The novel coronavirus outbreak has caused share market volatility that provides good headlines for news agencies and sometimes creates concern for investors. But in times of volatility, it’s important to take a deep breath and consider long-term perspectives.
There are many things that cause share market volatility. It can be a natural disaster such as a tsunami, or a political event such as Brexit. It can be a set of economic data. Or, as right now, a global health event. Volatility, particularly when reported widely in the media, understandably creates investor worry.
But before taking quick action with long-term investments and crystallising point-in-time returns, investors might be best served considering the bigger picture.
QSuper’s strategy is to invest in a “risk-balanced” way, focusing on risk allocation, not asset allocation. It’s a diversification approach different to that taken by most other superannuation providers and a factor in QSuper receiving the inaugural SuperRatings ‘Smooth Ride’ award in 2020, recognising the fund that had best weathered the ups and downs of the market, while also delivering strong outcomes.1
What it means practically for QSuper members in default and other diversified options (excluding the Socially Responsible option) is decreased equity risk and increased exposure to other asset classes, led by bonds (which tend to go up and down at opposite times to shares), as well as direct infrastructure, real estate, private equity and alternative investments.
Visually, here’s what it looks like:
Asset allocation
Traditional asset allocation: Higher reliance on equities for growth.
Source: The asset allocation in this chart is for the SuperRatings SR50 Balanced (60-76) Index median fund. SuperRatings does not issue, sell, guarantee or underwrite this product.
QSuper Balanced: Strategic use of long-term bonds for more diversified risk.
Source: The asset allocation of the QSuper Balanced option for the accumulation account.
Related risk allocation
Traditional risk allocation: Predominance of equity risk.
*Risk allocation is defined as contribution to volatility
Source: The risk allocation is based on QSuper analysis of the SuperRatings SR50 Balanced (60-76) Index median fund asset allocation. SuperRatings does not issue, sell, guarantee or underwrite this product.
QSuper Balanced option: More balanced risk – far less equity risk.
*Risk allocation is defined as contribution to volatility
Source: The asset allocation of the QSuper Balanced option for the accumulation account.
When markets are volatile, the QSuper investment team sticks to their long-term strategy of risk-balanced diversification, which involves behind-the-scenes daily management of the shorter-term asset allocations within the QSuper portfolio.2 This daily management occurs in all market conditions.
Every external market event is different in detail to the last one. All are common in that they cause short-term market fluctuation.
Precisely how this virus will impact markets is not fully known. In an economically interconnected world though, there are concerns that company earnings in developed markets will be impacted as the virus spreads. Share markets across the globe have declined recently, pricing in this concern.
This recent weakness in equities is not surprising. Since the virus first emerged in China in January, share markets had continued to rise. No risk of the virus disrupting the global economy had been priced. QSuper has held equities at the lower end of ranges, prior to the recent correction, mitigating the impact of the recent correction in shares slightly.
QSuper can’t tell its members what investment decision they should make, but the fund does encourage people to find out more. They know how important it is for members to hear about the performance of their investments and be confident with the balance of risk and reward they are seeking.
QSuper staff are available to talk generally anytime. QSuper also gives members access to over-the-phone financial advice3 on specific topics related to their QSuper account.