Archive for category: News & Insights

Watch the webinar recording.

Synopsis

Super funds are on track to stage a remarkable comeback in the second half of 2020. But there are still a host of challenges facing funds, including early access, market volatility, insurance claims, and ongoing regulatory uncertainty.

Join Kirby Rappell, Executive Director of SuperRatings, as we examine how funds are positioned to manage these challenges through 2020 and beyond.

Key takeaways:

• Get insight into trends across fees, insurance, asset allocation, and member servicing, based on the most in-depth bench-marking data available.
• Assess the major market themes affecting super fund portfolios through the 2020 pandemic and how trustees are responding.
• Learn how consolidation is impacting the super industry and what funds need to do to keep their offering competitive.
• Understand the key tests of tomorrow for super funds and how advisers can assess and compare super fund offerings to meet their best interest duty.

Any advice that SuperRatings provides is of a general nature and does not take into account an individual’s financial situation, objectives or needs. Because the information that SuperRatings receives about superannuation and pension financial products is from a number of sources, it is not guaranteed to be completely accurate. Because of this, individuals should, before acting on the information, consider its appropriateness having regard to their own financial objectives, situation and needs and if appropriate, obtain personal financial advice on the matter from a financial adviser. Before making a decision regarding any financial product, individuals should obtain and consider a copy of the relevant Product Disclosure Statement from the financial product issue.

Super funds have started the new financial year with some positive momentum but face a period of stark uncertainty as Australian cases of Covid-19 rise and Victoria enters harsher lockdown conditions.

While we have seen stabilisation in markets, they remain vulnerable to further shocks, while super fund performance is contingent on how communities and economies cope with further waves of infections.

According to estimates from leading superannuation research house SuperRatings, the median balanced option returned 0.9% in July as markets continued to rebuild following March’s falls. Overall, super funds have made it through in good shape but are preparing for more market ups and downs through the rest of the 2020 calendar year.

“The outlook is still unclear but based on recent performance super funds have shown they can weather the Covid-19 storm,” said SuperRatings Executive Director Kirby Rappell.

“Looking at SuperRatings’ balanced option index, the sector is 4.0% below where it was at the start of 2020. This is less than ideal for members, but thanks to the recovery we saw over the June quarter we have already made up a lot of ground. Hopefully this momentum can continue, and members can swiftly regain their super wealth.”

According to SuperRatings’ estimates, the median balanced option is down 1.2% over the 12 months to July. The median growth option is estimated to have fallen -1.7% while the median capital stable option is steady at 0.5%.

Accumulation returns to end of July 2020

Source: SuperRatings estimates

Pension returns have performed more or less in line with accumulation returns over the past year. The median balanced pension option is estimated to have fallen 1.2% over the 12 months to July, compared to a drop of 1.9% from the median growth option and a modest rise of 0.5% from the median capital stable option.

Pension returns to end of July 2020

Source: SuperRatings estimates 

July’s results represent the fourth month in a row of positive returns for super, following the 9.2% drop members experienced in March. While the results are promising, there is still a way to go before members recoup their losses, and the Covid-19 situation in Australia remains precarious as other states brace for potential spikes in infections.

“We can certainly take heart from recent performance, but we should not underestimate the challenge that we still face,” said Mr Rappell.

“Markets are incredibly difficult to navigate at the moment. Globally, we are seeing a disconnect between the rise in share valuations and the weakness in economic data. Meanwhile, the low yield environment will only be exacerbated by governments issuing more debt to shore up budgets and continue providing support to those affected by the virus.”

Growth in $100,000 invested over 15 years to 30 July 2020

Source: SuperRatings estimates

Taking a long-term view, super returns have done an incredible job at accumulating wealth for retirees over a period that includes two major financial and economic crises. According to SuperRatings’ data, since July 2005, a starting balance of $100,000 would now be worth $235,877 for members in a balanced option. For a growth option this would be slightly higher at $236,235. A member with full exposure to Australian shares would have seen their balance growth to $254,188. In contrast, returns on cash would have seen the balance grow to only $157,939.

There are plenty of fund managers who claim environmental, social and governance (ESG) credentials, but how many of them are actually the real deal?

When clients approach advisers looking to specifically invest in ESG, the problem has been distilling the true-to-label ESG players from those which only tick some of the boxes. Unfortunately, the objectives of investors are not necessarily identical to those of the fund managers.

There have always been ‘pretenders’ in the mix when it comes to ESG managers, but part of the issue is that mum and dad investors view ESG very differently to professional fund managers.

Confusion partly arises due to the different approaches to ESG, and this is where a gap in understanding arises. Often, when institutional fund managers discuss ESG, they are talking about a different thing to what regular investors might have in mind they think about how environmental, social and governance factors are incorporated into a portfolio.

Generally, when funds talk about ESG, they are looking at it through an investment prism – i.e. what will the ESG risk do to the value of a particular company?

However, when the mum and dads are looking at this, they are concerned about the ESG risks as they pertain to them, and what these mean for their community, planet and grandchildren. The bottom line is that the perspective the institutional fund managers and the mum and dad investors have may be quite different, and part of the adviser’s job is to work through this discrepancy and ensure their clients are investing in products that meet their expectations.

In order to do this, advisers and their clients need to understand the underlying investments of individual products and be able to make assessments and comparisons based on objective criteria. This is why Lonsec has been working with advisers to develop a new suite of research that is designed to give advisers and end investors the ability to identify investments that align with an investor’s values.

Under the new regime, all funds covered by Lonsec are issued with a sustainability score, which reflects the underlying investments of individual products and their compatibility with the United Nation’s 17 Sustainable Development Goals (SDGs). The research is provided in partnership with Sustainable Platform, a leading provider of sustainability data for investment managers and institutions.

There is growing awareness among investors of the importance of considering sustainability issues when constructing a portfolio. Advisers are now typically confronted with the question: ‘What am I really invested in?’ It’s essential that advisers are in a position to not only answer this question, but to create a portfolio that is truly aligned to their client’s preferences.

Under Lonsec’s new approach, a Sustainability Report is issued for each fund that undergoes assessment – a two-page document detailing the relative success of the fund in supporting the SDGs, together with any exposure to the 10 controversial industries. The Lonsec Sustainability Score reflects the net impact of these measures, which is peer ranked and results in a score of between one and five bees.

There are certainly a lot of traditional fund managers who have very good ESG processes, and they do understand the risks. However, if they feel the market is compensating investors sufficiently for these risks, they’ll take them. This is because they’re thinking about it in terms of the future value of a firm, but they’re not necessarily thinking about the risk to the future of the planet.

So there are certainly companies and funds that will be assessed very strongly by Lonsec as ESG managers because they do the work, understand the risks, and engage with companies, but that doesn’t mean that their portfolios will align with what investors are looking for.

Hence the need for a new way of assessing sustainability. This new approach is crucial in order to determine what is really going on behind the ‘sustainable’ and ‘ESG’ labels. That is what Lonsec has tried to do – we’ve tried to separate the way ESG is implemented and how fund managers think about it in terms of the investing process from what clients expect and care about.

This means looking beyond the marketing stories that managers are trying to tell. Instead, we need to assess portfolios based not only on what a particular company is, but what it makes (i.e. its products and services) and how are they used.

By mapping these activities to the SDGs and controversial industries, and distilling this into a single score, we hope to give advisers the tools and information they need to make investment decisions that genuinely align with their clients’ values. We also wanted to present this information in a way that allows advisers to clearly demonstrate how their investment selection is helping them contribute to a better world.

ESG is not a redundant process – far from it. If investors understand what ESG products are trying to achieve and how they work, then they may find these products valuable. However, we need to enable advisers to have these conversations with clients and fund managers so that investors can make informed decisions. That’s a goal we hope everyone can support.