Investment returns

Bernard O’Connor
NGS Super

In spite of a rough patch in November/December, fears of a trade war and unprecedented low interest rates, investment markets turned positive for the second half of the financial year to produce solid annual returns for superannuation funds by the end of June.

It is pleasing to report that the annual return as at 30 June 2019 for NGS Diversified (MySuper) (Accumulation Account Default) was 7.23%. Over a 10 year period the average return per annum was 8.48%. For the Income Account (pension) default option for the same period the yearly return was 8.14%.

It certainly has been an extended growth cycle since the Global Financial Crisis and fund members have benefited greatly from the continuous period of bull markets. The 10 year average return for Diversified (MySuper) is especially pleasing given that the investment objective is 3% above CPI per annum over rolling 10 year periods.

Other Accumulation Account options returned well with the highest being Indexed Growth coming in at 10.15%. Due to the historically low interest rates Cash and Term Deposits and Diversified Bonds returned 1.98% and 4.92% respectively. Australian Shares and International Shares performed well returning 9.03% and 8.93% respectively.

In a period which some investment professionals describe as “the end of the growth cycle”, it is important to consider risk tolerance and your investment time frame. Market factors such as investor sentiment and geopolitical events can affect investment returns as can legislative changes and currency risks. At present interest rate risks appear to have diminished due to the low interest rates set by the Reserve Bank but may reappear in another bizarre form as the interest rate approaches zero. Inflation risk is always present.

It’s important to consider your risk appetite when thinking about your time to retirement and the mix of growth and defensive assets you are willing to accept in your portfolio. If you consider volatility, which refers to the movement of asset values (up or down), it’s clear that growth assets such as shares and property are more volatile than defensive assets such as cash and fixed interest.

How much risk you are willing to take depends on how you feel when markets rise or fall sharply. If market returns keep you awake at night, it’s a sign that you may not want that much risk in your portfolio. On the other hand, if low returns frustrate you, you may wish to consider adding more growth assets to your mix. Of course the overriding risk will always be whether you will be able to meet your retirement goals.

In the investment world three adjectives are used to describe your investment horizon: short, medium and long. These adjectives refer to how long you are likely to be invested in the markets. ‘Short’ generally refers to five years. So if your investment horizon is short, you may be thinking about how to preserve the capital value of your investments rather than adding high risk.

For a short investment horizon it is possible to have a smaller balance at the end of five years if investment markets do not perform well. ‘Medium’ generally refers to a 10 year period in which an investor should consider volatility as well as inflation risk. ‘Long’ refers to a 20 year investment horizon and one of the main risks is inflation risk which relates to the investment’s ability to outperform inflation over the long term. If it doesn’t, the investment has lost real value.

NGS Super sets up its investment options with clear objectives. Diversified (MySuper), for example, aims for a return of CPI plus 3% over rolling ten year periods. As you can see from this year’s result, the Fund has clearly exceeded this goal adding wealth to members’ accounts.

Defensive assets include cash and term deposits, government and corporate bonds, property income, social impact bonds and bond alternatives. Growth assets include Australian and international shares, listed property, infrastructure and growth alternatives.

Before reweighting your portfolio, it is important to consider obtaining financial planning advice to assist you obtain the best possible mix of growth and defensive assets in line with you risk tolerance. NGS Super has a team of financial planners who work on a non-commissioned basis to help you. To contact the planning team phone 1300 133 177.

(Important information: The information in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances, read the Produce Disclosure Statement for any product you may be thinking of acquiring and consider seeking personal advice. Past performance is not a reliable indicator of future performance. Any opinions are those of the author and do not necessarily reflect the view of NGS Super.)