Annual Investment Update 2019: Your Questions

Q: I see a lack of investment opportunities for investors generally. Can you tell us about what you see?

A: Falling interest rates have led to very strong past returns in all assets including houses and shares.

However, there are signs that returns may moderate. Businesses are not investing as much as you would expect them to; perhaps because they see lower rates of future economic growth. Another indicator of this is companies buying back their own shares. Another example is the large retail companies, such as Myer and David Jones, who are facing lower economic growth, lower wage growth (which will reduce consumer spending) and also competition from online sales. That's combining to create pressure on returns in the retail sector.

Trade wars don't give people confidence. Investors are not as willing to commit capital long term into building manufacturing businesses and factories, if they cannot be sure where tariffs are going to go.

So we do see comparatively fewer investment opportunities just at the moment.

Q: Is the increased investment in cash a consequence of uncertainty?

A: The cash allocation in our Diversified options certainly is higher than normal. In some ways, it is a signal we are finding fewer opportunities to invest, as we’ve discussed earlier. It is also little high at the moment because we are in the middle of an asset reallocation and have sold some assets to take profits, but generally speaking we are also a little cautious. We are keeping our investment hurdles high. So it's a combination of things – but in the long run we are committed to investing in assets which will provide long term growth so I would not be surprised if next year those cash allocations are a bit lower.

Q: Exchange Traded Funds (ETFs) weren't around to any great extent when we had the last great crash. How robust are ETFs when there's a big rush to the door?

A: You can invest in ETFs through the Self-invest option. Some ETFs, particularly those in the self-invest option, are simple, solid and reliable investments. That is because they invest simply in shares, bonds and cash. I don't think those ETFs pose any more significant risk than other ways of investing. It is true however that there has been many more complex ETFs launched. We cannot be sure how stable they will be should markets suffer a downturn.

Remember: whether you use ETFs, whether you invest yourself, or whether you use a collective fund like QSuper, the only way you can manage uncertain risks is to diversify. ETFs are a way of diversifying but they are not without their risks.

Q: You mentioned the fixed interest part of the Balanced portfolio. Can you give us an explanation as to how you've achieved such outstanding returns on that part?

A: In the Balanced option, the money is invested in assets all over the world. We have equity, we have other sorts of things like infrastructure and real estate. In the bond portfolio component, the bonds are only government bonds, they are very long term, and because of the yields being paid, they are almost all US and Australian. And it's been a great place to invest.

Because the Balanced option is already diversified via the equities and real estate and infrastructure, we can afford to take more concentrated risks in the bond portfolio, knowing the overall option is well-diversified. By contrast the Diversified Bond option has to stand alone with only one asset class. Therefore, to control risk, it contains a wider spread of bonds (government plus corporate), the term of the bonds is much shorter and it is diversified across many more countries. As a result, returns have been a bit lower than those bonds we hold in the Balanced option.

Q: A question on cryptocurrency. In the Balanced fund, is there a chance of some money going into cryptocurrency?

A: We have no intention of buying cryptocurrency. They are not reliable stores of value. They are not an asset that pays a yield, so you don't know how much they are really worth. And their valuations go up and down far too much, driven largely by sentiment to be what we would regard as reliable long-term investments.

We prefer investments that pay a yield. And the reason that is important is because you can compare the yield of one investment with another. Shares pay dividends, bonds pay interest, real estate pays rent, infrastructure pays rent. You have a sense of where the valuations are. Cryptocurrencies don't do that.

Q: What is QSuper's strategy when it comes to climate change?

A: We are all very aware that climate change is a developing issue and one that is becoming understood better and better. We have a Socially Responsible investment option that has been in place for a long time, which has had a focus on not only climate change but sustainable investment.

In addition to that, the investment managers that work for us bring these things into account all the time in determining whether an investment is sustainable. This is part of a balanced assessment of future investment returns and risks. Climate change implications are considered as one of many issues that will impact long-term returns.

What I would say is that whether it's in shares, bonds, real estate or infrastructure, climate-related risks are becoming better understood and quantified. So quite apart from the community debate, which is important and valid, we as investors are progressively understanding them better.

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