Mercy Super - Always for you

The coronavirus (COVID-19) is affecting our lives in many ways, most obviously on the health of people around the globe, the toll on our health system and essential service workers, and the impact on the economy and jobs of hundreds of thousands of Australians. The disruption to lives, livelihoods and global economies is likely to continue for some time.

It’s not surprising that you may be concerned about the impact this may have on your investments, including your super. To help, here are some answers to questions you may have.

Super is a system for saving for your retirement. Your employer pays an amount of money into a super account for you on top of the wage or salary you receive. You can also choose to pay money into your super account yourself.

Unlike a bank account where your money is held by your bank in return for a set amount of interest, Mercy Super invests your money with a focus on adding value through long-term earnings. The amount added through investment returns depends on how successful those investments are.

Mercy Super invests your super, along with the super of all our members, in the share market and in fixed income (like term deposits) as well as areas like property (buildings, warehouses, shopping centres – not houses), infrastructure (airports, toll roads, windfarms etc.) and private equity (ownership of companies). We also hold some of your money in cash.

Spreading your money across these types of investments (known as diversification) spreads the risk and reward. Click here to learn more.

Diversification lowers the overall risk because different types of investments do well at different times. It is the best defence against a single investment failing or one investment type performing poorly (such as now with the share market falling). Diversification lowers the risk because, no matter what the economy does, some investments are likely to go up when others go down.

The balance of your super changes both because of money being paid in by you and your employer and because of the investment returns your super is earning.

The value of your super is always changing. Since February most investments around the world have fallen in value for reasons that are largely linked to COVID-19. This has affected the value of shares (equities), properties and even term deposits – pretty much all the things super funds invest in.

Because COVID-19 has caused many businesses to temporarily close down, with many people losing their jobs, most companies have an uncertain time ahead of them. So, the value of shares in those companies has fallen.

Many commercial properties that super funds own are likely to earn less in rent in the coming months, so their value has also fallen. Airports, toll roads and shopping centres that super funds own will all have fewer people using them at the moment so will be making less money, some even running at a loss.

So, for most Australians their super is worth less now than it was at the beginning of February. Each person and each super fund is different but your super might be worth between 5-15% less than it was a few months ago. Depending on your particular investments it might be more, or it might be less. You can check your account through Member Online here.

As the economy recovers however, the value of the investments supporting your super will recover as well and you can expect the value will return to where it was and continue to grow beyond that. Investment markets can fall in value quickly at times, as we have just seen. They also can also rise quickly too.

Everyone’s situation is different so each of us has a different answer to that question. For most people who are not likely to access their super for many years the best thing to do is to decide to do nothing. That might sound like you are ignoring the problem because at a time like this many of us feel like we need to take action. But when investment markets fall people often lose more money by making decisions at the wrong time.

Investment markets always have periods where values go up and down. The Global Financial Crisis (GFC), ten years ago, is the most recent example of a large “downturn” or “correction”. Throughout history investment markets have always recovered and risen to levels higher than before these periods of loss. Individual companies or investments do not always recover, but the overall share markets or property markets etc. do.

So, switching your super money between investments now to try and avoid losing more might mean you miss out on the gains when those investments pick up and rise in value. This chart shows what would have happened to a sample Mercy Super member’s super following different decisions they might have made during the GFC:

  • Remaining in the default MySuper Balanced option
  • Switching to Cash then back to My Super Balanced after one year
  • Switching to Cash and then back to MySuper Balanced after two years
  • Switching to and remaining in Cash.

Changing their investments away from more volatile investments, like shares, after the value had already gone down and missing the benefit of that value going back up has cost thousands of dollars which can never be recovered.

Impact of switching during the GFC

Source: Frontier Advisors, SuperRatings. The analysis is based on the returns during and after the GFC and assumes an average member with a starting balance of $50,000 and SG contributions invested in the median balanced/cash fund.

Because super is meant for your retirement, normally you can’t take your money out of your super before then. The Government has changed this rule for people who are facing financial difficulties as a result of the pandemic. This means some people will be able to withdraw up to $20,000 of their super over the next few months. Click here to learn more.

For many people who have lost their normal income, this may be one of the ways to get through the next few months.

However, if you can avoid withdrawing your super, or just take some if you really need to, that could mean you have much more waiting for you when you retire. Because Mercy Super invests your money for you to use when you retire in the future, it can be costly to cash in your super now, earlier than expected. You will miss out on the future earnings that money could have made in the years ahead. The way investments compound means that as your super balance grows higher, your super earnings also grow faster. This chart shows what would have happened to a sample Mercy Super member if they had taken money out of their super during the GFC.

We’re here to help you access your super if you really need it. It is your money after all. But, if you can put off, or take less out of your super at the moment, it is likely to be a good decision in the long term – depending on your own personal circumstances. We are all different so get as much information as you can to make the best decision for you.

Impact of withdrawing during the GFC

Source: Frontier Advisors, SuperRatings. The analysis is based on the returns during and after the GFC and assumes an average member with a starting balance of $50,000, invested in the median balanced fund, with no contributions for six months and SG thereafter.

Since the GFC most investment markets have produced good returns for a decade. Over history, dating back hundreds of years, markets have generally experienced “corrections” after long periods of constant growth. As the term implies, if values grow too strongly, they need to be adjusted or corrected to what is called a “fair value”. So, market corrections are normal.

One of the factors that has led to this fall in markets has been COVID-19. No nation around the world is unaffected and virtually all forms of investment have been impacted in some way. The virus occurred suddenly and it is hard to predict how long it will take to disappear, and how many lives it will touch. Investors don’t like uncertainty and we are seeing a lot of volatility in investment markets. In the last six weeks some share markets around the world have lost as much as 30% of their value. On particular days markets have dropped steeply and then the next day risen steeply, only to fall again the next day.

Governments around the world are taking drastic measures to deal with the virus and to try and support their economies. Very unusual policies and practices are in place, many of which we have not seen occur before. This means it is hard to predict how these decisions will work and at what speed.

We can be confident that markets will rebound. Through history share markets, for example, have always recovered their losses. Always. The chart below shows the Australian share market over the last 35 years as an example.

Source: S&P ASX, Frontier Advisors

Predicting when share markets will rebound is difficult, but it can happen quickly. Waiting for that recovery to start before moving back into shares could mean missing the largest part of the upswing. The US share market (the Dow Jones) rose 11% in a single day recently. Imagine missing out on that type of increase.

The value of shares, and many other investments like bonds, can change constantly. In the case of shares, minute to minute. But many investments like office buildings, shopping centres, airports, toll roads and the like don’t change value the same way. They are worth what someone is prepared to pay for them at a particular time, along with the earnings they generate like rent.

These investments are not linked to any market where their value is constantly recalculated, like the share market. These are often called “unlisted” investments. Normally these investments will be revalued at regular times, perhaps every three months or even annually. Those valuations are an estimate because the real value can only be determined at the time of sale. Just like a family home.

Because of the quick change in investment markets we have seen, assets like these are being re-valued now rather than waiting for their normal valuations. This will ensure the valuations of these investments are not out of step with the change in value of other investments like shares.

Mercy Super works with a team of investment professionals, with many years of experience. Each day they are looking at the impact of COVID-19 on your investments.

Like our members, the best thing at the moment is for us to stick to our investment strategy. However, as different individual investments will react and recover differently, there are opportunities to protect some further losses and to make some gains in the future. This requires a lot of information, experience and skill.

Working with fund managers and our asset consultants (Frontier Advisors), Mercy Super has literally thousands of investment specialists around the globe researching and analysing markets. Picking through this information provides the chance for us to make some decisions to improve outcomes for our members.

This is not unusual. Mercy Super, and our advisors, are always looking to manage the risks of our members’ investments and to find new opportunities.