July 18 2022
Investment Update

Investment Update 2021-2022

After strong returns in the last financial year, just a few difficult months in investment markets have led to a weaker outcome for many super funds this financial year.

At Rest, our Core Strategy has weathered the storm relatively well, returning -2.37% to June 30, outperforming most major global share markets. For Pension members, the default, Balanced Option returned -1.11% and the Core returned -2.75%.

In our 34-year history, this is only the 4th time the Core Strategy ended the financial year with a negative return. It also follows the Core Strategy’s return of 17.43% in the previous financial year. 

Performance for Core Super and Balanced Pension*

  1 year 5 years p.a. 10 years p.a.
Core (Super) -2.37% 5.51% 8.06%
Core (Pension) -2.75% 6.27% 8.92%
Balanced (Pension) -1.11% 5.10% 7.40%
  Core (Super)
1 year -2.37%
5 years p.a. 5.51%
10 years p.a. 8.06%
  Core (Pension)
1 year -2.75%
5 years p.a. 6.27%
10 years p.a. 8.92%
  Balanced (Pension)
1 year -1.11%
5 years p.a. 5.10%
10 years p.a. 7.40%

Source: Rest, June 30, 2022. Returns are net of investment fees and tax, except Pension which is untaxed. The earnings applied to members’ accounts may differ. Investment returns are at the investment option level and are reflected in the unit prices for those options. Returns for the ten-year period are annualised returns. Past performance is not an indicator of future performance.

We know that at times of increased economic uncertainty, it is natural to be concerned. At Rest, we remain focused on delivering competitive long-term returns to help our members achieve their retirement goals. Over many years, the inevitable negative periods smooth out, as shown in the graph below which shows how a 50K investment has fared over the longer term in the Core Strategy.

How a 50K investment has fared over time in Core Strategy

Graph showing a $50k investment in Core Strategy over time Graph showing a $50k investment in Core Strategy over time

What a difference a year makes

Given the positive returns for retirement savings in the 2021 financial year, what changed in 2022?

Up until the end of December 2021, super returns were generally still growing. Governments around the world were acting to protect people from the economic and health impacts of COVID-19.

Income support schemes, such as JobKeeper, sought to keep Australian workers in jobs and support businesses, while interest rates were kept at historically low levels. The development of effective vaccines to combat COVID-19 and the lifting of restrictions allowed economies to re-open. Global economic growth was generally strong. Financial markets generally responded well, and investor confidence helped markets recover faster after each new wave of COVID-19. This can be seen with the US share market (S&P500) example below. 

S&P500 recovery time from each wave of Covid

Graph showing how markets recovered faster from each wave of Covid - S&P 500 from 20 April 2020 Graph showing how markets recovered faster from each wave of Covid - S&P 500 from 20 April 2020

However, government spending, and people buying more goods coupled with supply constraints, started to put upward pressure on prices. This created a perfect storm for inflation to swirl in towards the end of the 2021 calendar year.

By the time Russia invaded Ukraine, price increases and inflation were making financial markets nervous. As a result, we saw some significant market downturns in the last three months of the 2022 financial year. Given these downturns were impacting different investments in different ways, the range of investments in the portfolio helped offset some of the declines for many of our members. Many financial markets have seen some of the largest falls in value in recent history from April to June. Australian equities fell 12.2%, but, in comparison, real assets that we invest in directly, like buildings and farms, have performed better and helped cushion the overall downturn.

2022: A story of two chapters

Chapter 1: Covid and buoyant share markets

The first half of the 2022 financial year featured strong returns across global share markets, with some reaching record highs between July and December 2021. Despite this, there were a few warning signs that this trend may not last.

During this period fears over rising oil, gas and commodity prices fuelling inflation sparked market volatility. The rise of the more infectious coronavirus delta variant also posed a risk to the re-opening of the global economy and prolonged supply chain disruption.

The US share market (S&P500) had another brilliant calendar year, gaining 25.3%. Australia’s share market (ASX300) rose 17.5% over the same period, and share markets generally closed out the calendar year near all time highs.  

S&P500 July to December 2021

Line graph depicting S&P500 July to December 2021 shows +11.67% Line graph depicting S&P500 July to December 2021 shows +11.67%

While many superannuation fund investments benefited from this market resilience, supply chains around the world started to come under pressure. Consumer demand for goods rose and supply could not keep up with this demand.

The foundation was laid for rising prices of goods and therefore inflation. By late November, US inflation had already reached 6.8%. And as inflation started rising, market confidence started to drop.

As the calendar year closed, Rest was increasingly cautious of this inflation risk and adjusted our investments accordingly. While inflation can cause a fall in share markets, shares linked to materials, commodities and energy typically offer greater inflation protection. Such shares have generally performed well in the Core Strategy, alongside strong returns from our property, infrastructure and agriculture assets*.

This highlights the benefits of a diversified investment portfolio in our Core Strategy at critical times like these – which has seen returns smoothed out across both higher performing and the lower performing investments. 

Chapter Two: Ukraine, Russia and soaring inflation

The new calendar year started nervously in the markets and the Russian invasion of Ukraine in late February became a further tipping point.

As Russia and Ukraine are some of the world’s largest exporters of food and energy, the conflict amplified the impact of rising prices, as there were further constraints on supplies of energy, commodities and food. Petrol prices moved past $2 per litre in our Australian capital cities and have remained high ever since, an impact many of us continue to feel.

As prices and inflation rise, interest rates typically follow. Rising rates tend to weaken economic growth, and this is why share markets are often sensitive to rate rises. The performance of the US share market (S&P500) highlights the downturn in the second half of the financial year.  

S&P500 January to June 30, 2022

Line graph depicting S&P500 January to Jun 30, 2022 shows -19.96% Line graph depicting S&P500 January to Jun 30, 2022 shows -19.96%

The final three months of the financial year were dominated by surging inflation, interest rate rises and falling share markets which quickly eroded the strong performance of the first half. The downturn has resulted in generally lower super fund returns across the board over the full financial year.

It is important to remember that investment markets move in cycles and always go up and down. Over the long term, negative periods have historically been offset by positive ones as shown by the 30-year graph below. 

Long term returns of major asset classes June 30, 1992 - June 30, 2022

Long term returns of major asset classes June 30,1992- June 30, 2022 Long term returns of major asset classes June 30,1992- June 30, 2022

Where to from here?

For many, super is generally a long-term investment. With that in mind, we continue to focus on the end goal – maximising retirement savings for Rest members.

We have confidence that many of our more inflation-resilient investments, like infrastructure, private equity, property and agriculture, will continue to serve our members well. Rest’s investments in these asset classes can provide important stability to an investment portfolio, especially in challenging times where share markets are volatile and fixed income returns are weaker. These types of assets typically generate steady income that tracks inflation, such as rent or toll payments**.

We currently expect to remain in a lower growth and higher inflation environment throughout the remainder of the calendar year. From an investment perspective, the conditions may be becoming more positive for those seeking to invest for the longer term such as our younger members.

Also, super funds may be able to acquire investments at cheaper prices, which has the potential to benefit members with higher returns in the future. Even in tough markets, there remain some good investment opportunities. The conditions will favour those who can identify and seize these opportunities and themes of tomorrow, like the transition to renewable energy.

Rest’s Core Strategy remains on track to achieve its goals over the longer term, having delivered on average 8.06% each year over the past 10 years, staying well ahead of Australian inflation rates to help many members achieve their personal best retirement outcome. 

Speech bubbles

Rest Advice when you need it

Before choosing an investment option(s), you should consider your risk appetite and return objectives. In just 7 minutes, Rest’s Digital Advice Investment Choice Solution will ask you some simple questions to help you learn more about your investment risk profile and give you advice on which Rest investment options are recommended for you.

Members have access to a range of Rest’s Digital Advice Solutions^ available 24/7 at no additional cost.

Find out more

You’re invited!

Want to hear more insights about how your super is performing? Join online at our End of Financial Year Webinar, where you can hear from our Chief Investment Officer, Andrew Lill, on our performance and how we’re navigating volatile investment markets.

*Past performance is not an indicator of future performance. Rest's other investment options may have performed differently. For information on other investment options, please visit https://rest.com.au/member/investments/super-options

** Each investment option has a different balance of asset classes and weightings. For details on each investment option, please visit https://rest.com.au/member/investments/super-options

^ Rest Digital Advice is provided by Link Advice.

Want to learn more?