FROM THE CHIEF EXECUTIVE
In this Chief Executive’s Report:
- The reasons for investment losses in the 2008-09 financial year and the outlook for Westscheme
- Member concerns for retirement savings
- The role of the Westscheme Trustee Board and its advisers
- A response to a news report about Westscheme’s assets
Westscheme’s Investment Performance 2008 - 2009Members of super funds across the board have experienced disappointment with the investment losses they have sustained during 2008/09. Westscheme members have also been hurt by this experience. I acknowledge the pain this has caused them.
Westscheme’s default option (the Trustee’s Selection, which is used by more than 95% of members who in the main have not made an investment choice) experienced significant losses in 2008/09 financial year which mainly reflected the Global Financial Crisis (GFC) - the most significant financial crisis since The Great Depression. The GFC resulted in a very sharp contraction in the global economy and devastated most asset values in the period from October 2007 to March 2009. The only asset classes that achieved positive returns during the crisis were Cash and Government Bonds. During the crisis the Trustee’s Selection did not hold any Government Bonds and only held a small amount of Cash. As a result it sustained greater losses than comparable funds in 2008/09
In the Trustee’s Selection Westscheme invests its members’ superannuation with a medium to long-term view. Therefore the Trustee’s Selection has investments whose values can be volatile in the short-term. To reduce the impact of inevitable downturns in individual asset classes, the Trustee’s Selection holds a wide variety of investments over many different asset classes. During the recent crisis, against conventional and theoretical expectations, this variety of investments did not work, and Westscheme was more exposed than expected to short-term volatility.
While the extent of the volatility during the GFC has been exceptional, the short-term volatility of investments is a risk that investors accept with a view to the reward of higher returns over the long-term. Focussed as Westscheme is on producing good long term returns for its members, it runs the risk that the values of its investments will be written down during some short term periods. These reductions in value are generally not permanent. This is because they often reflect the heightened caution of other investors during a crisis. When the crisis passes and the level of caution reduces, values tend to increase. These phenomena are currently being demonstrated by the turnaround in share markets. In relation to Westscheme’s unlisted assets (such as infrastructure), we expect the improving confidence in the economic outlook and better economic prospects to be taken into account in the valuation of unlisted assets over the course of this financial year.
Westscheme’s unlisted investments are mostly in businesses that produce reliable long term cash flows. They generate their revenues from activities that are relatively stable during economic cycles, so they usually help protect portfolio performance in an economic downturn.
The credit crisis has meant that the debt underpinning unlisted investments has been in shorter supply, or only available at much higher interest rates. In recognition of the expected downturn in economic activity, the managements of these businesses have budgeted cautiously during the first half of 2009. In general,
the valuation of Westscheme’s unlisted investments has been based on the conservative operating budgets of the underlying businesses, as well as concerns about the impact of the continuing contraction in commercial lending and the significant increase in applicable interest rates. This has adversely impacted the value of these investments.
Many of Westscheme’s unlisted assets are now being carried at values that are expected to produce double digit returns if markets continue to improve and they meet the conservative budgets currently in place. A further benefit is that the credit crunch is now easing, making it easier to borrow. While interest rates demanded on these borrowings remain significantly higher than those that existed before the crisis, in some instances they are now lower than those factored into current valuations.
Westscheme’s directly held unlisted investments are valued by the big four accounting firms (PricewaterhouseCoopers, Ernst & Young, Deloittes and KPMG) on a regular basis. Westscheme’s unlisted investments were, on average, valued on a net realisable value basis more than 3 times during 2008/09 to ensure valuations appropriately reflected the deteriorating economic outlook and the increasing severity of the worldwide credit crunch.
While the Trustee’s Selection incurred significant losses in the last financial year,
performance over the current financial year to date has been favourable, reflecting the changes in sentiment and risk rating referred to above.
Member concerns about retirement savingsThe substantial majority of Westscheme members are under 45 years of age and it is in their interest that the Westscheme Trustee takes a long-term approach to investing. Such an approach may not suit a member who, because of approaching retirement, has a relatively low risk tolerance and shorter investment time horizon. Members in this situation may use Westscheme’s limited financial advice service. This service is offered over the telephone at no additional cost.
Members who would like limited financial advice may call Albert Lim of Industry Fund Financial Planning (IFFP) to discuss how Westscheme’s investment options can be used depending on the member’s tolerance of risk. Albert can be contacted on (08) 9218 4038.
Members planning for retirement are also advised about Retirement and Transitions to Retirement Seminars in the regular Westscheme newsletter and on the Westscheme Website. These seminars address the special interests of members approaching or already in, retirement.
In the meantime, details about the available investment options are set out in section five of Westscheme’s current Member Handbook/Product Disclosure Statement.
The people who run and advise WestschemeThe Westscheme Trustee Board and Access Capital Advisers (Westscheme’s investment adviser and agent) have been actively involved in attending to Westscheme’s investment performance during this period. The dilemma they have faced has been whether to sell assets that have been drastically reduced in value during the crisis to raise cash as a refuge against the storm, or whether to tolerate the write downs and hold on to the assets so as to benefit from their returns once the crisis has passed. Risk management has been their overwhelming concern through the crisis.
In the current calendar year to date they have distilled the lessons learned from the crisis, reviewed Westscheme investment policies and strategies, and made some
enhancements to the investment strategy for Westscheme Trustee’s Selection.
The reasons for these changes and the economic outlook on which the strategy is founded are published on this website. Westscheme believes that the revised strategy has favourable prospects of returning the Trustee’s Selection to a top quartile investment performer over the medium term.
‘Fire sale’ of Westscheme assetsIn response to a news article in September 2009 about an alleged ‘fire sale’:
Westscheme has never had to consider a ‘fire sale’ of any of the assets it has invested in on behalf of its members. Such a predicament did not arise for
Westscheme during the height of the recent crisis and I do not currently envisage a situation in which this would occur. More than 50% of the Westscheme portfolio is held in liquid investments that can be sold within 30 days.
Westscheme also receives strong cash inflows which have always enabled it to meet its liabilities as and when they fall due. During the year ended 30 June 2009 Westscheme generated cash of $370.3 million surplus to its operational requirements and benefit withdrawals. This surplus was invested on behalf of Westscheme members.
Howard Rosario
Chief Executive
20 October 2009
Other articles from the Chief Executive are available via the links below: