This article was produced in partnership with Hostplus.
You’ve probably experienced concerned clients reaching out with more questions than usual when markets fall. Because super funds manage billions of dollars on behalf of members and investors, navigating market fluctuations is essential to optimising financial outcomes in retirement. If you understand the approach your client’s super fund takes in addressing market instability, you can use these moments to connect and establish trust.
Hostplus, for example, addresses market volatility through investment diversification, active management, and innovative product solutions. Adopting a long-term focus, along with its scale, allows Hostplus to invest significantly in unlisted and direct assets across property, infrastructure, private equity and private credit.
Unlisted assets are (unsurprisingly) assets that cannot be accessed via listed markets. They represent the majority of investable assets worldwide and therefore are a relevant consideration when building a highly diversified portfolio. However, only funds of sufficient scale and reach, that are willing to grapple with their complexity and which are able to manage their lack of liquidity, can access this broader and more diversified range of assets for their investments.
Diversification of asset classes, and within asset classes, is an important way super funds can try to mitigate the effects of market swings. Direct property is a very broad asset class and provides a good example of this. Hostplus has been able to gradually pivot into non-traditional sub-sectors, such as industrial, hospitality and medical offices. These have historically been growth sectors, and, in most cases, have helped to mitigate some of the impact from the increased pressure on capitalisation rates, especially in the office sector, where working-from-home has been impactful.
Hostplus believes that active management helps smooth out long-term returns. Following an active management approach allows funds to further diversify across manager styles as they seek out opportunities to exploit market inefficiencies. We think that active management will continue to be a key driver in managing volatile markets, offering a hedge by backing managers with different styles who are willing to deviate from the passive benchmarks that are prone to underperformance in tougher market cycles.
When selecting managers to carry out the active investment process, it’s important to consider different backgrounds to take advantage of different strengths. For example, larger and well-established fund managers can leverage the benefits of scale, but smaller boutique fund managers can offer specialised expertise. The other benefit for a fund to leverage external managers is by compartmentalising risk. Adding in more internal managers also means internalising risk.
Building robust portfolios requires an ability to provide resilience against a broad range of factors, such as inflationary concerns. For example, portions of the infrastructure and property portfolios have assets that receive rent, or income, based off inflation-linked underlying contracts. These investments can perform well under inflationary conditions, which helps to counterbalance other assets in the portfolio.
Market volatility poses significant challenges for super funds tasked with safeguarding their members’ savings. Implementing diversified investment strategies, active management techniques, and embracing innovation, can help super funds weather market ups and downs.
Greg Clerk is deputy chief investment officer at Hostplus.
Disclaimer: This information is general advice only and does not take into account your personal objectives, financial situation or needs. You should consider if this information is appropriate for you in light of your circumstances before acting on it. Please read the relevant Hostplus Product Disclosure Statement, available at hostplus.com.au before making a decision about Hostplus. For a description of the target market, please read the Target Market Determination available at hostplus.com.au. Past performance is not a reliable indicator of future performance and should never be the sole factor considered when selecting a superannuation fund. Issued by Host-Plus Pty Limited ABN 79 008 634 704, AFSL 244392 as trustee for the Hostplus Superannuation Fund ABN 68 657 495 890, MySuper No 68 657 495 890 198.
