Ange

Welcome to Super Simple Chats. Rest's very own podcast. We will be speaking to industry experts about all things super. Trying to make it understandable and relatable for everyday Aussies. After all, it's one of the biggest assets you'll ever have.

Ange (V/O)

We're recording this podcast on Gadigal land. We pay our respects to elders past and present.

Any advice you hear on this podcast is general and doesn't take into account your financial situation, needs or objectives before acting on any advice or deciding to join or stay, consider its appropriateness and the relevant PDS, FSG and TMD at rest.com.au/pds. Product issued by Retail Employees Superannuation PTY LTD.

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Andy

Welcome to a special edition of Super Simple Chats. Today, we're sitting down to discuss market volatility and super. With the conflict in the Middle East that is continuing to drive volatility, media headlines and cost of living pressures, many of you are asking what this means for your super and how you should be responding.

Today I'm joined by Rest’s Chief Investment Officer Michael Clancy…

Michael

Hi Andy.

Andy

and Rest’s General Manager of Communications and Community, Sam Baden.

Sam

Hello. Good to be here.

Andy

and we'll be breaking down and answering some of the most important questions we're hearing from members.

So, Michael, I'm keen to start talking about volatility.

Michael

Sure.

Andy

Can you help me understand how a conflict on the other side of the world might flow through to a super balance?

Michael

So, Rest investment options invest in a range of different types of assets. Some company shares, bonds, property, cash, and so on. And so, when conflicts happen, somewhere in the world, especially in the Middle East, then investors get nervous about how that translates into oil prices and other commodities. What that might mean for economic growth, inflation, so on. And so especially at the start of a crisis when you don't know a lot, when there's concern about how big this will be, how long it will last. Investors get nervous. And so, some will start selling assets and that moves prices around. And because we invest in many of those assets all over the world, some of that translates into our members’ unit prices, which drives the value of their accounts.

So, these kinds of things unfortunately happen all the time.

Andy

Right.

Michael

So, when we build our investment options for members, we do so in the knowledge that there will… as long-term investors there will always be some kind of events happen. It could be a natural disaster. It could be, some kind of economic shock. Think back to Liberation Day in 2025. Think back to, early 2020, when Covid 19, hit communities and also financial markets. Or it could be, military conflicts. If you think about, since the Second World War, there have been about 35 different nations state to nation state wars in… so that’s 80 years. So it's nearly every two years on average something like what we’re seeing in the Middle East happens.

These aren't uncommon. In fact they are expected and when, so I said earlier, we design our portfolios with the expectation that something like these events will happen.

Andy

So there's a lot of talk from different super funds and experts reminding us that volatility is a normal part of long-term investing. Can you break that down a little bit more for us than, you know we see these events happen. Can you just tell me a little bit about how it's inevitable and how super’s designed to manage these situations?

Michael

Sure. So, superannuation is for our members’ retirement. It is a long term investment almost by definition. So you need you need to think about your investment, in your superannuation account like a marathon, not like a sprint.

History shows us that there is a long-term relationship between risk and return. And because superannuation is a long-term investment, we have the ability to invest with that long term in mind. Which means investing in assets that can be more volatile from time to time in the pursuit of higher returns, because it’s those higher returns that drive high balances, which drive better retirement opportunities for members.

And so, because that volatility is normal (and) to be expected, when we build our investment options, we designed them with that in mind. So, we are really well diversified,

Andy

Yeah, so we see more risk in investing because of volatility. We can also see bigger payoffs throughout the lifetime of that.

Michael

Yeah. That's that's what generates returns.

Andy

Yeah. Right. Oh yeah.

Sam

It's really helpful actually Michael, for you to talk about this and actually talk about the fact that volatility is normal in investing that that's really helpful, I think.

Michael

Exactly right. Volatility is a feature of long term investing - not a flaw.

Andy

Yeah I mean we've got this beautiful chart here as well. It shows the different dips that you can kind of see throughout history. For those of you who are watching, you can see a graph on the screen now, but we'll also pop a link in the show notes for those who are listening.

So if I was to look at this, I could kind of point to the drops and then go, there's obviously some kind of event that took place. But then I can also sort of see that the market rebounds, right?

Michael

Yeah. And if you were to draw a line through that, you can see that in the long run markets recover - even in the midst of a crisis, you can feel very anxious.

It can feel nerve wracking, especially if the media is reinforcing negative messages to you day in, day out. However, as long as economies recover then markets tend to recover too.

Andy

We know that emotions play a huge role in driving behaviour, right? That's the way that advertisers get you - they get you in the feels. And then, I'd imagine that it would be very similar in people's minds if like, oh no, I'm seeing this thing, it feels terrible, I need to react defensively.

Michael

And I think that's part of our job as institutional investors is to not react to feelings. Our job is to understand history, understand how markets work, not get caught up in the emotional side, not to react, but actually to plan ahead. And to take advantage of opportunities like we see in the markets now. So, you know, there's that old addage of never waste a crisis. So crises are actually opportunities for long-term investors.

Sam

And I love the use of the word institutional investors as well because it does sound a bit boring. Michael, no offense, but that's what we want from our investment teams. We want professionalism. We want people who know what they're doing, you know, with our members’ investments.

Andy

You kind of just covered this off a little bit, but let's go into a bit more. Do investors prepare for volatility? Do they look at what's coming and then get ready for it. And how so?

Michael

I think there's three things I’d call out. First of all, is - I'm very fortunate as a superannuation fund - to be always receiving contributions from members and/or members’ employers. So, we're always investing. And our job is to make sure that whatever we're investing in, we need to make sure that we're getting a return that reflects the level of risk that is in any investment we have. So that's the first thing: making sure that risk and return are well balanced.

Secondly, I mentioned earlier diversification. Some people call it the last free lunch in investment management. It’s making sure that, you know, you don't just have one or a small number of assets, but actually the portfolio is well diversified across a number of assets, so that if something is doing well or pulling any given time, there's something else that is diversified.

And then thirdly, stress testing, the scenario analysis is also very important. It means that we can either run our portfolios through an historical event and see how they would have performed. Or we can imagine scenarios in the future. We can run the portfolio through that just to see what the impact would be on the portfolio. And whether the portfolio is sufficiently well designed that it is robust in those scenarios.

Andy

Wow. So like, you could go let's run this portfolio through an event that took place ten years ago and see how that event would have...

Michael

What the impact would have been on the portfolio and how it would have performed.

Andy

Yeah. Wow that’s amazing, I didn’t know that at all.

Sam

Pretty amazing.

Andy

We hear about diversification a lot too. Let's just break that down. Like, what does that actually mean from a practical point of view?

Michael

Right, so diversification is super important, because smooths out the highs and the lows of individual investments. And as the saying goes, you don't put all your eggs in one basket. And so, by having assets, different types of assets in a portfolio, it makes a lot of sense.

So, a good example is in our Growth option (which is the option that most Rest members are invested in) we are diversified across a variety of different asset classes. As I said earlier, things like company shares, property infrastructure, bonds issued by governments all over its cash, etc., etc..

And if you just take the share market piece, we're invested in over 3400 companies across, nearly 50 countries, across nearly 75 different industries.

Sam

It’s a lot.

Michael

And so the portfolio is really really well diversified in a way that, you know, individual investors just probably couldn't do it themselves. And that's especially the case if you look at the non-public investments that we have. So, part of their investments is in share markets and bond markets that you might be able to access if you're a sophisticated individual, but then the rest of their investments are in non-public assets. Things like property, business buildings of all types, infrastructure assets like airports, or energy generation, utilities centres - things of that nature. Things you just can't invest in as an individual. We're really well diversified with a view to delivering consistent returns – well, as consistent returns as we can

Andy

At a really fundamental level, I guess diversification means that if one thing goes down, another thing might go up, or it might remain the same, or vice versa. Tell me a little bit about why can't I make an investment that the kind of investment that Rest can make? You just you just mentioned that there's some assets that private investors just don't have access to. What does that mean?

Michael

Well, it means... So, for example, we are recording this podcast in the city of Sydney. And so, in the city of Sydney, we are surrounded by large office buildings. And as an institutional investor with over $100 billion to invest, we can buy buildings – whole buildings or parts of buildings. We own wind farms in Australia, we own parts of AI datacentres, we are part of the process of funding the transition to renewable energy. So, these are the kinds of things that we can do as institutional investor. Individual investors just can’t or just don't have access to it.

Sam

And one of the amazing things I think is, that we're doing this, but actually it's our members money. And so they're invested, you know, so our members might not even realise that actually, you know, their retirement savings are invested in these incredible assets.

Andy

And obviously it makes us more diversified than you could be on your own. So, when markets do get uncertain like they are at the moment. - what does the Rest investment team do? What steps that they take in that situation?

Michael

Well, hopefully I've communicated that we anticipate that some events will happen. So, the first thing we do is we don’t overreact. We don't have knee jerk reactions because it is part of our expectations that events will happen from time to time.

Secondly, we do actively monitor the situation. So, to take the example of the current conflict in the Middle East. From the very first weekend when that happened, our team were monitoring a whole range of different indicators to let us know how things were traveling in that part of the world.

Thirdly, we make sure we have plenty of liquidity. It’s in stressed events like this where it's not possible – certainly at the start of the event – to know how it’ll long the last, how big it will be. So, you want to make sure that you've got optionality. And so, by having cash we have optionality and, happily, Rest is a beneficiary of net cash flow for members, which is fantastic.

Sam

I just really want to understand a little bit more about liquidity, Michael. Can you tell us a little bit more about that?

Michael

Sure. So, liquidity is really important because it gives you degrees of freedom. For us, we always have some level of cash as part of our big, diversified investment options. And so we just want to make sure that whether members might need some of that cash, or if members might switch investment options, or investment opportunities present themselves in the midst of a crisis where we can take advantage of it - we have the cash on hand to be able to take advantage.

Andy

Right. And so liquidity is that it's basically that bucket of cash.

Michael

Yeah, it's that flexibility to know you can do what you need to do when you need to do it in the midst of a crisis.

Andy

Yeah. Right. Amazing.

Sam

Thank you. That's really helpful.

Michael

And we do also want to provide members with information to help put, events into context. So I think especially now, as you know there is a lot of focus on the conflict in the Middle East, it's important to remember that whilst there has been some up and down and volatility in the last month, the Australian market is up 14% over the last year. Actually a much stronger result than what you would ordinarily see typically.

The US market - the S&P 500 - is up over 30% over last year. Like really really strong results. And so, the volatility we're seeing today has to be seen in that context. And that’s only one year. The last three years have been great for investors, and over decades as well. It's important for us to try to put things in context so members don't have knee jerk reactions either .

Andy

Yeah. I think it's just important to know this is being recorded on the 17th of April, so if you're listening at home or watching at home, just be aware that that figure that we're using are as of that date and everything is accurate as of that date.

Andy

What should members really be taking away? Do you have any key points that people can take away from the back of this conversation?

Michael

Three things really. One volatility is normal. Volatility is a feature of markets not a flaw. And so, our members on average are quite young. And over the course of your working career, while you’ve got a superannuation account, you probably will go through many events like this, like we're seeing the conflict in the middle east at the moment. So, understand that that's normal.

Secondly, even if our members aren't focused on their superannuation account every day, we are. Me and my investment team are absolutely focused, on what's going on in the world, what's going on in financial markets, what's going on within Rest and the various flows, and making sure that we're doing everything we can to take advantage of that.

So third point is, never waste a crisis. If and when opportunities arise to take advantage of this crisis, we will do so.

Andy

So, Sam I'm going to come to you now. When it comes to the news headlines that we've all been reading, it can make some of us feel like we need to act. I certainly know that I feel that way at the moment. Can you shed some more light on the impact of the headlines and how they might be impacting the situation?

Sam

Absolutely. I think when you open the news or social media and you have a look at it and there's constant headlines that feel, you know, quite serious, and as though big things are happening, I think it's really natural to feel anxious and to feel as though you need to take some kind of action.

I think it's important to remember that when breaking news happens, or there's a particular, you know, a conflict is a great example, or geopolitical forces at play, or lots of headlines about markets, these headlines are happening without us really knowing the full picture.

And really, it's just important to know that it's just a normal part of the media and it's how the media operates. And we really don't know what the outcome is. Oftentimes when we see these headlines.

Andy

Yeah, it's so true. I feel like we're flooded with news and it really kind of switches off.

Sam

It's 24/7. You know there is commentary, there's reporting, there's speculation, and that moves around the globe really in minutes these days. And I think that speed can amplify reactions a lot as well.

One of the ways I like to think about it is really, you know, it's like a live newsfeed during a major event. And so every time new information comes in, you have a reaction, new information comes in, you have a reaction. And now often, all of those little micro moments of having a reaction make you feel really, really anxious.

But actually when you think about those big events, they settle and we get the full picture and often it's not what we thought at all. Sometimes it is, but often it's not really what we thought at all. So, I think it's just: be aware of that's actually how the news operates.

Andy

The story is not complete. It's happening. And it’s being written as it goes. So it feels like bad news gets more on the good news. Is that a fair thing to say in this situation?

Sam

I think it's an important point that news really runs on... it's about dramatic headlines. It's about, varying points of view. And this especially comes out during stressful periods. So, and the other thing is that media often zooms in on these worst-case scenarios to drive more news coverage. So what really is not always visible in those situations is the broader picture in the context. And I think that comes out in kind of, you know, definitely there's a role for media to play, you know, to, to tell that broader context.

Because we're really busy and we login and look at our social feeds and we see headlines here and there: you don't always get the broader picture. Not every headline really leads to a long term change, I think is an important point to remember, too.

Andy

Does bad news affect the markets? Like does it have an impact on how people approach investing or?

Michael

Markets aren’t a generic thing. Markets are actually made up of tens of thousands, hundreds of thousands of individual investors. Sometimes that individual investor is like one person. Sometimes that individual investor is like me and my team -institutional investor all making their own decisions. So, it's a really wide range of inputs that will drive different people, make different decisions, and different media is going to be one part of that. But only one part.

Andy

What does this mean for the markets? Is it the bad news itself, or is it more that there's uncertainty around it that markets don't like?

Michael

So I'd say that the uncertainty is a big factor. As I said earlier, if you're at the start of a crisis events and you don't know how it lasts, how big it might be, what the impact would be. There’s a strong tendency to be very conservative in your response to that event

And so that uncertainty means there's a wide range of possible outcomes, which means you've probably got to take a conservative view.

Andy

COVID's one example that we've been through, right? That's one crisis that truly impacted markets a lot. Did we see the markets sort of remaining uncertain the whole time or do you kind of get more rapid as we went through this?

Michael

This is such a great example and such an interesting example actually, because it was a very unusual event, you know, a global pandemic. We hadn't had one of those for 100 years. And so it was nobody's living experience of how to work through an event of thing like that. The initial reaction in early 2020 in financial markets was markets steeply declined.

But interestingly markets recovered really quickly as well. And it’s one of those situations where if you're taking a short-term view, it's one of those situations because it hadn't happened in living memory (a global pandemic that is). The future was uncertain, which certainly was in early 2020, if you were a short term investor it was very tempting to switch to a safe asset.

However, for long term investors, as it turns out, looking back in history... that was the worst thing you could have done. Because the markets recovered very quickly. And if you just switch out of growth assets into cash you'd be very unlikely a week, two week, three weeks later to switch back in.

There's an old adage that, what matters the most in investing is time in the market. Not timing the markets. And as a long term investors we’re big believers in that. It's time in the market. It's staying invested when others don’t. It's taking advantage of opportunities in the midst of the process. And not having that knee jerk reaction that gets you out of markets after they’ve already declined and then missing the gains from their account.

Andy

Like if everyone had a crystal ball, they'd know exactly when to jump out.

Michael

And while we don't have a crystal ball, we do have, lots of learnings from history. And we do have, you know, lots of experience having lived through many market crisis events over the years to have a good sense of what to do and when to do it.

Andy

With that in mind, what can happen if someone were to suddenly switch to an investment option, like cash, when the market's going through these rapid dips in prices?

Michael

If markets have already fallen and then because of nervousness or anxiety, a member chooses to switch cash, then, first thing you’ve done is you’ve locked in that loss. You don’t automatically get that money back. You’ve moved out of a growth asset class or growth assets into a less risky but lower returning cash option and then you have the challenging decision ahead of you that is do you stay in cash or do you move back to that growth “riskier” asset and when do you do that?

In my experience, most professional investors find those decisions extremely hard. Professional investors who are very experienced and have all of the resources and time involved to make those decisions and find it very difficult. And most don't successfully, consistently get that right. You can always be lucky and get it right sometimes but the ability to consistently get that right is very low.

Andy

So, Sam, given the headlines being the way they are, can you help you break down how a member might want to react? That feeling of "I should jump out” I imagine being common for a lot of people.

Sam

I think it can be very unsettling, and one of the most important things I think, for people to consider is, you know, not to rush into making a decision based on a short-term market move. So, you know, Michael spoken about this, already and I completely agree that trying to time the market by jumping in and out is extremely risky.

Really, depending on your personal circumstances and the options or the option that you're invested in, you probably made that decision based on your own situation, your goals, your timeline. It may be that what is going on in the markets and what you're saying in the media has actually not had an impact, you know, on that.

And so it could be that your current option could be still the right option for you.

And of course, everyone's financial situation is different. You know, people have their own goals, their own financial situation, their own timeline, their own risk appetite. And really, you've got to be led by that. I think that’s the thing to remember for people who are thinking about taking an action.

But of course, you know, this is just general information, and everyone's financial situation is their own.

Andy

But what if someone was just about to retire or already in retirement? Should they be considering changing investment options?

Sam

So it's a really important point. And I would say, generally speaking, for many people, super continues to be invested even after they have retired. Yeah. So that means that even if you are close or into retirement, for some people they will likely have many years left for super to move around after a kind of a short-term change in the market.

Potentially taking an action after a market movement could lock in losses, and then you miss out on the recovery. Again, in general terms. That said, there still can be reasons to consider switching. And we of course have advice available at Rest so people can get in contact with Rest for some general advice.

And we can also connect members to one of our advisors for some personal advice as well. And that information ‘how to contact Rest and be connected to an advisor’, that's all on our website. So, Andy might be worth dropping in the link, to the show notes for

Andy

Our advice team is incredible. I don't know if you've ever sat near them or heard them speaking. They’re so great at just answering general questions and then taking them through questions for their long-term future. So if you are at home and you are on the fence about it, I would say get in touch if you can.

Michael

I think the years leading up to retirement, and the first few years into retirement, are just really important years to do everything you can do to get it right for your retirement future. And getting financial advice, for a lot of people, will make a really good sense.

Andy

I also imagine people might be feeling some extra financial pressure at the moment, Sam. Is that true?

Sam

Yeah. Look, I think a lot of people are under real financial pressure right now with the cost of living. And, you know, we the last thing we want is more of that, to be honest. It does mean that some people do start to think about whether they can access their super before retirement.

And I think it's important to say that in certain circumstances, you are able to apply to access your super early if you are in severe financial hardship. So, super really is for your retirement, and the government actually sets very strict rules about when and how you can apply to access your super before you reach retirement or preservation age.

These rules apply to all super funds, not just Rest. And we have to follow these rules. If people do apply for financial hardship relief. We've got some really clear guidance on our website about this if people want to find out more. But we also have some other options that members could have a look at as well that suggest some other options.

For example, you know, there might be things like government support services or other things, depending on your circumstances, that you could do to try and and kind of help through this difficult period. I'd really recommend putting a link in the show notes to that, Andy as well for, for any listeners.

Andy

Awesome. I'll definitely put a link to the show notes on that. Thank you so much for coming in today, Michael. I feel like it's been so useful to have the chief investment officer come in and talk about the investing strategy and how we manage these situations, and I know I've certainly learned stuff, so thanks.

Michael

Yeah, it's been a real pleasure. So, thanks Andy, Sam. It's been good to be part of it.

Andy

Thanks so much for listening and watching today. And don't forget to like and subscribe to the podcast when you get a chance. And that's super simple.