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Last week we concluded our weekly commentary with the line that (as at the end of May) "by itself, a fall on the ASX of only 12% YTD, given the "R" word... is extraordinary." As at the time of putting Hedge Clippings together only a week later and the ASX is in almost exactly the same position, but having both risen and then fallen 400 points over the week.
As anticipated by a few old hands, the steam seems to have well and truly gone out of the post-COVID rally, with volatility and risk well and truly back on the table. Whether that's a reflection of too fast, too hard, the realisation of the economic damage facing the global economy, or a reaction to recent civil unrest, is hard to tell. Maybe a combination of all three, plus others. However, it is a reminder that diversification, particularly into assets and funds with a low correlation to the market and each other, is a cornerstone of risk mitigation.
The other re-appearance over the past week has been some good old political opportunism with oppositions of all persuasions grasping for (or should that be gasping?) airtime in the COVID saturated media. As we've mentioned before, given there was no playbook for the crisis that's unfolded over the past four months, we think that both the Federal and State governments have steered through the potential social, health and economic carnage pretty well. By global standards, both Australia and New Zealand have shown the world (with the exception of Taiwan) how to handle, or not handle as the case may be, a crisis.
Now as we exit lockdown, those same governments have possibly come to the difficult part of the exercise, with a combination of community impatience and frustration building up. Taking away the handouts that so many people have received (including some who saw it as a free bonus given they didn't need it in the first place) is the difficult part of any welfare process.
Hereafter, and for years or decades to come, Australians will be footing the bill for the essential life support the economy has been put on. That will take some real management, and we hope the government (or governments) will take the opportunity to reform certain key areas. One amongst them that Hedge Clippings has long banged on about is the current superannuation regime.
Where do we start given limited time and space available?
Well for a start, make it simpler! What should be straightforward has been overcomplicated by rules and regulations to the extent most of the population can't fathom out the detail and just leave it for others.
Secondly, what's the point of forcing the workforce to save for 40 years or more by (they or their employers) contributing almost 10% (yes, we do think it should be higher!) of their salary, only to allow them to take a lump sum at retirement or aged 65, and be able to potentially blow the lot rather than earning a pension, even though they have another 20 years or so to go before "moving on"?
And finally, and probably most importantly, given the economic need to kick start the economy with long term infrastructure projects, why not force - or incentivise - all superannuation funds to invest a percentage of their assets in approved infrastructure "bonds". As of the most recent APRA data, there's now $2.7 trillion in superannuation, almost 35% of which is in a combination of fixed income or cash. That's almost a trillion dollars earning not very much (over 13% is in cash, so not very much is actually almost nothing) and which is there for the long-term (up to 45 years).
Meanwhile, infrastructure, and the country, has the need for funding, has a similar investment term, and can provide steady returns (certainly more than cash in the bank).
And finally, that $2.7 trillion is forecast to grow to over $7 trillion before yours truly (if he's lucky) is currently scheduled by the actuaries to shuffle off to another place. So that is around $2 trillion in cash and fixed income which could, with the benefit of some governmental initiative and taxation reform, be helping to build the nation, and helping to stabilise the returns of all superannuation fund members.
OK, off the soapbox! Australian Fund Monitors is delighted to announce the addition of Damen Purcell to the position of COO. Damen has over 20 years of experience in the financial services sector and will bring added depth to the management, marketing and operations of AFM. Yours truly might even be able to hand over the reins of Hedge Clippings in the not too distant future, and return to his prior habit of enjoying lunch each Friday. (Question mark deliberately excluded!)
Now there's an idea worth chasing!
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