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August 18 2022
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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%.

The average return for super funds this year was -3.44%1. A quarter of these funds1 lost more than 4.34% as bond and share markets fell together – a rare combination. Some markets contributing strong gains in the first half of the year gave them all back in the second half, and more. In the first six months US shares rose over 11%; they fell nearly 20% in the next six months2. Long-term our Core Strategy continues to exceed its objective returning 7.39% annually over 20 years and performance ranking in the top quarter of its peers1.

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.

Click here to see our latest investment option performance

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. 

Options performance commentary

Magnifying glass

Structured

Balanced

The Balanced option (super) returned -0.91% over the financial year, and outperformed its investment return objective of CPI +2% over six years by 1.03%, returning 5.36%.

The Balanced option (pension) returned -1.11% for the year and 5.99% over the six years, also outperforming it’s longer term objective by 1.66%.

Towards the end of the past financial year, financial markets became very volatile given the background of increasing inflation, the war in Ukraine, and rising interest rates. Unusually, both share and bond markets have fallen in this environment.

The Balanced option’s lower allocation to shares and higher allocation to cash than Core helped cushion the impact. The fall in overseas and Australian share and bond markets was partially offset by the broader range of investments in the Balanced portfolio. Real assets that we invest in directly, like property and infrastructure , have performed better and helped cushion the overall downturn for Balanced investors, highlighting the importance and value of true diversification.

Balanced – Index

The Balanced - Index super option returned -6.97% over the financial year, whilst the pension option returned -7.47%.

The Balanced Index option aims to achieve a return in line with the indices that make up its return objective by investing in a mixture of growth and defensive assets from Australia and overseas. Because the option is designed to track the returns of the underlying indices, returns should be expected to go up when the index returns go up, but also expected to track them when they go down.

Towards the end of the past financial year, financial markets became very volatile given the background of increasing inflation, the war in Ukraine, and rising interest rates. Unusually, both share and bond markets have fallen in this environment. With negative index returns, the option has therefore delivered a negative return.

Capital Stable

Over the year, Capital stable (super) returned -0.32% and the pension option returned -0.45%.

Capital stable (super) returned 3.16% over 4 years, underperforming its investment return objective of 3.49%. The pension version outperformed the objective by 0.08% over the same time frame.

Capital stable has a higher weighting to cash and debt (bonds) than the Core Strategy, and also a lower weighting to shares than Core, both of which have helped cushion the degree of the negative return over the year.

Towards the end of the past financial year, financial markets became very volatile given the background of increasing inflation, the war in Ukraine, and rising interest rates. Unusually, both share and bond markets have fallen in this environment. Normally bonds outperform when shares fall which is why they can be a good stabiliser of returns in the portfolio. The fall in share and bond markets was partially offset by returns from real assets that we invest in directly, like property and infrastructure, highlighting the importance of true diversification.

Diversified

The Diversified (super) option returned -1.58% for the year, whilst the pension returned -1.89%.

Over the 10 year investment time frame, both have outperformed the CPI +3% investment return objective of 5.19% by 3.40% (super) and 4.30% (pension).

Diversified is a high growth option and therefore has a high weighting to shares. Global share markets fell significantly from January to June 2022 over concerns about inflation and interest rate rises, so the portfolio ended the year with a small negative return. However, Diversified has more exposure to private equity assets than Core and these assets performed extremely well. Also, Diversified’s higher allocation to infrastructure also helped offset the negative returns from shares. Over the last year, we have actively increased our allocations to assets that offer inflation protection, like unlisted property and infrastructure, which has helped to improve returns.

High Growth

The High Growth option (super) returned -2.10% for the year, whilst the pension option returned -2.43%.

Over the option’s 12 year investment timeframe, the super option returned 8.96% and the pension option returned 9.49%, both comfortably outperforming the CPI +4% investment return objective of 6.22%.

High Growth, as the name suggests, is Rest’s investment option with the largest weighting to growth assets like shares. Whilst global share markets fell significantly from January to June 2022 over concerns about inflation and interest rate rises, bond markets also delivered negative returns due to the same fears over rising inflation. Whilst both Core and High Growth are growth oriented, High Growth’s exposure to private equity assets is approximately three times higher than Core’s which performed well and helped cushion the negative returns from listed shares. The high weighting to Australian shares also helped as they outperformed overseas shares markets.

Sustainable Growth

Sustainable Growth (super) returned -6.62% and the pension option returned -7.11% over the financial year. Both options have an inception date of March 2021, and therefore do not have long term returns available. The option’s investment return objective is to outperform the CPI +3.5% over 12 year periods.

The Sustainable Growth option includes screening criteria for listed equities. Industries and companies most likely to be screened out often include those linked to energy, mining and commodities. Following the war in Ukraine, energy and commodity prices have soared and these sectors have been some of the strongest performers. When these sectors are outperforming, a portfolio that screens them out will typically underperform the broader market index.

When these sectors are outperforming, a portfolio that screens them out will typically underperform the broader market index.

Abacus

Tailored

Cash

Cash returned 0.50% for super and 0.57% for pension, both outperforming the RBA Cash rate over the financial year and benefitting from rising interest rates.

Bonds

Over the financial year, the Bonds option returned -8.09% for super and -8.99% for pension. Over the option’s 2 year investment timeframe, both super and pension have outperformed the -4.97% investment return objective by 0.96% (super) and 0.55% (pension).

This financial year has not been a good year for bond markets as a result of inflation worries and rising interest rates. Although inflation and interest rate rises were expected, the pace of the rate rises was quicker than forecast and therefore created a period where bonds prices fell more than anticipated. As such, the price of existing bonds fell in the short-term providing a negative return. Given the rising rate environment, we have selected bonds that are less sensitive to interest rate rises, which has helped deliver returns above the option’s objective return.

Property

The Property option returned 15.96% for super and 17.18% for pension over the financial year. Both options strongly outperformed the benchmark of 5.11%; super by 10.85% and pension by 12.06%.

Over the longer term, with an investment timeframe of 7 years, both the super and pension options have comfortably outperformed against their investment return objective of 5.04%, returning 9.63% (super) and 10.50% (pension) over the same period.

Direct property has been a very strong performer over the last financial year, with rising property prices supported by strong employment data, rising wages, a shortage of high quality property and historically low interest rates.

Rest’s high quality Australian office portfolio has outperformed the wider market with a flight to quality buildings for tenants after Covid which has led to prime office space experiencing strong investor demand. Additionally, strong tenant demand for Rest’s US Industrial and Multi-family investments has led to outsized rental growth in these sectors.

Shares

Shares returned -5.78% for super and -6.59% for pension, both outperforming the benchmark return of -6.83% over the financial year. Over the investment return objective timeframe of three years, both super and pension have slightly underperformed the benchmark, returning -1.19% for super and -0.44% for pension.

This option invests in both Australian and overseas shares. Both overseas and local share markets fell significantly during the second half of the 2022 financial year after rapid rises in inflation led to faster than expected interest rate rises, and eroded the strong performance of shares in the first half of the year. Despite this, our investments in Australian shares strongly outperformed the index, driven by our exposure to companies that benefitted from the energy transition theme and also companies that improved their business performance which helped to mitigate the overall negative performance.

Ultra large companies led the strong growth in the US and other overseas markets, and the portfolio underperformed given our investment in companies of all sizes to diversify the portfolio. While the portfolio made up ground in the second half of the year as the large companies fell in value, overseas markets fell across the board as a result of rising interest rates. In the US markets, our lower weighting to large technology shares in the strong period to December was a key driver of underperformance, whilst our low weighting to shares in China and our stock selection in the Communications sector helped performance.

Australian Shares

The Australian Shares option returned -3.54% for super and -3.82% for pension, both easily outperforming the S&P/ASX300 index which delivered -6.78% over the financial year.

Over the option’s 3 year investment timeframe, both super and pension have outperformed the 3.44% investment return objective by 0.75% (super) and 2.15% (pension).

Australian share markets fell significantly during the second half of the 2022 financial year after rapid rises in inflation led to faster than expected interest rate rises, eroding the strong performance of shares in the first half of the year. Our outperformance against the index was driven by our exposure to companies that benefitted from the energy transition theme such as Lynas and Jervois and also companies that improved their businesses, like Tabcorp and QBE Insurance.

Australian Shares – Index

Australian shares – Index returned -5.62% for super and -6.43% for pension, as Australian shares retreated over the financial year. Australian share markets fell significantly during the second half of 2022 after rapid rises in inflation led to faster than expected interest rate rises, eroding the strong performance of shares in the previous half of the financial year.

Because the option is designed to track the returns of the underlying Australian shares index (ASX300), returns should be expected to go up when the index returns go up, but also expected to track them when they go down.

Overseas Shares

Overseas Shares returned -8.59% for super and -9.53% for pension, both slightly underperforming against the benchmark of -7.66%. Over the three year investment timeframe, both super and pension have underperformed the global shares index.

Overseas shares fell significantly during the second half of the 2022 financial year after rapid rises in inflation led to faster than expected interest rate rises, eroding the strong performance of shares in the first half of the year. It was a challenging period for active management with markets driven by policy events like interest rate changes. The war in Ukraine intensified the global energy crisis and led to an unusual mix of traditionally defensive and traditionally growth shares (like those in energy and commodities) outperforming at the same time.

Ultra large companies led the strong growth in the US and other overseas markets, and the portfolio underperformed given our investment in companies of all sizes to diversify the portfolio. While the portfolio made up ground in the second half of the year as the large companies fell in value, overseas markets fell across the board as a result of rising interest rates. In the US markets, our lower weighting to large technology shares in the strong period to Dec was a key driver of underperformance, whilst our low weighting to shares in China and our stock selection in Communications helped performance.

Overseas Shares – Index

The Overseas Shares option returned -5.99% for super and -5.94% for pension, as overseas shares retreated over the financial year.

The option is designed to track the returns of the underlying global shares index so returns should be expected to go up when the index return goes up, but also expected to track them when they go down. Overseas shares fell significantly during the second half of the 2022 financial year after rapid rises in inflation led to faster than expected interest rate rises, and eroded the strong performance of shares in the first half of the year.

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

Stay informed!

Watch Rest’s annual End of Financial Year on-demand Webinar to hear from our Chief Investment Officer, Andrew Lill, on our performance over the FY21/22 financial year and how we aim to deliver resilience in challenging markets.

Watch now

1. As measured by the SuperRatings-SR50 Balanced (60-76) Index

2. As measured by the S&P500

*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/investments/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/investments/options

^ Rest Digital Advice is provided by Link Advice.

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