The incredible interest in superannuation returns at the start of a new financial year belies the fact that most of the time they’re totally boring, even when the environment in which they’re generated isn’t. Back in April, when headlines were screeching about market bloodbaths and ASX wipeouts, it didn’t seem likely that super funds would broadly generate double digit returns for their members – but (so far) most funds have.
“Every year we and all the other funds remind members that it’s not always going to be like this and they need to prepare themselves for returns to be lower in the future than they have been in the past,” Aware Super head of investment strategy Michael Winchester tells Investment Magazine.
“Then we come back and say it again the next year.”
Aware returned 11.9 per cent in its default high growth option this year, its third consecutive year of double-digit returns. Minus a bad year in 2021-22 – when only Hostplus, Qantas Super and Christian Super made money for their members (the other funds just didn’t lose much of it) – funds have weathered an incredibly tumultuous period from the start of the decade, and done it in largely boring fashion: with the mainstay mix of equities, unlisted assets and fixed income and credit.
“These last 12 months have been pretty astounding from a headline perspective, but from a market perspective the S&P500 has been about as volatile as it usually is and the returns have been better than they usually have,” Winchester said.
“The average 30-year return is about 10.5 per cent and we had 14 or 15 per cent this year. If you’d gone to sleep on July 1 last year and woken up on July 1 this year, you’d be thinking that it was a pretty good year.”
That doesn’t mean the macro and geopolitical environment isn’t changing, or that funds won’t have to think deeply about it in order to keep generating those double digit returns. Uncertainty is what’s certain now, Winchester said; the Trump administration is “clearly very unpredictable”, and will continue to wield trade policy as a blunt instrument to fulfill domestic political objectives. But things usually settle down in a way “where the settlement is worse than we would’ve liked but a lot less than we would’ve feared”.
“My expectation is that we see that pattern repeat over the next 12 months, and for us as long-term investors that can be damaging to confidence when it comes to making long-term investments, particularly in illiquid markets, but it offers a lot of opportunities in the public markets when stocks sell off on that uncertainty,” Winchester said.
“If you’re able to figure out what the impact is likely to be on growth and earnings, it can give you the confidence to step in and buy like we did in April.
“A lot happens, but if you look through the noise, for the most part the long-term picture doesn’t really change. The increase in trade frictions and geopolitical frictions is something that’s been happening for the last few years; this deglobalisation and reshoring pre-dated COVID and was accelerated through COVID. I think that’s an underlying trend we’ve observed.”
One thing that has changed as a result of Trump’s “unpredictable and often antagonistic” approach to allies – and which the Aware investment team is trying to come to grips with – is that the US dollar is no longer as safe a haven as it has been in the past.
“We’ve seen that in the return of the US dollar-weighted index, which is down about 12-13 per cent since the Trump inauguration,” Winchester said. “That is something that’s unusual and we’re spending a bit of time thinking about what that means for our hedge ratios; should we still feel confident relying on the US dollar as a hedge for risk?”
The fund is reviewing its strategic asset allocation and will make a recommendation to the investment team in the next few weeks, but it has been playing at the edge of that trade to generate returns for some time.
“There’s two time horizons we look at; the long-term structural and strategic position, which hasn’t changed… and there’s the short-term tactical position, where we have a macro strategies team who trade actively across financial markets trying to generate excess returns for the fund, and they’ve had a tendency to be underweight or short the US dollar against the Euro or other currencies, and that’s been profitable for us. But it’s not a long-term position; that’s trading incrementally to try and eke out some excess returns.”
