Anne Fuchs: Hello and welcome to Super Insider, a podcast brought to you by Australian Retirement Trust on all things superannuation and retirement so you can have the best possible life once you finish work. I'm Anne Fuchs. I am the Executive General Manager of all things advice, guidance, and education here at Australian Retirement Trust, and I'm thrilled to be able to bring someone very special to the show today.  

 

Before I introduce him, I want to remind you that this is general advice only, so please don't act on anything you hear today. Make sure you go to our website, give us a call, get some financial advice from us or your advisor, or if you're a member of another super fund give them a call.  

  

Ian Patrick is on the show. Yes, he is, people. I am so, so excited. This is the man, our Chief Investment Officer, responsible for our over $300 billion in assets. Many of the talents of Super Insider, like Brian Parker, Andrew Fisher, and Elizabeth Kumaru, are in Mr Patrick's team. He's been with ART for over 9 years, and we’ve finally got him on the show. 

 

Ian Patrick:  Anne, it's a pleasure to be here. I got in the door eventually. 

 

Anne: Yes. I was hoping you would dress up like Bono, being the rock star that you are in ART, but you're in your suit and here to talk business today. 

 

Ian: Business - always. 

 

Anne: Always business. In that spirit of stars, we've got the star questions we get asked, our top 10. What was that show? Countdown - I'm showing my age here. The top 10 questions or smash hits back in the '80s and '90s that you, our members, are thinking about regarding your precious retirement savings. So, Ian, are you ready to go? 

 

Ian: I am. 

 

Anne: Have you got your seatbelt on? 

 

Ian:  I've got my seatbelt on. My skates on. 

 

Anne: For our members and Australians generally thinking about super, many wonder, 'What does great look like? What should I be expecting in terms of a great outcome?' And how do you, as a fund, achieve that? 

 

Ian:  I think the best thing we can do when we set about investing for our 2.4 million members is deliver what's on the tin or, in other words, what's stated in the PDS or the Investment Guide as the objective we're seeking to deliver. And why do I say that? History will show you that, if you shoot for the stars and aim for the top return in the industry, chances are you could be at the bottom of the pack in the next year or the next quarter. What we want is a steady delivery of what we've said we will aim for. We go about that by building diversified portfolios of a multitude of assets and using managers around the world, whose skills we really respect, to invest on our member's behalf. 

 

Anne: Andrew Fisher, who heads up our strategic asset allocation, has said before on the show that it’s not one big decision, as you've referenced; it's lots of little good decisions. I instantly think of a tennis analogy. Some tennis players make the big point; they take risks. I won't reference any tennis players. Am I right about the analogy, or the thread I'm trying to pull here to help our listeners and viewers, around the strategy to get what's on the tin? 

 

Ian: You're right. What you don't want to go for is hero shots to stretch your analogy a little bit. You want to be able to consistently hit the percentage shots that, through time, will build up a series of potentially match-winning points. That is what you want to do. At the end of the day, we do have to place bets. You cannot gain a return without taking some risk. But we want to place bets judiciously, and then we want to ensure that they diversify each other so that the return follows in most environments. 

  
Anne:  My bet is those bets have been rehearsed to a degree and really thought through, so you're not doing a hero shot, and you've never tried it before, you haven't thought it through, or you haven't done the maths? 

 

Ian: That's one of the fundamental laws of investing. Start with what you have as a set of beliefs about investing, where you can bring your comparative advantage or your skill to bear to be successful. Don't stray outside those tramlines. Because if you stray outside the tramlines into an area where you have little skill, I think it will surprise you. So, you want to stay within your area of competence. You want to make sure that you make a big enough call that it’s going to benefit the portfolio if you're right but not so significant that it will hurt the portfolio if you're wrong. 

 

Anne: People generally don’t like surprises, or bad surprises, when it comes to investing. When you think about the difference between Super Savings and QSuper and the historical returns, we have had a lot of questions from members about that. Some were surprised, I guess, at the difference between the 2. Are you able to explain why that was so? 

 

Ian:  Yes, with pleasure. I'll come back to the statement I made a few minutes ago about beliefs. Those 2 portfolios start from a slightly different point in terms of beliefs. In the case of the QSuper Balanced option, now called Balanced Risk-Adjusted on our new menu, that was a belief that through time, one should mitigate the effect on the portfolio of an equity market downturn or a crisis event in equity markets. Rather, go for less downward movement in the portfolio due to share market declines, and aim for gradual wins through the cycle, 10 years, of that option. The Super Savings version had a different outlook on protecting against downside volatility, or the effect of share markets. That means they had different strategies, which is the key point. You were investing in various mixes of assets, so they performed differently in different market environments. In the recent 2 years, share markets have absolutely run away, and fixed-income investments have been very mediocre. The Super Savings option had a little bit more in shares. The QSuper option had a little bit more in fixed income. That differential, which has been as high as 15% over the last 2 years, is what's caused the difference. 

 

Anne: It's worthwhile explaining to our listeners and viewers that most people would think about fixed interest and shares behaving differently and acting differently as part of a diversification strategy. However, that hasn’t necessarily been the case. That isn't as true as people would think it is. That's why other asset classes play an important role in what we believe in achieving what's on the tin. 

 

Ian:  Correct. If we only had shares and fixed income, which is typically government or corporate bonds, at our disposal, we'd have a broadly diversified portfolio in terms of the number of shares or number of bonds you could hold, but you wouldn't have the exposure to small companies starting out. You wouldn't have exposure to large infrastructure assets like major airports. Those kinds of assets come to us through what we call unlisted assets. That's infrastructure, private equity, real estate, many of the office buildings we inhabit, and private debt lending to private companies. All those play a role in the portfolio because they're opportunities we can invest in, but they are just not available on a listed share market. 

 

Anne: That's one of the amazing things about this merger between QSuper and Sunsuper. It's allowed us to launch this new investment menu with a breadth of investment options, particularly for our QSuper members. It's opened doors overseas in terms of investment that may not have been open to individual funds. But also, I think the investment strategy that QSuper members are used to is now the default for our retiree members. Why is that, Ian? 

 

Ian:  The way I look at it is that, in the same way that we want to access the best investment opportunities for members' portfolios, we want to make the most use of all of the skills that came to us by virtue of the merger. The QSuper investment approach had a particular set of strategies or skills that are very useful for retirement. I spoke earlier about moderating volatility or protecting you against the worst of share market downturns. That's particularly important for retirees because retirees don’t have the same amount of time to remain invested, to recover when the share market has a sell-off and then rebounds. Mitigating against that drawdown, as we call it, is incredibly important. Bringing that skillset from the QSuper approach to what is now the default for retirement, Balanced Risk-Adjusted, is significant, and that's what we've sought to do, diversify what members have access to in the same way that we diversify portfolios. 

 

Anne: Also, retirees are drawing down an income. There is that sequencing risk, in that they are selling assets every time they get their income paid to them which would be another factor in the strategy, would it not? 

 

Ian:  Correct. It's a combination of you're drawing income, so your balance gets smaller, and you need the ability to capture those rebound returns on the same-sized balance. You cannot put in future contributions, often referred to as your working capital, when you're earning money; you cannot put more of that in. You do need to ensure that you've got the appropriate investment strategy through that income drawdown. 

 

Anne: Speaking of investment strategy, many of our members—young, middle-aged, and older cohort—are really interested in doing good with their retirement savings and making the world a better place while also generating an income in retirement. What have we learnt about ESG investing, and how has it informed how we approach it at ART? 

 

Ian: I think the world at large has learnt - and ART is no exception to that and has taken it to another degree - that whether it's the risk of climate change, whether it's the risk of poor labour practices, whether it's the risk of lack of diversity around a Board table, each of those things is a real risk to whatever we happen to be investing in. Being attentive to those risks and then, to the extent we can, working to improve the practices within companies through casting votes at annual general meetings or whatever it happens to be - all of that is absolutely critical to ensuring that we deliver with our capital hopefully a better world, but at minimum not a worse world than what we set out to invest into today. That's absolutely crucial because if you don't consider those risks, I'm quite convinced that there will be a diminution of the value of your assets over a full period. 

 

Anne: Ian, do you think the role of the indices is well understood? Let's frame it this way. If you're someone who's really interested in ESG, the ASX, and exclusions, and non-exclusions, how does that apply? There might be companies that may not be aligned with your values regarding ESG if you're investing in the index, for example? 

 

Ian: In general terms, the index, like the ASX300, represents all the available companies in proportion to their market capitalisation or their worth. Each and every company that meets the listing rules gets to go in. There's no other filter. When we think about investing - and I'll give you a classic example at the moment, in relation to thermal coal - we think that companies that derive a high proportion of their revenue from mining and selling thermal coal to external entities are at risk of becoming stranded assets as we go through the energy transition. 

 

You just don't know when that could be reflected in the price. And we think it’s in members’ best financial interests to therefore exclude those dedicated thermal coal mining companies from our portfolios. So, we have an exclusion. At our base level in portfolios, we have a small number of exclusions. However, if you have a more values-oriented approach and want to see a greater level of ESG screening applied to your portfolio, you can select the Socially Conscious Balanced option, which would have a subset of the ASX300, going back to our opening comments. 

 

Anne: I'm going to do 4 rapid questions for you about nation-building, gold, geopolitical issues, and currency—advance warning. We'll start with gold. Members wonder why we don't invest in gold. 
  

Ian:  We don't invest much in gold. 

 

Anne: I notice there's a finger point there. 

 

Ian:  That was not intentional. Sorry. I was going to say one instance. When we came out of the GFC, government bonds were not a great defensive asset, and QSuper portfolios had a small exposure to gold, which leads to, 'Why gold?' Typically, it's seen as a safe haven in times of crisis or market stress. Luckily, today, government bonds generate yields that offer that kind of defensiveness today, and we have other defensive strategies. Gold doesn't pay you an income, and you need to store it somewhere, and you need to pay for storage. Those two factors make it a less attractive defensive asset compared to our other options. 

 

Anne:  I'll pull the thread. You talked about unstable times. The world does feel unstable right now. How do we factor that into all the risks facing the world and members' precious retirement savings? 

 

Ian: It is tricky to do so because it is often not the event itself. If I think about the Middle East, it's not necessarily that event, as tragic as it is, that leads to a medium- to long-term impact on markets. It is the fact that there may be disruption to the oil supply, and all the implications that that disruption to oil supply may or may not have to economies, to the profitability of certain companies, etc. That is the kind of scenario or second-order implication we need to consider. There are many geopolitical potential events and actual events in the world I'll say the US election in and of itself is an interesting geopolitical event. But if you go back through history, elections do not fundamentally change the course of markets. Longer-term policy that flows from an administration in government - tends to impact economies and markets. 

 

Anne: So, no big 'boom' moment in November? Currency-wise, though - I'm guessing that currency is something we use to manage those risks that you're referencing about those things that happen off the back of a geopolitical event like oil? 

 

Ian:  We can use currency for that purpose. As you'd imagine, a bit like people seek safe havens in a storm, people tend to gravitate to certain currencies. The US dollar and the Swiss franc, to name just 2, and the Japanese yen, possibly a third - people tend to gravitate to those currencies in a time of crisis. That means they appreciate compared to all others. You can use currency in that context for defensive purposes. But the other thing that's important to bear in mind with currency is that it affects an asset's value. If I hold a deposit in a US bank in US dollars and the Aussie dollar appreciates, my deposit, as measured in Australian dollar terms, is worth less. I may not want that. That's cash. I might hedge that because I don't want my money to depreciate in Australian dollar terms. So, there are two uses for currency. One is a defence part of the portfolio. The other part is a consideration of the impact on the value of your assets. 

 

Anne: But it's certainly a thing that factors into getting the number on the tin? 

 

Ian:  Absolutely. 

 

Anne: The last of the 4 questions is about nation-building. There has been a lot of talk, particularly in newspapers and so forth, about governments - not just Australian governments, but the US and the UK - wanting pension funds to do nation-building. Some members worry, 'Is that the best use of my money?' What would your response be to members who are hearing that and wondering what it means for them? 
  

Ian: The first and most important point I'd make to members is we have an overarching legislative need to invest in members' best financial interests. So, we approach every investment, whether it could be tagged as nation-building or not, from the same point of view: does it offer us a risk-adjusted return that's commensurate with similar assets that might not bear that same label? And does it add characteristics to our portfolio as a diversifying source of return to improve the label on the tin? Does it add that to our portfolio? If we can meet both criteria in members' best financial interest from a risk-adjusted return point of view and it’s complementary to our portfolio, we're delighted to invest because it has that third-order advantage of helping society. But we don't start at that point. 

 

Anne: There are aged care homes, airports, telecommunication towers, and caravan parks. They happen to be nation-building projects, but that's not why we invested in them. 

 

Ian: Correct. 

 

Anne: Ian, what is your final message to our viewers? I don't know when you're coming back next on the show. Maybe you'll be back again soon. What would be your final message to our viewers and listeners about considering investing with a super fund like ours? That's a weird open question, but what would you say to them? 

 

Ian: One of my favourites now - and I wax and wane a little bit - are the markets; observing them will lead you to believe that we sway between boom and bust. That can cause uncertainty and anxiety. The reality is, as one investor said, the world itself, the reality around us, is seldom different from not-so-good to pretty good. It's not boom or bust. What an investor ideally should be able to do is see that sentiment flowing through markets boom to bust, and guard against that. Time and time again, sticking with a strategy and holding that strategy will deliver. If you have that time horizon and you've got good advice - and everybody who can, should seek advice – I think that's the answer. Try to get out of the reactionary to boom and bust, because markets will drive you crazy. 

 

Anne:  That's a beautiful way to finish. For some reason, I've got Goldilocks in my head - it’s just right, perfect. I don't know why I'm thinking of Goldilocks, but there is something about that boom and bust, just right and blocking out the noise. Ian, thank you very much for being on the show. 

 

Ian:  Thank you, Anne. 

 

Anne: Have you had fun? 

 

Ian:  It's been an absolute pleasure. Absolutely. 

 

Anne: To our viewers and listeners, please give us a great rating wherever you get your podcasts or watch your videos. Please join us again soon. Thank you. 

 

This transcript has been edited for length and clarity.