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Vision Super’s Balanced Growth investment option has now generated positive returns for the ninth consecutive financial year. This represents an unusually extended period of positive returns, given this option’s large investment in equities (shares) which are expected to provide the best returns over the longer term, but also suffer occasional periods of negative returns. 

Looking at the current return for the year, with an inflation rate of roughly 2%, the real return (above cost of living increases) is 8%, a very strong result.   

Vision Supers Balanced growth option returns to 30 June 2018

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While this result is encouraging, members need to be aware of the risk involved in participating in an investment option that has an elevated equities allocation. When choosing an investment option, members should not refer to the short-term performance of the option in question, but upon the long-term performance of the investment option over the timeframe of their expected period of investment. Clearly the investment timeframe is longer for members with a long time until retirement than those with a short period. A more important result for Balanced Growth members is the ten-year return, which is 6.3% p.a.. This ten-year result is excellent, as it is roughly a 4% return above cost of living increases.

Performance for both the 2017/18 financial year and longer periods for all Vision Super options is available here.

The year in review

In reviewing the year just past, several key economic themes played out. These themes included:

  • geopolitical risks continued to influence financial market pricing, as rumours of Italy leaving the European Union surfaced, sabre rattling occurred between the US and North Korea and as the US President pursued protectionist trade positions with major trading partners,
  • the technology sector supported the general rise in equity prices, with strong revenue growth and elevated valuations in many well-known companies, like Amazon and Netflix, becoming apparent during the year, and
  • while the technology sector soared in price, the financial sector (mainly banks) languished under the weight of rising interest rates, especially in the US.

Market Inflation expectations remain a key determinant of interest rate levels, and, the pricing of all our investments. In Australia, inflation remained low, which led the Reserve Bank of Australia to leave official interest rates unchanged over the year at 1.5%. Interest rates in major economies overseas remained very low by historical standards, even in the USA.

Challenges ahead

Looking ahead, several challenges lie ahead for financial markets, and for the pricing of global and Australian equities this coming year. Some of these are as follows:

  • first, how various sectors in the equity markets will respond to gradually higher US interest rates, when many companies have become reliant on very low interest rate settings. Some companies may struggle to pay back their debts if interest rates rise too fast,
  • second, some economies, especially the US, are at full employment with labour shortages present for many jobs. This gives rise to the possibility that inflation (and interest rates) rise more than expected, leading to recession. In turn, this possibility would inevitably affect the global economy including Australia if it were to occur, and
  • third, how the financial markets will price equity for technology companies this year, as current pricing remains somewhat optimistic.

While Vision Super has benefitted from its relatively high exposure to international shares, we have moderated this allocation somewhat. Australian equities also performed well over the financial year. However, the gradual decline in Australian property prices, the leveraged nature of the Australian consumer, and slowing of Chinese growth, will all pose challenges to the outlook this year. Property and infrastructure assets performed well this year, however ongoing performance will depend on a complex variety of factors. Cash and fixed interest returns were relatively low. Fixed income investments are expected to provide a low but steady return for the year ahead.

Bearing all these risks in mind, Vision Super recommends that members continue to focus on longer-term performance. The aim of superannuation investment is to meet member objectives over the period to retirement, not from year to year. While this year has been an excellent year for many members, the financial markets may not deliver the same excellent rate of return next year. Fluctuations in returns are normal, so it remains important to stay focused on long term.  Vision Super strongly recommends that members pursue a consistent strategy when choosing their investment option. How this is implemented will take into account their objectives for retirement and their current circumstances.

Vision Super remains ready, willing, and able, to assist any member on the careful, systematic, and prudent choice of an investment option.

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