Have things become more expensive? Is it just temporary?

From groceries to school shoes, second hand cars, accommodation, fuel and transport, these days prices are noticeably higher than they were a year ago.

07 Sep 2021

From groceries to school shoes, second hand cars, accommodation, fuel and transport, these days prices are noticeably higher than they were a year ago.

Some argue this is temporary, because COVID-19 has disrupted supply and slowed exports coming in through our borders. Others believe this will mark a turning point in the low inflationary environment we’ve enjoyed for so long[1].

To prepare our investment portfolios for both possibilities (and many other possibilities by considering scenarios such as high inflation, slowdown or recession), we regularly conduct stress testing and scenario analysis to determine:

  • The least amount of risk that can be taken without jeopardising an investment portfolio’s ability to achieve its real return objective[2],
  • The most amount of risk that can be taken without jeopardising a portfolio’s ability to manage capital loss[3].

For example, we acquire real assets like property and infrastructure as they can manage and hedge against the risk of inflation. See the latest addition to CSC’s digital technology portfolio – acquisition of the largest network of mobile tower sites in Australia.

Investment markets are not static and are prone to shocks that can persist. The range of potential outcomes is wide and variable and can be subject to unforeseeable surprises. We stress test the portfolios using historical high risk environments where the portfolios were vulnerable to extreme fluctuations, e.g. the 2008 global financial crisis, the late 1990s Technology bubble, and the 1970s oil shock.

[2] i.e. returns above the rate of inflation.

[3] i.e. permanent write-down in the value of savings.

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We were the first Australian superannuation fund to implement a detailed bottom up security level risk system in 2009 that is a fully integrated but flexible whole of portfolio approach.

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