Equities will deliver best returns over five years: AustralianSuper CIO Mark Delaney

AustralianSuper CIO Mark Delaney expects equities to deliver the best returns in the coming years, despite a trio of near-term headwinds.

AustraliaSuper chief investment officer Mark Delaney. Picture: Eugene Hyland

Equity markets will deliver the best returns over the next five years despite a trio of headwinds that threaten the near-term outlook, according to Mark Delaney, the chief investment officer of the $180bn AustralianSuper super fund.

Mr Delaney’s prediction comes as the nation’s largest super fund posted a positive return for the 2020 financial year despite the swiftest sharemarket correction in history in February and March, with its balanced option returning 0.52 per cent for the year.

“We’re reasonably comfortable about the outlook for equity markets. The short term is always difficult, but when you look out two years or so, valuations are either fair or relatively undemanding,” Mr Delaney told The Australian.

“We’re in a recession but things are improving. That’s typically the environment where you want to be buying stocks.”

Near-term risks that could halt the sharemarket recovery include the coronavirus not coming under control, which Mr Delaney labelled the biggest threat, policy stimulus around the world being withdrawn too early, and the US election in November.

“Most likely these are all six-month factors. When you look out beyond that it looks a bit clearer. The risks are all in the near term, rather than long term,” he said.

The positive return for the fund’s balanced option was driven by an 11.5 per cent return in global equities, which, at 34 per cent of the portfolio, is its largest asset class.

The fund has ridden the US-centred tech stock boom in recent years, with holdings in companies such as Amazon, which hit an all-time high last week.

“They’ve had a very good run, the tech stocks. It’s been the place to invest, basically on the thesis that that’s the way the world is evolving and structurally changing and you should be inclined to get on board those trends.”

Digitalisation services would continue to accelerate that trend, he said, as he dismissed concerns of a tech bubble.

In contrast to the performance of its global equities, the fund’s Australian equity holdings, which represent 21 per cent of the balanced portfolio, returned -6.5 per cent for the year.

The fund maintained its exposure as markets collapsed in February and March because “it was too late to sell and too early to buy”, Mr Delaney said.

Predicting equities would deliver the best return in the coming five years, he said there were opportunities “across the board”.

“The market has rewarded those stocks which have got a secular growth aspect, like technology stocks. It’s done that on the way up and on the way down. That’s likely to broaden out if the economic recovery gains momentum and some more of those cyclical stocks start to gather momentum.

“Valuations are fair to cheap on a historic basis. They’ll be supported by stimulatory policy from governments, and with interest rates being very low, it’s hard to see income-yielding investments generating anywhere near the comparable returns.”

The fund is also hoping to deploy cash into the alternatives space in the near term, Mr Delaney confirmed, after it gradually reduced its holdings in the asset class between 2018 and early 2020.

“We didn’t get everything perfect for the COVID-19 period but what we did was get our unlisted weighting down to a pretty low level for us. We thought, well you can only sell unlisted assets in an upturn; you can’t sell them when the markets roll over. So now we’re really looking to redeploy that capital, which we’ve warehoused over the last 18 months or so, back into opportunities.”

Private equity valuations had already come back quite a bit and may retreat further, he said, while infrastructure pricing had improved “but not dramatically”.  While the fund stayed invested through the crisis, Mr Delaney revealed that members had shifted $8bn into cash as markets were collapsing earlier this year. Most of it is still sitting there, with those members missing out on the recent recovery.

“We get people who switch the day after the equity market goes down. It’s fear driving that. You can’t invest with fear — just let other people do it and trust them.”

Recent calls for the superannuation guarantee to be paused at 9.5 per cent, meanwhile, went against the need for a long-term strategy for contributions, he warned.

“You can’t chop and change for economic circumstances. We know people need about 12 per cent-plus for viable retirement incomes. This move we’ve got in place whereby it increases by 0.5pc next year is a relatively modest change in the scheme of things,” he said.

“The other argument that super has a substantial adverse impact on wages — I’m not really a believer in that.”