment markets, the economy and strategies to make sure you live your best possible retirement. Now, before we begin, I just want to acknowledge that Brian and I are sitting today in Turrbal and Yuggera country and pay respects to Elders past, present and emerging. So, who is Australian Retirement Trust for those that don't know? Back in February two, really high performing established funds with deep history and heritage, merged, QSuper and Sunsuper. And now we are Australian Retirement Trust. And there's so many exciting things that are going to come from this merger, like the Super Insider podcast series, Brian.

Absolutely.

Look, I'm Anne Fuchs for those that don't know me, I head up advice at the fund for our 2 million members. We've got over $200 billion of money invested. And so, it's really important, all those 2 million members with all of that money invested have access to personal financial advice so they can make the right decisions when they're having a life event or just generally thinking about what to do about their retirement savings, whether they're 28, 48, 58 or 68 or 78. There we go. There's some decades there. Now, with me is my partner in crime, the chief economist extraordinaire, otherwise known as, the Barrie Cassidy of Super Insiders. Brian Parker, who has quite a cult following. He brings the showbiz and celebrity into economics. Welcome, Brian.

Good to be with you Anne, or Catherine Murphy or whatever you'd prefer.

Yeah, Amy Remeikis, any of those things go with that. Okay, good. Excellent. I like her fashion and her makeup, so I'll go with that. I can try and emulate that. Now we've got to do something for the compliance people so we stay simpatico and friendly with them.

Absolutely. They sort of they hang out to hear this sort of, this, listening, waiting with bated breath to actually hear this. Look, before we start today, we need to let everybody know that what you're about to hear over the next, say, 15 to 20 minutes or so is general advice only. It doesn't take into account your personal circumstances or your personal situation. You should consider your own circumstances before you decide to act on anything you've heard on this podcast. And before you act, you should also seriously consider seeking out personal advice. You can get a copy of our product disclosure statement from our website. You can also call us on 13 11 84. If you're an Australian retirement Trust super savings member or if you have a QSuper account, you can call us on 1300 360 750.

Excellent. You did a marvellous job.

Thank you very much. I think I might have done this before.

We are, we are becoming old hands at this Brian. Now, I think there would be many a member and I know this to be true, actually, that they are calling us. They're calling us because they're worried. They're watching the news and they're seeing all sorts of things relating to potential recession, interest rates, cost of living, the next phase of COVID. What does that mean? The war in Ukraine. And so, I know many of our older members in particular are maybe losing some sleep over it. And the point of this podcast series is to really make information about your superannuation accessible and easy for you to access and consume whenever it suits you, whether you're on the train to work in the morning or sitting in bed at night, just sort of catching up on your iPad and maybe save you the phone call and getting some information so that you aren't losing any sleep. So, Brian, I don't know where on earth do we start? Do we start on the war in Ukraine? Where do you want to go?

Yeah, Anne I think when you look at times like this, it's important to try and not sugar-coat what's going on. There's no point in either of us turning up and doing a podcast and saying, don't worry, the world is a wonderful place because quite frankly, the world is not a wonderful place right now. There's a whole litany of things to worry about, obviously, the ongoing war in Ukraine, and nobody has any clarity as to how that is going to continue to evolve from here. But also, more fundamentally, you know, worries about interest rates, worries about cost of living pressures, worries about persistently high inflation. These are continuing to unsettle financial markets. And obviously, we've seen negative returns over the year to September. It's been a very, very challenging time for world markets. And it's certainly been a worrying time for our members. These inflation pressures in particular, the cost of living pressures are real and they're persistent and certainly they've lasted longer than many people thought. And that's really prompted the world's major central banks the US Federal Reserve, the European Central Bank and including our own Reserve Bank of Australia, to raise interest rates quite aggressively. And what are the, why are they doing that? They're doing that because they want to make sure that they want to try and bring inflation under control and they want to try and do that with as little economic damage as possible. That's the ideal. But whether they can achieve that remains really uncertain, and that's really what's troubling markets.

The Federal Treasurer has been talking about and using the term hard landing, maybe it'd be worthwhile just explaining what that means. And, and does that impact people’s superannuation accounts and how do we as a fund manage that risk for our members to protect their retirement savings?

Look, absolutely. It is a very challenging environment right now and I think Treasurer Chalmers is right to acknowledge that. If you look at the history of these things, whenever you see the world's major central banks raising rates aggressively, why are they doing that? They're doing that because they want to slow down demand, slow down the demand for goods and services. What that should do over time is bring inflation down. But the cost of that potentially is another global recession, and that's the risk that they're really running at this point. You know, I think are there still reasons for optimism that we may be able to avoid another global recession? I think there are reasons out there. I think there are reasons we can hang our hat on. But when you look around the world, Australia looks relatively well paced. The United States still seems to be in pretty good economic health, but the UK and Europe are in a world of pain, especially given the shock we're seeing in cost, you know, we talk about cost of living pressures here in Australia, the cost of living pressures courtesy of sharply higher energy prices in Europe, in the UK, courtesy of the war in Ukraine. I don't think you can go through a shock like that without actually having a serious economic downturn.

Did the impact of COVID and the disruption on supply chains just generally globally also feed into that cost of living? Or do you think it purely put it down to the war in Ukraine?

No, not at all. It's, you're absolutely right. It is very much the ongoing impacts of these supply chain difficulties. And you can look at a whole range of indicators over the last year or two, whether it's been shipping costs, commodity prices, how long it takes for suppliers to deliver stuff to you if you're a business, the backlog of orders you're trying to fill, these supply chain pressures facing businesses around the world have been very real. But here's the good news. A lot of those pressures have actually started to roll over. They've actually started to ease. So, you've seen commodity prices come off. You've seen shipping costs come down. You've seen even though we've seen some volatility in recent days, oil prices are still lower than they were in you know, at the level where they got to when the war in Ukraine started. So, oil prices are below their highs. So that what I would call that first wave of inflation, if you like, is sort of rolling over. So, we might actually get some better news on that front over the coming months. But longer term, though, I think we do need to get used to the idea that inflation rates and interest rates are going to be somewhat higher than we experienced in the decade leading up to COVID.

It's a double-edged sword, though, for retirees, isn't it? Because on one hand, you know, retirees have really, I guess, been perceived disadvantaged because of low interest rates. And they like they're in more secure, you know, secure assets and not as exposed to listed markets, etc., where the younger people were obviously the beneficiary of that. But now I think retirees, if you overlay that consideration with actually the cost of living, so whilst the interest rates have gone up, so has the cost of electricity prices and retirees are worrying about longevity risk and again, talking about portfolio construction and drawdown. What are your reflections or words of wisdom for our retired members?

I'm not sure about words of wisdom.

Come on, you always have word of wisdom.

There's a lot of, there's a lot to unpack there. But let's have a crack. Firstly, I think it's important to acknowledge that when you and it's something you touched on in the introduction as well is that we actually believe very much in financial advice and making sure, and I think financial advice actually helps you ensure that the investment strategy you have is right for you and it's right for your stage of life.

Because everyone's different.

Absolutely right. Your stage of life, your appetite for risk if you like, your tolerance for risk, your long term financial goals, what you want to do in retirement, etc.. And again, the answer to all these questions is different for each individual person. And but what it leads to really is this idea that I need to make sure that if I'm designing a long-term investment strategy as part of my retirement planning, I need to make sure that I'm taking enough risk to make sure I meet my financial goals longer term, but not so much risk that I'm losing sleep at night. Getting that balance right is really crucial. And right now I think while we have seen interest rates rise quite significantly, we have seen term deposit rates rise significantly. So what that means is the future returns you're going to get if you're heavily reliant on cash in term deposits for your investment returns, while the future returns are now actually better than they would have been, say, a year or two ago, quite obviously, because interest rates are going up, but that may not be enough. I think it's important to understand that we still need to have some exposure to what we would call growth assets, such as, you know, such as share markets, such as property markets, private equity markets, infrastructure, because these are the kind of assets that do give us higher returns over time. Now, they do come with more risk, especially at a time like now. But, you know, avoiding all risk means that, well, I may, I may not.

You’re creating another risk actually.

It means, okay, well, I'm not I'm not losing sleep at night because of markets, and that's great. But I'm actually losing sleep at night for another reason. I won't have enough of a return.

And you've got that longevity problem.

Absolutely.

It is probably worthwhile just reminding members about how the asset allocation in the portfolio sort of changes from as you in that leading into. Our default members in particular.

Absolutely. And this applies very much to Australia Retirement Trust, super savings members, but also to our QSuper members. If you are in one of the default options, the MySuper default options, rest assured that as you approach and then enter retirement, you've already had the risk in your portfolio reduced so you're not as exposed to share markets in particular as perhaps those members in imbalanced or more aggressive options, if you like. And that's important because in a way, the default option mechanism has done the work for you. It's in many ways it's done the job that a financial adviser would do with his or her clients, reducing risk gradually as that as people approach retirement. But again, you know, I think there's a few enduring messages here. Superannuation is the longest term asset that any of us will ever have.

Super is 30 years this year, it's three decades of it. Absolutely.

Huge pool of money.

Huge pool of money. And yet you now talking about, what, over $3 trillion in assets in superannuation.

And most of these people, I mean, certainly my family wouldn't have retired with money had it not been for superannuation.

That's entirely right.

It'll be the biggest, you know, besides your home, it's the biggest asset, financial asset you have.

Exactly. And I think that's an interesting point when you think about let's call it the test of the superannuation system, I think the system actually is actually performing remarkably well. The first real test will be well, actually people, I think I'm a tiny bit older than you Anne just quietly, but it's actually when people like me go to retire because I'll be one of the first people aged to, it's a frightening thought, just quietly. But when I go to retire in about, you know,

20 years’ time.

You know, if I'm allowed to retire. Yes. But in, say, eight or nine years’ time before I consider retiring, I will be the first sort of part of the first age cohort, if you like, that has had superannuation through their entire working life. So it's really, you know, let's see how people like me fare in retirement in a way as a as a way of seeing how it's the first real world test of the system is still to come. But I think the other key thing is that it's a long-term asset and part of being a long-term investor is this acknowledgment that, you know what, as I go through my life and I'm an investor, I'm going to go through multiple periods such as we've seen in the last year or so. I'm going to go through, will there be another in my working, if I'm let's say I was 22 today, that would be wonderful. But if I was 22 today, I'm looking ahead at 42, 43 years of working life over that 40 plus year period it's highly likely that I will go through another global pandemic. I will go through multiple, maybe seven, eight or nine or ten major share market downturns, which will cause me and others potential lots of grief. So over the course of your working life, major market downturns are inevitable. Recessions are inevitable. Crises are inevitable. They're part and parcel of long-term investing. But one thing we do know is that every crisis, every bear market, every recession, every downturn comes to an end bar none. There's always a light at the end of the tunnel and it's not a train, it's the end of the tunnel.

And I think yeah, that that you talk about the default, the power of it is that you can just rest at night knowing that we have a plan to make sure your money is safe and that there is a strategy to look after that risk. With all these things you know, those big events, scary events happening. And that's and so that when you do eventually have a life event, be it a health event, and ending your working life, divorce, whatever it is that causes you to pay attention about your super, you know, you know that it's in safe, it's in the best possible it can be.

It is absolutely in safe hands. At the end of the day, particularly for our default members, we are actively managing risk and actively managing to try and make sure that you get the best return relative to risk possible.

So, question. Final question for you, B.P. otherwise known as B.C. Barrie Cassidy, that was a joke, that is I mean, you started it, so is investment returns. You said it before. What should members expect? And I know that's a big that's a, we've got young members old members but just what should members expect in terms of future investment returns? Looking glass, handing it to handing it to you my friend.

Oh, look, absolutely. And let's make a few points there. Firstly, we do not design portfolios based on our ability or anybody else's ability to forecast where markets are going to be in the next six months, 12 months, etc.. I often say to people, you know, if I knew where the stock market was going to be in 6 to 12 months.

You’d be drinking your body weight in Chianti.

In my farmhouse in Tuscany.

Of course.

Exactly right. But I'm not. I'm here doing a podcast with you Anne.

And you won the lotto doing so.

I did, absolutely yes, but basically what we do do however, is build portfolios that are well-diversified, that are aiming to deliver the real return objectives that we communicate to members in our product disclosure statements. And as I said in the disclaimer, please get a hold of our product disclosure statement and have a read and have a look at the return objectives we put in there, because that's our prime function to deliver medium to long term returns for our members. Now that begs the question, what sort of returns do we put in there? We and let me put this in some perspective. Currently, if you're in a, and it varies from option to option, obviously, but if I'm invested, for example, in some sort of a balanced option over the next decade, we tell our members that we are aiming to achieve about three and a half per cent above inflation after fees, after superannuation tax, so a real net return of three and a half per cent. Now let's put this in some perspective. That really is the kind of long-term return that we think is achievable and sustainable over time. And that's and it's our job as an investment team, over 100 of us located in Sydney and in Brisbane primarily. Our job is to get to that return and preferably do better than it, but also without taking excessive amounts of risk either. Now, how does that actually compare to returns over the past decade? What's interesting to note is that the decade leading up to including the COVID period, the decade leading up to the end of December 21, that decade was remarkably strong. In fact, well above that real return objective that I've just told you, three and a half per cent above inflation. The past decade was very, very strong, even including the COVID period. The last 12 months has been very, very challenging obviously. And you have seen negative returns. The next decade looks somewhere in the middle, you know, returns that are not as generous as the returns we saw in the decade leading up to COVID, but considerably better than the last 12 months. So, and also just as an aside as well, that's how we don't take we don't produce those projections in the PDS lightly. That's a serious intellectual exercise to come up with that number. So, anyone promising you that they can deliver much, much higher returns than that and even implying they can do it with complete safety, please run a mile.

Yeah. If it looks too good to be true it is too good to be true.

It is, absolutely.

And I would argue, actually, and I know I bring a very biased lens, subjective lens, but now more than ever and advice is more important in these challenging times just to make sure that you've got the right strategies in place to solve all those things, like making sure that you're spending, you've got a plan for cost of living, inflation, longevity.

Absolutely.

The sleep at night factor. And there's also other strategies that I'll be talking to some other guests on the podcast series about around retirement and maximizing your super. So there's lots of other things you can do to maximize that money outside of just the investment performance, that you and the team do beautifully.

Absolutely. And again, another thing I think we should touch on, especially at a time when the cost of living pressures are very, very acute and there may be lots of members out there, that draw down on their super only, that they only draw down the minimum. And one thing I do worry about when you get around the place and you talk to members and your advice team absolutely sees this is members that they don't really want to draw down more than the minimum.

Because that, the frugal mindset, they worry.

It is a frugal mindset. There's also a very, very strong desire among many members to hand on something to the next generation. And that's very, very much understandable. That's very hardwired into people's psyche. But one thing I would say to members is when we think about superannuation, we think about super into two phases. There's the accumulation phase and then what it is, what is known as the drawdown phase. It is called drawdown for a reason. It's there to fund your retirement. It's a retirement income strategy that too many people, in my view, think about. They worry too much about leaving money to the next generation.

And you think of how long we're all living. In the old days, you finish work, you probably, most men died within ten years after finishing work, and they didn't have to worry about living a long time. So I couldn't agree more. Enjoying yourself and at the end of your working life it could be 20, 30 years. It is, so so important.

I know, before my mother passed away some years ago and about a year or two before she passed, she was saying, oh, look, you know, I want to leave something for you and kids. And I said, Mum, if you pass, if you shuffle off this mortal coil with more than a dollar left in your bank account, that's just bad planning on your part. Just go and spend the money.

Did she take your advice?

She didn't. Because again, she came from Scottish heritage and she was very, very frugal with the money. But she had a very, very happy retirement.

Absolutely. I'm pleased to hear it. Look, I think we'll call it we've covered a lot of themes and considerations encourage you to give us a call if you have any questions. If you like the Super Insider podcast series we’d encourage you to rate us on the podcast app store or like us, let us know, tweet about us, put us on Instagram and whatever, whatever you think we'd love more members to be listening to Super Insider because it really the more people understand about their superannuation, the better more Australians will be living their best possible retirement so the better off they'll be. But look, it's been fun Brian.

Thank you very much Anne and good to be with you again.

And thanks for listening and viewing if you're watching this podcast as a video. Okay, we'll see you soon

Bye everybody.

Bye.

This podcast is brought to you by Australian Retirement Trust Pty Ltd (ABN 88 010 720 840, AFSL No. 228975) the trustee for Australian Retirement Trust (ABN 60 905 115 063) (the Fund).