Investment update – coronavirus and super

Wednesday, 27 May 2020

As the coronavirus pandemic continues to affect the economy and financial markets, we understand that you and your employees may have some questions about super and investments.

Investment markets – it’s been a wild ride

The past couple of months have seen the Australian share market on a wild ride, declining more than 37% from their high on February 20 to their low on March 23. The main reasons for this decline was a collapse in oil prices and the extreme uncertainty regarding the Australian economy, business activity and the unemployment rate as Australia looked to shutdown in response to the coronavirus crisis. Since then, we’ve seen the Australian share market recover around 31% (as at 11 June 2020) from its March 23 lows , with the drastic action to date by the RBA and Morrison Government fuelling investor’s expectations of a ‘V’ shaped economic recovery.

Rest’s active management approach in action

While we could not have forecasted the coronavirus pandemic, the resultant downturn in markets was the type of outcome we were concerned about for some time. In recent years, we took the view that there were heightened risks in the Australian and global markets. These risk factors included historically low interest rates which fuelled high levels of debt, which contributed to inflated asset prices. These types of markets are more vulnerable to ‘shock’ events such as the current pandemic which can trigger major market falls or volatility.

Following our assessment of these risks and prior to the start of the pandemic, we had already reduced share market risk in our default option Core Strategy to help protect members’ retirement savings. We did this by changing its asset allocation, most notably by gradually reducing the allocation to Overseas Shares and Australian Shares in Core Strategy from 50% to 39%. We also held up to 11% of the fund in ‘cash’, a defensive asset class, which we had been increasing our allocation to over time. Holding extra cash meant we also had funds available to potentially purchase shares or other assets at attractive prices if markets fell. This left Core Strategy positioned relative defensively in comparison to its peers, prior to the coronavirus-led market volatility of the March Quarter 2020.
As share markets began to correct in February 2020, our defensive position allowed us to use some of this cash to increase Core Strategy’s exposure to shares at much cheaper valuations than before. In fact, we increased our target asset allocation to Australian and Overseas shares from 39% to 44% which we funded with a reduction in cash.

It’s the results that count

This active management approach helped to cushion Core Strategy (comparatively to peers) from the large fall in share markets in the volatile March 2020 quarter. It also helped to position Core Strategy for the quick market recovery, taking advantage of cheaper share prices by increasing its allocation to more equities. 

Rest has followed this risk-managed, long-term investment approach for many years and it has served our members well during previous periods of market turmoil such as the Global Financial Crisis. Since the Core Strategy started in 1988, it has achieved an average annualised return of 8.63% (as at 31 December 2019).