More super funds set to cut investment return targets in response to rising secular headwinds

From

Kim Bowater

About one-quarter of MySuper funds have cut their investment return goals over the past three years and more are likely to follow in the face of rising uncertainty, according to Frontier Advisors.

Ageing demographics, falling productivity across developed nations, mounting geo-political risks, threats to global trade, and the impact of climate change are just some of the factors dragging down return expectations.

Frontier Advisors Director of Consulting, Kim Bowater, said now was a good time for investors to review their investment beliefs and the amount of risk they were willing to take to achieve their objectives.

“We think the returns going forward will be lower and will be more challenging,” Bowater said at the final panel session at Frontier’s annual conference held in Melbourne on June 20.

“Our experience, particularly that 70:30 type portfolio, is that taking on extra risk is an activity of diminishing returns, so you become increasingly less efficient. So, there’s a case there to reduce objectives.”

Many balanced funds have an investment goal to outperform CPI by a net 3.5% however the three year outlook is for returns around half that level, according to Frontier.

 

 

While the median fund has posted a strong 8.5% annualised return over the three years to April 2019, according to SuperRatings, Frontier Advisors Director of Investment Strategy, Chris Trevillyan, said growth assets such as equities still had more to give over the long-term.

“As long-term investors, we think bonds have a high potential to produce low or negative real return going forward and that’s going to impair the ability to achieve investment return objectives. Although growth faces a number of significant headwinds, we still see the potential for long-term growth, and current pricing provides a reasonable investment over the longer term.”

Trevillyan also suggested funds remain flexible and well diversified. Bowater said there was no one key for investors to boost returns in the current challenging environment but suggested they consider strategies such as active management, liquid alternatives, derivatives and investing in specific growth areas aligned to secular themes.

The Frontier Advisors panel session was one of several held at Frontier Advisors’ annual conference which covered areas as diverse as the US-China trade war; the merits of active management; the latest approach to alternatives; how to tackle governance issues such as modern slavery and corporate culture; and the outlook for Australia’s housing market.

Frontier was recently voted the number one asset consulting firm in Australia for the fourth consecutive year[1] and its median balanced super fund client was ranked in the top quartile for investment performance over 1, 3, 5, 7 and 10-year periods to March 2019[2] .
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“This year will be our 25 year anniversary,” Frontier Advisors chief executive Andrew Polson told the audience earlier in the day.

“In that time, we’ve seen enormous changes in our market and we’ve been able to develop and adapt to those changes along the way. We’re now the only unconflicted institutional investment adviser remaining in the Australian market and we intend to stay that way so that we’re working in alignment with the interest of our clients and nothing else.”

Frontier has posted substantial growth and now has 35 clients, up from 25 just two years ago. The firm has also made several hires in recent times, employing 71 staff, up from 58 this time last year.

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