Comment from legalsuper

There has been extensive press about the volatility that is presently affecting world investment markets and we anticipate that members will have questions about how this impacts their retirement savings with legalsuper.

We asked David Holston of JANA Investment Advisers Pty Ltd to expand upon the factors contributing to recent volatility and its impacts for investments.  JANA Investment Advisers Pty Ltd is legalsuper’s asset consultant and advises and assists the Board of legalsuper with overall investment strategy.

It is worth noting that there has already been a partial correction of the recent downward movements in valuations.

The important take away message is that as a long term form of savings, superannuation is well placed to be able to ride through the volatility that occurs over the short term.  By far the majority of members will not access their super for some considerable number of years by which time the impacts of the present short term period of volatility will have long since ended.

The majority of legalsuper members are invested in the Growth (formerly Moderate) option – a further 8 investment options are available for members to choose between.

Recent market volatility

Australian and overseas investment markets have recently experienced a sharp increase in activity and volatility.

Periods of volatility in investment markets are common and periodically occur in response to revaluations of specific asset classes, changes in market sentiment or a significant event or disaster.

While all investment markets have these short-term cycles, over the medium- to longer-term, investment markets have continued to provide healthy gains.

Superannuation funds adopt investment strategies that focus on longer-term gains and avoid reacting to shorter-term market fluctuations and therefore avoid knee-jerk reactions to short-term market events.

The current period of increased volatility was triggered by a reassessment of the price of risk in sub-prime mortgage markets in the United States. The value of mortgage assets was reviewed after markets reassessed their underlying risk. The level of reassessment was heightened where investors were using borrowings to invest in the sub-prime market.

This review of sub-prime mortgage markets has flowed into a general review of the prices and valuations in other investment markets.

Investment markets are not always rational. Recently we have seen investors continue to plough money across all markets without necessarily adequately assessing the real risks
or underlying valuations. The reverse is now occurring and investors have been selling assets.
 
It is also worth noting that investment markets have been very good over the last four years and in the last financial year the Australian share market rose nearly 30 per cent. The strength of the market was aided by significant amounts of cheap credit. This credit has tended to dry up recently as lenders ask for higher returns or more ‘normal’ returns based on a reassessment of the risk of lending money.

Twelve months ago the ASX 200 broke through the 5000 barrier and rapidly added another 30 per cent, moving very quickly in response to favourable conditions. Some of this rapid movement is now being reassessed and it is a similar story in other markets. 

There will continue to be ups and downs in the cycle, but over the long term investment markets are expected to continue to provide healthy returns for investors in superannuation.