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1. What's been driving the market fluctuations?

First of all, let me re-iterate that market volatility is a normal part of investing. 

We expect market ups and downs as par for the course, and our long-term investment approach takes this into account.  

That said, the market volatility in 2022 has been driven by a complex mix of factors.  

After a long period of low inflation and low interest rates, inflation pressures returned in 2022 and caught Central Banks a bit unprepared.  After initially believing inflation would pass, they found themselves needing to raise rates rapidly and this had flow on impacts to shares and bonds.  We can usually rely on bonds to diversify share investments, but this year they both fell at the same time, which is quite unusual.  Adding to the volatility was the war in Ukraine, China’s ongoing struggles to contain COVID and lingering supply chain issues from the pandemic. 

Super funds, like Aware Super, have not been immune from this, although our diversified portfolios benefited from investments in assets like property, infrastructure, and alternative strategies, which have proved very defensive in this climate.  

As investors, we often find that market falls can create investment opportunities. Our large investment team of over 100 experienced professionals are ready to invest as, and when, good quality opportunities become available at low prices.  

Our focus remains dedicated to delivering long-term returns for our members’ retirement outcomes. This allows us to look through market volatility and economic cycles, like what we are seeing at the moment, to deliver you strong long-term returns. 

2. Looking forward to 2023, what do you think we'll be seeing in markets?

The peak of market volatility was around the end of September, and since then many of the causes of this year’s uncertainty have marginally improved. 

Inflation appears to have peaked in the US and will likely do so in Australia in the next few months. The pace of interest rate hikes has slowed and the peak is now in sight, some time early next year. 

China is tentatively moving to re-open and while the tragedy of the war in Ukraine continues, Europe appears to have enough energy supplies for the winter, albeit with some rationing required.

We’re not out of the woods yet though.  These improvements can always reverse, and we’re still to see the impact on economic growth from 2022’s interest rate hikes.  The impact of Central Bank policy tends to have a lag of 12-18 months and so we’ll be watching economic indicators over 2023 to gauge how significant the slowdown will be and whether we’re headed for a deep recession or a “soft landing”.

As the market grapples with these two potential economic outcomes, we’re likely to see more volatility persist, but as was the case in 2022, a broadly diversified portfolio should help to mitigate the impact on your super.

3. So, what is Aware doing to safeguard my investments?

At Aware Super, we understand the importance of safeguarding the retirement savings our members have worked so hard to build. Our investment approach is designed to give our members the confidence to enjoy their retirement, and to stick to their long-term plan.  

There are 3 key-ways we invest to help our members’ savings last in retirement, even through market ups and downs: 

Firstly, investing in a diversified portfolio of quality assets. This means investing in a number of different asset types, not just shares and cash, but other things like unlisted property and private equity.  

Diversification helps to spread investment risk. You benefit from this because not all investments are likely to perform poorly at the same time.  

Secondly, and as an extension of diversification, we invest in unlisted assets. Being a large super fund, we have the opportunity to invest in assets that individuals typically aren’t able to invest in.  

And unlisted assets, like infrastructure and property, often generate stable income streams over long-term investment horizons. This helps to smooth returns over time, even during periods of market volatility like we are seeing now.  

For our members in retirement, we deliberately invest differently in our balanced and more conservative options, to help cushion the impact of large market falls. This can help retirement savings go the distance so income can last over the long-term.

The chart below shows the benefits of diversification and the stabilizing effect of unlisted assets in the current environment. It also shows that our retirement investment strategies worked well in recent market volatility, helping our members lose less than many other similar funds. 

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*Source: SuperRatings Pension Fund Crediting Rate Survey, 31 October 2022. SRP25 Conservative Balanced (41-59) Index (approx. 25 options). Aware Super Retirement Income Stream Balanced Growth option returned -1.3% for the year, compared to the median of -3.3% over the same period. Aware Super RIS Balanced Growth option ranked in the top 10 over 1,3,5,7 and 10 years. Market returns as per following indexes. Australian equities – S&P/ASX300, Global equities – MSCI ACWI unhedged, Australian fixed income – Bloomberg AusBond Composite, Global fixed income – Bloomberg Global Aggregate Float Adj (ex CNY hedging).

 

Our Retirement Income Stream Balanced Growth option returned –1.28% over the year to 31 October 2022. While still negative, our diversified portfolio fell by less than the listed markets. And, as at 30 November 2022, markets had rebounded slightly as a result of more positive economic data, taking the 1-year return from our RIS Balanced Growth option to -0.1%.

In the end however, it’s important to remember that even in retirement, super is a long-term investment. So, while lower or negative returns in the short term are never welcome, it’s the long-term returns that matter most. You can feel confident that our long-term returns remain strong, and we continue to invest with the aim of delivering you the best possible retirement outcome.

4. What does inflation mean for investments and living expenses?

Rising inflation, put very simply, means the cost of living is going up. You may have noticed your grocery or electricity bills increasing, and even your daily cup of coffee may be costing more.  

Inflation has been rising rapidly over the past year. And given an increase in prices, it means that your dollar isn’t able to buy as much of the same good or service it was able to, compared to this time last year.  

This means there are two important things to consider.

  1. It is important to review your expenses and budget and consider whether the income you are drawing is sufficient for your needs.  

  2. As an investor, it is important to think about whether the returns you are making from your investments will keep up with the higher rate of inflation over the long term.  

Even though your retirement savings are there to meet your income needs, investing in retirement is still a long-term game. Our research shows that about a third of retirement income from a pension account is generated through the investment returns from retirement savings, so it’s important to remain invested in assets that can generate returns above inflation.

When inflation is present, it is more important than ever that retirement savings benefit from the long-term growth that markets provide, so that your retirement income is able to meet your lifestyle goals. 

5. How an adviser can help you manage your portfolio to deliver sustainable income

Having a plan means you’re prepared for market uncertainty and often don’t need to react or make changes to your investment portfolio.  Your adviser will have helped you to construct an investment strategy that’s appropriate for your goals in retirement, and this includes dealing with the inevitable bouts of volatility that will occur.  

That said, this last year has been unique in that inflation has been much higher than usual. You may need to revisit your income needs when next meeting with your adviser, to make sure they review any planned expenses.

As always it will be important to ensure that you rebalance your portfolio to stay on track for your plan, and to discuss any changes in your goals or circumstances so that these can be factored into the strategy and ensure you’re set up for success.