Rest Super expects a challenging year ahead, despite its solid return to members

Rest’s two million members could expect returns in the 5 to 10 per cent range in the next financial year, the retail industry super fund has revealed.

Rest’s My Super default option is on track for a return of about 8.82 per cent for the financial year.

The $86bn retail industry super fund, Rest, expects a more challenging investment year ahead as it is set to report a return of almost 9 per cent for the financial year just ending, according to chief investment officer Andrew Lill.

In an interview with the Australian, Mr Lill said the fund’s My Super default option called Core was currently on track to show a return of around 8.82 per cent for the financial year, thanks to the stronger-than-expected performance on global share markets.

“The year has been driven by the strength of the global equity markets including the Australian market since around November,” he said.

He said sentiment had changed towards the end of last year from a view that the world was about to go into a recession to a more optimistic view on world share markets that central banks were going to make significant cuts in interest rates.

US equity markets, he said, had also been driven by the “technology revolution,” particularly the potential of artificial intelligence to deliver profits for some companies.

But he said the outlook ahead was more challenging with US markets, in particular, having already priced in significant profit increases.

Mr Lill said Rest’s two million members could expect returns in the 5 to 10 per cent range in the next financial year with private markets set to turn around but with less upside expected in US markets.

“Achieving 9 per cent return this year is going to be challenging,” he said. “Members shouldn’t be expecting the same next year as this year.”

Mr Lill said Rest had delivered long term returns of some 8 per cent a year since its inception around 30 years ago.

“Eight to 9 per cent is a good expectation of what super should be providing over the longer term,” he said.

“It’s consistent with a nice margin for our members over and above inflation.”

He said Rest had taken a decision in July last year to increase the exposure to equities in its My Super default option by 3 per cent, on the basis that its younger membership could take a slightly more aggressive approach to investing.

He said this has helped boost returns from the share market growth since the end of last year, adding the strength of the global equity markets had been one of the big surprises of the past few months, particularly the big tech stocks in the US.

“We’ve had the big bounce back in November/ December,” he said. “We’ve had this continued US exceptionalism. US markets have seemed to do better than all other markets.”

But he believed that “the US exceptionalism story is going to get more challenging.”

“Depending on the outcome of the upcoming European elections, I see more value for equity markets in Europe and Japan.”

“Even if growth is lower, the share markets in both of those regions are not priced to the same perfection that the US market is.”

Mr Lill said that health care was one area which could be expected to benefit from the application of artificial intelligence.

“We think that healthcare as a sector is going to be a great benefactor of artificial intelligence,” he said.

“It probably hasn’t fully been reflected in the prices of health care stocks. It could be an area where we could see it driving share market returns in the near future.”

Private markets had endured a tough year adjusting to higher interest rates and the higher cost of capital.

“The private markets book has struggled to make a positive return this year,” he said.

But he said he expected they would “come back and start driving positive returns.”

“We think price discovery which has been happening in private market assets over the last two or three years is nearing the bottom,” he said.

Rest uses external managers for around 80 per cent of its investments.

The fund has joined with industry super fund investment vehicle IFM and three other super funds to put up a $1bn proposal to the Housing Australia Future Fund to invest in social housing.

Mr Lill said the fund was seeing opportunities in industrial property given that the world was deglobalising and there was more emphasis on having access to goods closer to home.

Originally published as Rest Super expects a challenging year ahead, despite its solid return to members