Investment update – Coronavirus implications 

After an extended period of positive returns, share markets have been experiencing significant sell-offs in recent weeks as the world grapples with the uncertainty of the spread of Covid-19. 

A fall in oil prices following a breakdown in discussions between Russia and Saudi Arabia has added to weak investor sentiment.

Central banks and governments have both enacted and are preparing countermeasures. The Federal Reserve completed an “emergency” cut series of rates to the official cash rate.  Other central banks have taken similar steps, including in New Zealand.  Measures to ramp up fiscal expenditure and support business activity are well in train.  

The rate of new Covid-19 cases has fallen sharply in China with the global growth of new cases now being solely in ex-China. South Korea and Singapore have been quite effective in dealing with new cases, although countries such as Italy have been less effective with the government now taking the extraordinary action of placing the country in lockdown. The biggest “known-unknown” is the spread of the virus in the US and indeed in other countries. 

In times of volatility, diversification tends to be an investor’s friend. 

This relates to diversification of the asset classes invested in, but also the diversification of the investments within asset classes.  The Scheme invests in a range of sectors and through a number of investment managers with different styles.

The negative impact on financial markets has primarily been upon equities.  It is worth noting that all portfolios, and particularly those with a conservative bias, have exposure to high quality fixed interest securities (bonds) and cash.  Generally speaking, we have seen the yields on bonds fall markedly, driving bond values up, thereby offsetting portfolio losses in equities.  In addition, portfolios have partial exposure to “real assets” such as listed infrastructure and property, commodities and timber.  These sectors, while under pressure in some cases, typically hold up better than the wider equity market.

Active management used within asset classes means that the funds will not simply follow benchmark indices down during soft markets – managers have the ability to provide a buffer through careful security selection.  While it is too early to say with clarity how successful these managers have been in recent weeks, many of them employ an investment bias to quality businesses and have been conscious of allocating to companies not trading on stretched valuations.
It is clear that Covid-19 is going to have a significant impact on human health and business activity.  To what extent local and global economies are going to deteriorate, however, is a less pertinent question in an investment sense than how much deterioration is factored into today's asset prices.  To quote prominent investor Jeremy Grantham:  "Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before". Predicting the future is highly problematic, but by taking a long-term perspective as an investor, it becomes less critical whether that shade changes tomorrow, next week or in several months' time.

What does this mean for you, and should you be concerned?

It’s important to be aware of your investment option, the risk level of that option, your investment timeframe and your ability to tolerate fluctuations in asset prices. The volatile nature of markets continues to be a reminder of the benefits of diversification and maintaining a focus on the longer term. News reports on changes in market performance can prompt concerned members to check savings balances and react without considering that, in most cases, the Scheme is intended to be a longer-term savings mechanism.   

1) Do you know where your money is invested?

The Scheme’s investment strategy (as published in the statement of investment policy and objectives available on the Scheme website) allows for investment diversification, with assets spread across various asset classes including shares, property, bonds and cash. The Scheme offers members a choice of four investment funds (Cash, Conservative, Balanced, and Growth). This helps the Scheme’s investments meet their longer-term return objectives, notwithstanding periods of market volatility.

2) Need to withdraw money in the near future?

If you are thinking of leaving teaching or withdrawing your money from the Scheme (if eligible), it’s important that you understand that the value of your Scheme may go up or down with the market and allow for that.

3) Do I have to take my benefit out of the Scheme when I retire or leave teaching?

No. If you don’t want to take an immediate cash withdrawal from your account, you may choose to defer receiving your benefit and remain a member. Alternatively, you can elect to receive a regular fortnightly or monthly withdrawal (more information is available in the fact sheet).

4) Have you spoken to an expert?

A financial adviser can provide you with independent guidance and advice on superannuation and other financial services and products. If you are concerned about the markets or considering making a withdrawal sometime soon, then speaking to a financial adviser can help refine your goals. Visit the Financial Markets Authority website to find a financial adviser near you.

This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs.This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs.

17 March 2020