28 February, 2022

Navigating the storm … an update on Spirit Super’s investment strategy

CIO Ross Barry
Ross Barry
Chief Investment Officer
In the current investment environment, it is easy to feel like a small boat on a big ocean in the middle of a perfect storm. In the past two years alone, the global economy has been rocked by severe weather events, a global pandemic, global supply chain disruptions, a resurgence in inflation and, now, a major conflict in Europe. Naturally, many of you will be feeling a little anxious.

But it is not all doom and gloom, and long-term investing is largely about navigating diligently through such times and winning the long game. Accordingly, we’d like to update you on how our investment portfolios have been performing and set out for you some of the important steps we’ve taken to keep your savings safe.

Historical returns

Firstly, looking back at performance up to 31 December 2021, we continued to deliver very strong returns across all investment options. The (MySuper) Balanced option delivered 13.3% for the year, while our Growth option delivered a return of 16.9%. Even our most defensive pre-mixed option, the Conservative option, delivered 5.8% for the year.

Returns to Spirit Super Pre-Mixed Options for the period ended 31 December 2021
 Accumulations 1 Year 5 Years 10 Years Min. Timeframe
 Conservative 5.83% 4.74% 5.19% 4.54%
 CPI + 1% 4.59% 3.21% 3.54%  3.22%
 Moderate1 8.24% 6.32%    6.32%
 CPI + 2%  5.43% 3.96%   3.96%
 Balanced 13.32% 8.53% 8.97% 8.57%
 CPI + 3% 6.59% 5.03% 5.28% 4.95%
 Sustainable1  14.39% 8.64%   8.36%
 CPI + 3% 6.59% 5.03%   4.93%
 Growth 16.88% 10.29% 10.02% 10.02%
CPI + 4% 7.5% 5.61% 6%  6%

1 Performance history prior to 30 March 2021 is for TasPlan’s Moderate and Sustainable options. Past performance isn't necessarily an indication of future performance. The value of investments can rise or fall, and investment returns can be positive or negative.

As good as these results are, we do not expect them to be repeated in 2022.

Having recovered strongly from the onset of COVID-19, global financial markets became unsettled late last year by the re-emergence, after several decades, of higher inflation. Bond markets, often seen as a “safe-haven” asset class, sold off as economists began to predict a sooner-than-expected shift in policy settings toward higher interest rates.

Against this backdrop, global share markets have also become very volatile. The greatest weakness has been in large US technology stocks like Facebook, Tesla and Google, but more recent selling has become more broad-based as corporate earnings have been impacted by an extended period of shipping backlogs, labour shortages and unavailability of critical inputs like semiconductor chips.

The S&P500 Index of US stocks has fallen by more than 10 per cent from its peak at the start of the year, while the ASX300 Index of Australian stocks has fallen close to 8 per cent from its peak.

S&P500 (US) and ASX S&P200 (Australia) Indexes: Last 5 Years

Graph depicting S&P500 (US) and ASX S&P200 (Australia) Indexes: Last 5 Years

The invasion by Russian military forces of Ukraine has compounded this uncertainty and, naturally, caused fear and anxiety across the world. Like you, we have been both disturbed and deeply saddened by developments in Ukraine. Our thoughts are with the families of all Ukraine and Russian people who will inevitably suffer from the tragedy unfolding in eastern Europe.

Not surprisingly, our immediate investment focus is the impact of the conflict on commodity prices, trade flows and infrastructure networks. Russia is a major global supplier of oil and gas, coal, copper and wheat. Higher commodity prices and supply disruptions will likely add to existing inflationary pressures worldwide. We also remain attuned to the risks of a further escalation of hostilities, the response of other countries and the potential for another refugee crisis in Europe. The longer the Ukrainian issue plays out, the greater the potential impact on already elevated inflationary concerns.

How are we managing these risks?

It is important to note two things about managing risk. The first is that markets are complex and don’t always react to news and events the way you might automatically expect. The second is that the middle of a market dislocation is rarely the right time to de-risk portfolios. A good risk management system is forward-looking and seeks to re-position the portfolio before such developments.

This is exactly what we have been doing.

Over the second half of 2021, the Spirit Super investment team shifted our pre-mixed portfolios from a slightly “risk-on” posture to a slightly more defensive one.

  • Some of the steps we took were as follows:
  • Unwinding a prior overweight to growth assets such as Australian and Global shares
  • Establishing a significant “short duration” tilt within our Fixed Interest portfolio, (reducing our exposure to rising interest rates)
  • Reducing our exposure to international credit risk and redeeming most of our exposure to Emerging Market debt
  • Redeeming from a number of more highly leveraged hedge fund-like investments and projects with lower-quality assets and/or significant development risk
  • Increasing the overall liquidity of our portfolio through the exit of several non-core illiquid assets – this will increase our ability to respond as the outlook evolves, including to take advantage of new opportunities if and as they arise
  • Reducing our foreign currency hedges – while this may seem counterintuitive, small-country currencies like the $A tend to fall in periods of heightened global risk aversion, which means the unhedged value of offshore holdings increases in $A-terms.

These revisions have served us well. But, perhaps, more importantly, Spirit Super has been particularly well served by its long-term commitment to diversification across a broad range of different asset classes as our first line of defence. We have not put all our eggs in one basket.

We have also been committed to building portfolios of high-quality property and infrastructure assets with strong economic fundamentals, robust cash flows and very solid counterparties. This is strongly reflected in our recent acquisitions of Parliament Square in Hobart and Geelong Port.

Returns in recent months (see below) have also been supported by a 30-40 per cent uplift on our significant holding in Sydney Airport as a result of the sale of that asset to a consortium of investors, as well as strong returns to our private equity and venture capital investments.

What specific exposure do we have to Ukraine and Russia?

As the conflict has emerged, the Investment Team has kept a weather eye on our direct holdings in Eastern Europe, including regular dialogue with our investment managers.

We can report that as of 25 February:

  1. across our international shares portfolio, our exposure to Ukraine and Russia is negligible at just 0.10% of Spirit Super’s total portfolio;
  2. we have no direct property or infrastructure investments in the region; and
  3. across our international fixed income and credit holdings, our managers report negligible holdings (approximately 0.02% of Spirit Super’s total portfolio) in Ukraine and Russia

More generally, our portfolios will continue to be impacted by broader indirect fallout from the conflict, including higher energy costs and other trade disruptions. A significant part of our Australian shares portfolio, for instance, is invested in resource companies including investments in the development of renewable energy sources that lessen Australia’s reliance on global energy markets. We also note that many of our holdings have revenue streams that are positively linked to CPI-inflation and therefore are expected to perform better in higher inflation environments, all else being equal.

How have portfolios performed since the start of 2022?

As noted, since the new year, there has been a rise in bond yields (and market-determined interest rates more generally) and weakness in most global share markets. Not surprisingly, returns to our more growth-oriented investment options have been negative during this short period.

The figure below shows the progression of $1 invested at the start of the year in the Conservative, Balanced and Growth options. Compared with the performance of the S&P500 index, the extent of losses in Spirit Super’s options has been quite muted – this reflects the inherent level of diversification, the quality of assets in the portfolio and the significant steps we took during the past six months to de-risk.

Return path for the Conservative, Balanced and Growth Options since the beginning of 2022

Return path for the Conservative, Balanced and Growth Options since the beginning of 2022

Short-term movements and short-term volatility are part of growth-oriented portfolios. We continue to monitor developments in real-time and respond appropriately and, as always, in members’ best long-term financial interests.

Some of you may be thinking about changing investment options. We recommend you consider any move carefully and get appropriate advice before making a decision. You should consider factors such as how long you are investing, your personal risk tolerance, and what part super plays in your overall retirement planning goals. For your advice options, see Advice.

We hope this update is helpful. We are committed to being as open and transparent as we can about managing your retirement savings and will provide further updates over the coming weeks and months.

For more information about our investment performance and options, see Investments or reach out to our contact centre.

Remember, past performance isn't necessarily an indication of future performance.

Ross Barry, Chief Investment Officer

Investment Update - 4 March 2022:
Further to previous communications, Spirit Super confirms it is now in the process of divesting all remaining holdings of Russian assets in accordance with sanctions announced by the Australian Government.