2021–22 Investment Performance Review

Our investment performance

2021–22 Financial Year

Global share and bond markets have experienced negative returns for the 2021–22 Financial Year.

We appreciate these one year results may be concerning to you, but they must be considered in context. We have been planning for this, and working quietly in the background to build resilient and diversified portfolios with quality assets for you.

You can find further details of our 2021–22 Financial Year investment performance at How We Perform¹.

Why is this year different?

Following years of record low interest rates, inflation, and atypical sharemarket returns, markets have been experiencing significant corrections towards more sustainable levels since the beginning of the 2022 calendar year.

Geopolitical, economic and market conditions have led to negative returns from both global share and bond markets.

The short-term impact on superannuation balances will depend on a funds’ investment strategy, including the extent of genuine diversification. The longer-term impact will depend on the quality of assets in customer portfolios.

There may be a downturn, but we are prepared

We thoroughly and proactively consider a wide range of potential scenarios that can occur, and the likelihood of them occurring. As part of this planning, we have been preparing customer portfolios to weather higher inflation and lower asset values as central banks respond. This was mentioned by our CIO in customer newsletters in 2021 (e.g. Have things become more expensive? Is it just temporary?), and also discussed by her at the 2021 Annual Member Meeting.

Here’s how

We have been planning proactively to take advantage of opportunities as markets fluctuate and prices of inflation hedged and high quality assets become more reasonable. Here are some examples:

1. Sourcing the types of investments that build more inflation-hedging into your savings.

   One example of this is our purchase of an interest in Amplitel, an Australian wireless tower infrastructure asset (co-owned with Telstra). This is a high quality asset that offers returns linked to inflation, and less correlated with the economic and market cycle.

   Read more about our assets

2. We increased our cash holdings through the latter half of 2021.

   We did this to prepare for potential deflation in asset prices—this cash will be used to buy into high quality assets as their prices fall.

3. We retained high quality active managers

   We retained high quality active managers in our portfolio because of their capacity to identify and invest in companies and assets with strong balance sheets, high free cash flows, and undervalued business models. These traits were not fashionable through the speculative 2020–21 period, but their value is visible in your portfolios now². Read more about our investment managers.

Built to manage market fluctuations

We have built resilient and diversified portfolios³. We deliberately chose not to only invest in sharemarkets or government bonds, because these momentum-driven markets are vulnerable to events that make people recognise changes in the fundamental drivers of growth and inflation. Over the past 12 months, these events have included:

• Policy responses to the pandemic. In 2020, we took the time to understand the longer-term implications of these responses.
• Rising competition and associated geopolitical risks. These are currently manifesting in outright conflict by Russia in the Ukraine.

These events have unearthed, and in some cases accelerated, existing supply constraints and subsequent price pressures in energy, commodity, food and goods supply chains.

In response to this, we diversified our exposures into select real assets such as infrastructure and regional economies less vulnerable to inflation risks. These are risks we identified last year, that are now very visible across the developed world.

Trust our track record

• Our primary aim is for your savings to be secure as well as grow. Our investment strategy has been carefully designed to capture most of the gains as markets rise, but avoid more of the losses, on average, when markets fall compared to our peers⁴. This is a distinguishing characteristic of our approach, versus our peers, because we understand that it isn’t the ups and downs in returns that you experience along the journey, but the wealth you are able to accumulate and sustain in retirement to support your spending then, that matters.
• It is possible that markets will continue to face headwinds over the coming year or two. This means that investment returns may not be as strong, on average, as those experienced over the past couple of years. This is because asset values will be surfaced as prices adjust to underlying fundamentals.
• Our focus on downside protection and high quality assets means that these price variations do not erode the underlying value of your investments. Rather, they remain temporary fluctuations not permanent impairments to your savings—as demonstrated in our history⁵.
• We continue to measurably outperform our regulated portfolios across all options, which the regulator monitors to assess the quality of superannuation fund investment capability⁶.

How do we aim to keep protecting your assets?

We will continue to focus on your long-term retirement outcomes and invest in assets that can be depended on to provide sustainable income, ahead of inflation, when you retire.

We have technically referred to this as maximising returns net of fees, adjusted for risk. In practice, this means we proactively invest in assets that are resilient to adverse market environments, but can grow when conditions are strong. For example, the last three financial years have seen significant fluctuations, year-to-year⁷:

Investment performance is subject to market volatilities and past performance is not an indicator of future performance.

Our investment strategy has been carefully designed to capture most of the gains as markets rise, but avoid more of the losses when markets fall compared to our peers⁸.

Why do we focus on downside avoidance? We manage the fluctuations to reduce downside, because losses require more than proportional gains to get back to square one. The smaller the losses, the greater the share of future returns that can go to actually growing your savings rather than just restoring them to their pre-event level.

Focusing on downside avoidance is important because of the asymmetric impact of losses compared to gains on longer term wealth creation. For example, if markets fell by 20%, a portfolio of $100 will fall to $80 and markets would need to rise by 25% to restore the portfolio to its original value of $100. The larger the losses, the greater the subsequent gains required to restore value. A 30% loss will require a 43% gain.