Table 2. CSC’s investment performance: criteria and results
CSC’s investment performance for its default accumulation options over a rolling three-year period. (SOURCE: CSC’s 2019–20 Corporate Plan, p. 5; 2019–20 Portfolio Budget Statements, p. 101)
Achieved: CSC’s default accumulation option achieved its annual real return target of 3.5% per annum over the rolling three-year period to 30 June 2020
CSC’s investment portfolio is maintained withn Board-approved risk parameters, such that negative returns are expected in no more than four out of every 20 years for the default accumulation option. (SOURCE: CSC’s 2019–2 Corporate Plan, p. 5; 2019–20 Portfolio Budget Statements, p. 101)
Achieved: CSC’s portfolio risk for its default accumulation option has been managed such that there have been no more than four years of negative returns over the 20-year period to 30 June 2020.
Our performance helps customers reach a comfortable retirement
By consistently achieving our investment performance criteria, summarised above, CSC increases the probability that the average CSC accumulation customer in retirement will reach the ASFA ‘comfortable retirement standard’ of income for Australian retirees (see page 23 of this report for definitions). We track five customer cohorts, by gender, to ensure our investment objectives continue to appropriately support this ambition for all of our customers.
Today, our average defined contribution customer across all cohorts has accumulated savings that are on track to deliver a retirement income equivalent to 121% of the ASFA comfortable standard. Further, the majority of our full-time working customers are on track to achieve that standard as well. This ratio will change over time and differs between customers depending on their personal circumstances. However, by ensuring that all our customers can track – via our website – their individual savings against the ASFA standard and their cohort of peers, we can assist every individual to choose wisely their level of investment risk, the contributions they make and their retirement age.
Our investment options cater to individuals
We provide three pre-mixed investment options plus a purely cash option. All are explicitly designed to work together or separately to allow tailored risk-taking appropriate to the different stages of the working life cycle and individual customers’ circumstances. The one thing in common for all our investment options is the strength of our investment risk management. It enables us to consistently generate some of the highest net real returns to investment risk-taking in the industry. This means that our customers can choose between our options with confidence.
- Our income fund option focuses on generating a sustainable income with continued moderate capital growth and is suitable when the capacity to recover from market volatility is lower. This option is consistently rated in the top quartile of its type in SuperRatings survey (net returns taking into account risk), and was first across all time horizons to 30 June 2020.
- Our aggressive fund option focuses on generating high real returns over the long term and is suitable for individuals with a capacity for higher risk investments. This option is consistently rated in the top quartile of the SuperRatings survey across all time periods and was either first or second for all time horizons to 30 June 2020.
- Our balanced fund, as its name suggests, balances capital growth with capital protection to deliver greater certainty of outcome. Our balanced option is our default option. It targets net investment returns of 3.5% per annum above inflation. This target is the average annual growth rate in real savings that we estimate is needed to provide the ASFA comfortable standard in retirement income to our average accumulation customer. It takes into account that customer’s age, current superannuation balance, amount of superannuation contributions, cost-of-living adjustments and likely retirement age. Our strategy here is to capture most of the upside in markets and avoid much more of the downside to increase the probability that all of our customers will retire with adequate income. The return generated per unit of risk taken in this option is rated in the top quartile of the SuperRatings survey over long horizons.
- Our cash fund aims to preserve capital and is 100% invested in cash assets.
Our customers can factor in their individual characteristics on the retirement income calculator on our website and track their progress towards retirement.
Our investment strategy
CSC’s investment strategy is designed to help all of our customers achieve a standard of living in retirement that is ‘comfortable’, as defined by ASFA, regardless of whether they retire in strong or weak market conditions. We expect every investment risk we take to improve the probability that our customers’ balances will meet the ASFA standard by the time they retire at an assumed age of 65.
This means that we focus on the fundamentals of cash-flow generation and its sustainability, rather than on market sentiment. We use market price momentum and reversals as opportunities to buy assets at prices that are low relative to our assessment of long-term fundamental value, or we divest from assets that are no longer expected to deliver sustainable cash flow.
Compared with other superannuation funds, this means that our Default Funds generally suffer fewer or smaller losses when markets are falling, but still capture a large proportion of the gains when markets are rising strongly. This reflects our intentional strategy design to truly balance the need to preserve our customers’ capital through downside risk management, while ensuring that they take sufficient risk into opportunities that can grow their savings above inflation through market recoveries.
Over the long-term horizon for customers in our balanced option, we expect to deliver competitive returns with greater certainty of income sufficiency at retirement. Our income-focused and aggressive funds are expected to deliver competitive returns consistently as their risk appetite is more directly comparable to that of other funds.
We actively protect our customers’ savings and hunt for robust opportunities to grow their savings without undue risk. We are early adopters of new and innovative investment opportunities including technology infrastructure like data centres which are only now gaining popularity with institutional investors, telecommunication satellites and renewable energy investments.
We continuously assess whether investment returns for assets, net of costs and tax, are sufficient to compensate for any evolving risks to which those assets are exposed and vulnerable. Risks are not just those visible in an asset’s short-term earnings; they can also arise long-term in an asset’s ecosystem and may reduce potential earnings capacity. Such risks include how an asset or business is governed; how well it understands its competitive environment; the threats and opportunities of technology; how it supports, trains, manages and aligns its employees to its purpose and values; how it considers and manages its impact on the environment; and the community in which it operates. We believe the most robust insights into these factors come from a strong understanding of the governing body and management of an organisation, and by looking for consistency between a business’s long-run strategies and short-term performance.
Competitive and consistent returns for our members
Our investment strategy aims to achieve a cumulative return for our customers which is:
- Fit for our customers’ purpose: delivering the ASFA comfortable retirement income by the age of 65.
- Resilient to developments in external market environments: by proactively managing risk especially as exogenous shocks occur, e.g. pandemic and associated market volatility and buying high-quality assets and strategies, and profitable and sustainable businesses at fair or better prices.
- Competitive: compared with other superannuation funds with different strategies, because we aim to consistently generate a robust return for every investment risk we take. By avoiding the risk of capital impairment, but being prepared to take risk when prices are below long-run value, we expect competitive longer-term returns and reliable long-run outcomes.
Our investment performance to 30 June 2020
The COVID-19 pandemic and the methods used by governments to control its spread have had widespread impact on incomes around the world. Record-setting collapses in global economic activity were recorded in unemployment, services and manufacturing statistics. Some of these indicators have recorded levels last seen during the Great Depression in the 1930s.
Between late February and early March 2020, financial markets reflected these consequences in the fastest fall in equity markets ever recorded. Monetary and fiscal policy responses then enabled an equally extraordinary, albeit volatile, recovery in the June quarter (amidst rising daily cases of infection).
As a result, the impact on our one-year results is a relatively small negative return. But over the medium and long term, investment returns for the 3, 5, 7, 10 and 15 years to 30 June 2020 for the Default, Balanced and MySuper Balanced options of the various schemes exceeded their objectives.
The pandemic volatility demonstrated the fine balance between the need to minimise losses from exogenous shocks, against the imperative to grow customer savings above inflation to sustain adequate retirement outcomes. Our approach aims to minimise losses when markets fall, but also capture most of the increases when markets rise strongly. For example, this is why we have historically outperformed many other funds in volatile and troubled market environments, such as in February and March 2020, but can underperform them, by a smaller amount, when markets are driven by sentiment rather than fundamentals. Over timeframes relevant to our customers, we expect this strategy to accumulate very competitive retirement outcomes.
Over the last ten years to 30 June 2020 spanning both bull and bear markets, we have avoided 40% of the losses that peers incurred when markets fell, while capturing most (86%) of the gains in strong markets relative to our Balanced fund peers. Additionally, the balanced fund has historically been in the top quartile of our peers over the long term (7 and 10 years to 30 June 2020) when comparisons take into account the amount of risk that customers are exposed to. Our Incomefocused and Aggressive options have been consistently in the Top 2 funds for net risk adjusted returns in their peer groups for all time periods.
The key portfolio activities in 2019–20 that contributed to our performance are highlighted below. Our overarching strategy and investment discipline was to seek investment opportunities on an apples-to-apples comparison – return adjusted for risk – basis, rather than taking on more risk to capture higher returns. This is because the dramatic increase in uncertainty caused by the pandemic has led to significantly higher premia for taking risk:
- Diversification of our portfolio by investing in innovative investment opportunities. Examples include:
- Adding further domestic and offshore infrastructure, including renewable energy investments.
- Completed a successful partial sale of Canberra Data Centres (CDC) to lock in some of the “supernormal” returns on this investment over the past three years.
- Participated in an award-winning telecommunications project refinancing a new satellite in Asia-Pacific.
- Established and launched a systematic private equity co-investment program with the appointment of a specialist global co-investment adviser to access high-quality, riskadjusted return opportunities at lower cost.
- Expanded the public-market seeder program to access high-quality sources of alpha without increasing customer fees proportionally.
- Developed an additional proprietary alternative strategy that provides another low-cost diversifying source of active returns.
- Proactive management of portfolio risk – not only at the individual asset, manager, sector and regional level, but also at the integrated fund level. Prior to the market volatility in late February, we reduced our risk exposures relative to peers to protect customer savings. Subsequently, as unparalleled policy support reassured and stabilised markets, we took that price opportunity to rebalance back into equity markets at lower prices in the June 2020 quarter, and thereby supported our customers’ savings to grow.
- Portfolio resilience through defensive assets. We have also increased defensive exposure, including a small exposure to gold futures, diversifying into other non-USD safe-haven currencies, and longer-term bonds, as part of building up the portfolio’s longer-term resilience to inflation and shorter-term recessionary concerns.
- Liquidity for investment and customer needs. Our processes for liquidity management worked seamlessly through this period enabling us to meet all demands on our cash from members, as well as our investment portfolio needs.
- Customer equity was preserved. Our valuation policies allow for stress situations and ensure that valuations on our private assets are not stale when public market equivalents are changing materially.
Our investment governance model is unique and designed specifically to support our capacity to take investment decisions in real time, rather than subject to the constraints of the Board meeting cycle; and to proactively identify and manage risks with agility before they can materially impact customers’ superannuation savings. We operate with full transparency, clarity of risk appetites and tolerances, and delegated accountability in all investment decisions. This was especially stresstested when the pandemic shock started in February 2020 – the delegations framework in enabling pro-active decisions to be taken into and through market dislocation, with accretive outcomes for customers.
Our investment governance framework means that CSC implements its investment decisions through:
- A structured and transparent set of delegations, ensuring the right decisions are taken at the right time by dedicated professionals best skilled and, therefore, accountable to take them.
- A robust set of specialised, external agents who complement CSC’s internal resources, who are agile and targeted to be fit for specific CSC investment purposes, and who materially reduce our uncompensated operational risks.
- A nimble, stable and skilled internal investment team focused on ensuring CSC’s comparative advantages are used to our customers’ best interests; are empowered to continuously innovate to maintain our global best-practice credentials; and focused on assessing and managing the implications for risk taking that flow from a continuously evolving, global market.
To learn more about CSC’s investment approach and strategy, go to 5. Our Investments in this report.
The global investment outlook
Portfolio-management agility remains critical as the distribution of plausible economic outcomes is unusually wide. Given the complexity and uncertainty of the policy challenge ahead, we remain cautious on the outlook. However, we are also respectful of the fact that policymakers have stated their intention to do as much as they can to underwrite as robust an economic recovery as possible.
Markets will be responsive to the evolution in this policy path; its attendant political risks including those manifest in US–China relations; and ultimately, the underlying realisation of fundamental employment and business solvency rates.
A rolling ‘saw tooth’ pattern of virus reoccurrences and localised shutdowns in economic activity, aimed at containment, may persist until a medical solution to the virus or its virulence is found. The OECD predicts that it will take at least two years to return to 2019 GDP growth levels. Others argue that recovery will be much faster than this.
It is likely that the pace of recovery will differ across and within regional economies and industries:
- Recovery depends on the speed, effectiveness and agility of policy responses in balancing population health and economic viability; pre-pandemic government balance sheet and living standards; the interaction between the pace of economy re-openings and health-system capacity and testing coverage; cultural adherence to social distancing rules.
- Continuing material fiscal and monetary policies plus the potential for pent-up demand (including higher investment to re-design away from supply-chain vulnerabilities) have restored some momentum in consumption around the world. The lingering effects of the pandemic on behaviours may result in a slower pace of recovery from here, though that is not certain.
With interest rates anchored at zero in much of the developed world, investors are being forced to take more risk to derive a return. And the nature of traditional defensive assets has changed because it now comes at a real cost (taking into account inflation).
Longer-term, structural influences on cash flows will be important:
- Supply-chain management: Supply-chain interruptions that persist for longer than 1 or 2 quarters, and result in material disruption to global earnings represent high operational risk for businesses around the world. This may encourage investment to duplicate supply chains within regions as businesses trade-off some efficiency for greater supply-chain resilience. This would represent higher cost bases for some companies.
- Industry consolidation and supply destruction: This is likely to occur in the industries most directly impacted by the pandemic. We remain mindful of this and seek opportunities for capital deployment selectively.
- Pre-existing structural trends: The pandemic shock has accelerated trends such as the migration from analogue to digital work practices (uncoupling the physical location from the productivity of resources); technology-for-labour substitution; increased reliance on cloudbased technology; regulatory reform including tax systems; and industry consolidation.
- Policy responses: The rapid and extensive responses by many governments, combined with vast expansion of central banks’ balance sheets to relieve financial conditions, have allowed the risk markets to look past the economic impacts and assume unlimited government and central banks support. It is likely that while government policies “fill in” lost incomes for a time, they cannot completely erase the impacts of the global recession. Significant economic damage occurred in the June 2020 quarter. The secondary (and probably longer-term) effects of the pandemic depend on consumer and corporate behaviour.
- Geopolitical events, including the implications of the US election results, Brexit negotiation and China–US tension, are expected to also remain influential on financial markets.
- Risks of inflation: Inflation risk is not a near-term concern in asset markets. However, we are mindful that it may be a growing risk longer term if gradual de-globalisation trends raise corporate costs and policy remains expansionary as economies recover to inflate the debt away.
To robustly navigate this uncertainty, we rely on the diversification characteristics of our portfolio; the quality of its underlying material assets; and the agility of our asset allocation management to lean against (into) the risks (opportunities) as they evolve.