Prime Mover Magazine

Investing in a complicated environment: TWUSUPER

TWUSUPER CEO, Frank Sandy, shares his investment advice and industry insights for the discerning transport worker.

When a few canny Dutch investors bought up tulip bulbs in 1636, they had little idea their purchase might pay off so handsomely. Within months, a single tulip bulb was worth ten years the salary of a skilled tradesman. At the peak of hysteria, one investor suffered an especially bad case of FOMO, (fear of missing out) trading five hectares of land for a single bulb. Of course, months later, the same bulbs were virtually worthless. Investors went from zero to hero to zero in the space of a few months. Some lost entire fortunes.

This is precisely the type of high octane investing we steer well clear of at TWUSUPER. Investing for the retirement of transport workers demands great responsibility and care, not least because the money was hard-earned by businesses and individuals. But also because of the older age profile of those in the industry. 

We have been cautious over the past few years as the stock market boomed. While we enjoyed sustained and steady growth, we have been careful to balance the attractive returns due to buoyant markets against the risks associated with them. While we could not have foreseen COVID-19, we knew that a key plank of long-term investment is avoiding the worst of periodic market downturns. Of course, with the benefit of hindsight, we can now see this was a sensible approach. The Fund has fared well relative to other more aggressive funds and is well positioned to take advantage of a recovery.

The Global Financial Crisis provided some valuable lessons in how to prepare for and manage a crisis. At the time some superannuation funds were forced to sell assets at fire sale prices and reduce their exposure to share markets. Other funds, which had been careful to manage their liquidity before the crisis, were able to buy discounted assets and maintain market exposure. Subsequently they enjoyed tremendous returns.

The current crisis has placed similar pressures on liquidity. TWUSUPER held a high level of cash at the start of the year, which now means that the Fund can meet member requests under the Early Release scheme and take advantage of the opportunities of the other side. The very worst time to have to sell illiquid assets is during a crisis. Conversely, it’s the best time to buy them. For example, during the Global Financial Crisis Wesfarmers purchased a number of sites for Bunnings stores across the country when land values were at lower than normal prices — a strategy that subsequently helped propel their business.

The vast majority of our members are invested in the Balanced (MySuper) Investment option, which includes a diverse mix of growth and defensive assets. Prior to the COVID-19 crisis, our Balanced option was holding almost double its normal allocation to cash at close to 10 per cent, as well as being overweight in other defensive assets. Those more liquid assets have helped mitigate losses and have made the last several months easier in terms of being prepared for members switching investment options and early release requests. It will also stand the Fund in a better position to take on new opportunities.

Of course, the next ten years of investment will be decidedly different to the decade past. No one has a crystal ball, but I believe we can reliably point to a few big changes. The level of government support around the globe during this downturn will accelerate the recovery. This combined with the ultra-low interest rates promoted by central banks helps explain the rally we have seen in stock prices since the end of March. Make no mistake, it will still be a tough environment for businesses, and economic recovery will take years. But even this provides an opportunity for reforms that can ultimately make us all better off. Investment analysts are not natural optimists, but in aggregate they can see light at the end of the tunnel in the form of company profits returning earlier than previously expected.

The looming challenges and tensions are now priced into the market. Trade policy tensions and concerns about China and the US going their own separate ways on technology such as 5G are well understood. That means any glimmer of hope about these tensions easing will produce upside for investors.

There is an emerging consensus that the long-term rate of return from share markets will be much lower than in recent years. Returns over the last decade have been extraordinarily high as interest rates have fallen and prices have recovered from a low base after the GFC. Looking forward, interest rates cannot go much lower, and those lower yields are now baked into asset prices. However, it’s worth considering this in the context of inflation, which is also likely to be low. Lower inflation means that investors don’t need as high a return on their investments to fund their standard of living in retirement. For example, if the return on investments is 9 per cent per annum but inflation runs at 4 per cent per annum, then the real return for investors is 5 per cent per annum. This is precisely the same as a return of 6 per cent per annum combined with an inflation rate of 1 per cent per annum (actually a bit better after allowing for tax). TWUSUPER is preparing for lower returns with a focus on enhancing returns through active management while minimising costs.

Finally, we at TWUSUPER are keenly aware that investment decisions are not made in a vacuum. As awareness of environmental, social and governance risks grows, the demand to make socially responsible investments will be driven by commercial considerations and reputational concerns. This is a positive development and I’m happy to say TWUSUPER is well ahead of the curve.

Frank Sandy
Frank Sandy, CEO of TWUSUPER has been with the fund since 2005, with previous roles managing both finance and human resources. Frank is a CPA and has a Degree in Business Studies (accounting) as well as a wealth of experience in finance and superannuation.

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