Volatility could cut super returns, says Australian Retirement Trust investment boss Ian Patrick

Australians could see super fund returns in the mid single digits this year due to a combination of a hostile geopolitical landscape, rising inflation and looming rate hikes.

The newly formed Australian Retirement Trust’s investment boss Ian Patrick, left, and chief executive Bernard Reilly. Picture: Adam Yip

Australians could see super fund returns in the mid single digits this year as an increasingly hostile geopolitical landscape, rising inflation and looming rate hikes promise to amplify volatility on global markets.

That is the view of Ian Patrick, the investment boss of Australian Retirement Trust, the $230bn megafund created by the merger of Sunsuper and QSuper which has ambitions to manage $500bn by the end of the decade and may soon look to establish an offshore footprint to boost its international investment prowess. The merger completed on Monday.

According to the veteran investment manager, listed equities still look more appealing than bonds, even though bonds are “becoming less unattractive”, while unlisted assets are throwing up some “good investment opportunities”.

“I think we’re in for a year of volatility. Some of that will be driven by surprises on the pathway to interest rate rises … The geopolitics introduces (another layer) of volatility,” Mr Patrick told The Australian in an exclusive interview.

“I still think that the fundamental support of decent consumer balance sheets and pent-up demand on the part of consumers as a consequence of lockdowns, or quasi-lockdowns is going to underpin corporate earnings, along with the resolution of supply chain issues.”

“Even though interest rates are ticking up they’re structurally low. And without the threat of a recession I think it is plausible to get something in the upper half of single digits this year,” he predicted.

At the same time, Mr Patrick cautioned on his “optimism” of super funds returns reaching even that level.

“The uncertainties have escalated a little bit since the start of the year. The geopolitical environment is more fragile and that has all kinds of knock-on impacts on energy prices, which will weigh on sentiment and be tough for equities potentially.”

Alongside this, the uncertain inflation picture will also cause bouts of volatility in the coming months, he warned.

“That may weigh (on markets) because sharply rising inflation, particularly supply shock-type inflation, will be very hard on equities and probably hard on real assets, even though they have some level of inflation resistance.

“Adding up the uncertainties and maybe I’m too optimistic. Maybe (returns) will be in and around 5 per cent,” he cautioned.

The expected returns will come as a shock to members following a bumper 2021 in which the median balanced option returned 13.4 per cent over the 12 months through December, according to research house SuperRatings. The best performers, including Sunsuper, fared even better: Hostplus came out on top with a 19.1 per cent return, followed by Qantas’ corporate balanced option at 18.5 per cent and Sunsuper’s 16.5 per cent.

In recent weeks as turbulence hit, bonds have become “less unattractive,” Mr Patrick said.

“As yields have crept up, bonds, on an intrinsic-value basis, look less expensive than they were, while equities have come off a bit too. The trade-off there means that there’s actually not as much variation in the equity weight versus the bond weight as you might think.”

Unlisted assets, meanwhile, look attractive, particularly infrastructure and property.

“The sentiment around commercial property and retail property is probably still biased to depressing prices versus elevating prices, so I think there are opportunities there,” he said.

And despite the sharemarket sell-off, he thinks tech stocks in the US are still priced for perfection.

“I still think there’s a lot in the price, and there’s a continuing belief that the dominance of those tech companies and the continuing incursion into traditional business models will deliver earnings at superior growth rates into the future.

“As we’ve seen most recently with Facebook, that’s not a given and I think the market is now adopting more of that view. But there’s still a lot of really optimistic views, in terms of the market dominance and the continuing ability to grow, reflected in prices.”

The impact of the rocky geopolitical landscape, meanwhile, is in full view as Russia steps up its attack on Ukraine. Global markets careened into the red last week as Russia invaded Ukraine but bounced sharply on Friday even as Vladimir Putin vowed fresh attacks.

After suffering its biggest one-day fall in 18 months on Thursday, the S&P/ASX 200 recovered on Friday to close flat. SPI futures are pointing to a strong start on the local sharemarket on Monday following Wall Street’s swift recovery.

Negative surprises, such as on interest rate moves, will add fuel to the volatility, while a rogue regime making a move as the world focuses on Ukraine is a dominant risk to watch, Mr Patrick warned.

Mr Patrick moves into top investment job at Australian Retirement Trust after running the investment team at Sunsuper since 2015. By his side, as his deputy, will be Charles Woodhouse, who headed up QSuper’s investment team before the merger.

The merger of Queensland’s two biggest super funds creates the country’s second largest pension fund, managing $230bn in retirement savings for more than two million members. It sits not far behind the market leader, AustralianSuper, and its $260bn in assets.

Commenting on the completion of the merger, Australian Retirement Trust chief executive officer Bernard Reilly said it was an exciting day for the merged fund’s members, customers and team.

“As the second largest super fund in the industry, we’ll leverage our size and scale to seek out world-class investment opportunities for our members and deliver enhanced products and services and lower fees,” he said.

While the combined fund has double the funds under management of Sunsuper, the investment process will only change at the margins, Mr Patrick said.

“We may just find it harder to transact because the liquidity at scale in listed markets does become an issue, so you‘ve just got to be more thoughtful about your trading activity,” he said.

The scale of the new fund will also work to its advantage, he predicted, revealing Australian Retirement Trust may soon look to expand its operations in overseas markets.

“I think it is inevitable when one thinks of the differential in volume of opportunities to invest, that we will have offices offshore before too long. That‘s a personal view. The board hasn’t opined on that yet. And it is quite a big step because of the operational and cultural implications of having an offshore office.

“It’s something you step into very thoughtfully but I think it is somewhat inevitable because of the need to be close to the assets you own and the partners who are incredibly important to sourcing and managing those assets down the track.”

Originally published as Volatility could cut super returns, says Australian Retirement Trust investment boss Ian Patrick