Super fund returns of 5pc the new normal: Anna Shelley

Forget about the high returns of recent years, says the chief investment officer of the new Catholic Super and Equipsuper joint ­venture.

Catholic Super and Equip­super chief investment officer Anna Shelley. Picture: Stuart McEvoy.

Super fund members need to forget about the high investment ­returns of recent years and prepare for annual returns of about 5 per cent, says the chief investment officer of the new Catholic Super and Equipsuper joint ­venture.

“Some members still have in their heads the 10 per cent-type returns that we were able to ­deliver off the back of the GFC,” Anna Shelley told The Australian in an exclusive interview.

“But going forward, with inflation at 1.5 per cent or so … they need to remember that if super funds are able to ­deliver (returns equivalent to) consumer price index plus 3 per cent, which is the objective of most balanced funds in Australia, then that’s a good result.

“At the moment, that means (a return) under 5 per cent. We are having to work very hard to ­deliver returns above that … it’s a bit of a slog. In an absolute sense, 5 per cent to 7 per cent annual ­returns over the next five years is what we’re expecting.”

Catholic Super’s balanced option returned 5 per cent in the 2019 financial year while Equipsuper’s equivalent, its balanced growth option, returned 6.07 per cent. The best performing fund of the year, Unisuper, ­returned 9.88 per cent, while the median fund return for the 12 months through June was 7 per cent, according to super fund rating website Superratings.

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Catholic Super and Equip­super formally launched their $26bn joint venture last month. The tie-up between the two funds comes amid expectations a wave of consolidation is set to sweep through the industry as trustees come under pressure to merge for the benefit of members.

QSuper and Sunsuper confirmed this week they are in discussions on a partnership that could lead to a superannuation behemoth with more than $180bn in member funds. A ­combination of the two would create the nation’s biggest super fund, surpassing Australian­Super’s $165bn in member funds.

Ms Shelley said 2019 had been defined by merger talks.

“It’s worth considering industry consolidation through the lens of another sector of the ­finance industry: Australia’s credit union sector has dramatically contracted (since the 1990s).

“In 1991 there were 241 credit unions and building societies. Two years ago, APRA recorded just 58 of these entities. It’s a scale of change that could be mirrored in the super industry as high ­returns are not the only measure of success in super anymore.

“Mergers have the potential to deliver efficiency wins for industry and improve member outcomes,” she said.

Benefits of scale

Commenting on the Catholic Super-Equipsuper joint venture, Ms Shelley said both funds’ ­members would see the benefits of scale.

Separately, Catholic Super has already reduced fees by 24 per cent over the past 12 months.

“Some of that was just casting a stricter eye over our investments, looking at investments that were expensive in terms of fees and costs but hadn’t delivered what we had hoped they would,” she said.

The fund has reduced its ­exposure to underperforming hedge funds in recent months in favour of investments that are lower risk but which promise relatively high returns, such as ­insurance run-off books, she said.

“The AMP sale was an example of (an insurance run-off book) where the business no longer wants to invest or continue to grow a life insurance business.

“They can still make very good ­returns, particularly when they’re brought together with other life ­insurance books. There’s a lot of synergies in bringing them ­together under one management team.”

The fund has also increased its private credit exposure, both offshore and domestically, “because those investments are very low duration, so not hinged on interest rates and therefore not at risk of having negative returns from interest rate blowouts”.

The interest rate “conundrum” that has spread throughout the developed world is the biggest risk facing the global economy, Ms Shelley warned.

“It’s unprecedented, this race among the various central banks to lower rates. And it doesn’t fit with our understanding of economics or human behaviour.

“Everyone thinks interest rates are staying low forever or going even lower from here. That’s precisely when you’ve got to be really careful — when everyone’s confident that things are going in one direction,” she cautioned.

Catholic Super is “moderately underweight” in equities and has ­diversified into assets that are not correlated with equity markets and not correlated with interest rates, she said, including property and infrastructure, as well as private credit and real estate loans.

The second biggest risk facing the global economy, she warned, is how regulators and governments respond to the threat of climate change.

“We haven’t seen a lot (yet) here in Australia but certainly ­Europe has been very active in terms of regulation and its commitments across the spectrum. And it does feel like there’s a bit of a groundswell among ­governments and regulators across the world … I expect that we probably will see more cohesive policies globally.”

The fund is watching for stranded assets that may arise from action on climate change, she said.

Appointed CIO of Catholic Super mid-last year, Ms Shelley believes her unconventional path to the funds industry — she studied psychology, German and literature at university — is an ­advantage.

“When I first started out, I thought not having an economics or commerce degree would be a disadvantage. But the older I’ve gotten, the more I realise investing is actually a social science. It’s the study of human behaviour. And so that psychology major of mine is handier than I originally thought.”

Diversity

The focus on hiring “technical experts” was one reason for there being more men in the sector than women, she said, but super funds had performed better on the diversity scale than the broader funds management industry.

“There is a tendency for people to focus on technical experts … But the behavioural part, the emotional quotient part of investing, is just as important, if not more important, than that technical, mathematical side.

“It’s been a bit by necessity and also by desire that the super ­industry has cast the net wider and looked at more diverse skill sets, because that diversity ele­ment, particularly diversity of thought, is really important in ­investing.

“Having herd behaviour or herd thinking in an investment team is a disaster, you really need to be listening for that differentiated voice.”