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Angela O’Brien (AO): Hi. I’m Angela O’Brien from UniSuper and I’d like to welcome you to this edition of Five questions for the Chief Investment Officer, John Pearce. Given the incredible situation we all find ourselves in, we’ve had to improvise a touch from the usual format. Like millions of others, we are working from home. It’s not ideal, but I’m sure you all understand.

John, you mentioned in a recent investment update that you have been involved in financial markets since 1986. So you’ve seen a few market crises in your time but nothing quite like this one, right?

John Pearce (JP): Indeed, Angela. To capture the enormity of what's happened over the past few months, I picked four slides. Let's have a look at them. Firstly, in terms of monthly market movements, that's both up and down. We have to go all the way back to 1930 to see a period where we've had greater monthly movements than recently.

Graph showing monthly percentage changes in the S&P 500 Index in response to the following historical events: the Great Depression; Hitler invading France; Black Monday; the dot-com bubble burst; the Global Financial Crisis; COVID-19. The change observed in relation to COVID-19 is the largest since the Great Depression. 

The oil market. Now, here is a classic case of a perfect storm. At a time when the world is awash in the supply of oil, we've had a collapse in demand. You know, bear in mind that 60% to 70% of global demand is in transportation. Let me know what's happened to that. There's one crazy time last month when an oil price futures contract was actually trading at a negative price. So that's right, in effect, sellers of these contracts were actually paying buyers to take oil off their hands. Crazy times.

Graph showing the West Texas Crude Oil futures prices per barrel, dropping from just under $60 in November 2019 to -$38 in late March, before jumping to over $12 per barrel shortly thereafter. 

Unemployment. Once again, referring to the U.S. situation, during the GFC, the U.S. lost about 7.5 million jobs. Since the GFC, about 23 million jobs were created in the U.S. In the last six weeks, about 30 million jobs have been lost. Hopefully, a lot of this is temporary. But the reality is that it's going to take a long time before the U.S. gets to pre-crisis levels in terms of employment.

Graph comparing the number of US jobs lost during the global financial crisis (seven million), the number of US jobs created since 2008 (22 million), and the number of US jobs lost in the last five weeks due to COVID-19 (30 million).

What about response to this crisis? Well, in typical fashion, the central banks around the world have flooded global markets with pretty much free cash. Government response. Unlike the GFC where the governments were a bit slower to react, the governments have done it very swiftly. And at the top of the tree, in terms of as a percentage of GDP, number one, the Australian government. That's right, over 10% of our GDP is the level of the stimulus the Australian government is adding to our economy.

Graph showing government stimulus as a percentage of gross domestic product. Australia is at -10.9 followed by the US at -8.7, Singapore at -7.8, and the UK at -6.1. Figures from 26 other countries are also shown, ranging between -5.6 and zero.

So in answer to your question, yes, over three decades of being involved in financial markets, I have not seen a crisis unfolding at the speed and the magnitude that I've seen in the current one.

AO: I understand the situation is very fluid but can we have an update on the performance to the end of April?

JP: This might be the most surprising stats of them all. Given all the turmoil that we've read about, members might be a little bit surprised to see that the year-to-date returns may not be as bad as they expected.

On this table here, we have our diversified options, our key diversified options. And of course, you can go to our website to get the full list. We're seeing a huge bounce in April. That's putting financial year-to-date returns to reasonable levels. If you can look at our Balanced option, which is the default option for our key members, down about 3%. And then follows 10 years of very strong returns, about 9.5% on average. Our Sustainable Balanced option, without being impacted with the oil price crash, because, of course, it doesn't have any fossil fuels, it's holding up really well.

Particular mention to the Conservative option because this option is very popular amongst our retired members. I'm very pleased to say that capital on our Conservative option, on a year-to-date basis, has indeed been preserved. So that's really positive.

Of course, it's not all positive news. The worst performing option has been our Listed Property option. You can see that number year-to-date to date, quite a large negative. And it shouldn't come as any surprise, if you think about what's happening to retail property in particular, it's been decimated, and the outlook is very uncertain.

On the other hand, our best performing option, Global Environmental Opportunities, the green theme, very strong leading up to the crisis, and even the losses sustained during the crisis has not moved that option back to negative territory.

Table showing the investment option performance to 30 April 2020.

But of course, as you say, the situation is very fluid. It's just pleasing to see that maybe the results are not as bad as people initially anticipated.

AO: It’s reassuring that our Defined Benefit Division remains in a healthy surplus. Can you elaborate on the performance of the portfolio and the outlook for the key investments?

JP: Well, as of the end of April, we estimate the vested benefit index to be about 114 and the accrued benefit index to be about 123. So in stark contrast to the vast majority of the defined benefits around the world, which find themselves in a deficit, we are still an originally healthy surplus.

Now, in terms of the outlook, there are obviously no guarantees, the situation is fluid, but I think it's worth having a look at our 10 key investments in that option. Now, I've categorised them along the following lines. If you look at that table, I've looked at the impact over a one-year basis on the actual businesses of these investments.

Table showing our Defined Benefit Division’s top ten holdings.

So at one extreme, you have airports and shopping centres. And quite frankly, even if we roll the portfolio to a year, the outlook is still uncertainty. On the other extreme, we have a look at companies like ASX, which we don't believe has been that badly impacted by the virus, and the one-year outlook stays about the same. And then we have a couple in the middle, Transurban toll road and Enbridge pipelines.

Now, most importantly, let's see if the market agrees with this assessment.

Table showing our Defined Benefit Division’s top ten holdings, and the expected impact of COVID-19 on underlying business over one year. Companies named are divided into low, medium and high. Low impact expected to APA (-4%), ASX (+2%), Woolworths Group (-17%), Telstra -18%. Medium impact expected to Transurban (-15%), Enbridge (-23%). High impact expected to Sydney Airport (-24%), GPT (-32%), Scentre Group (-38%), Aena (-31%).

Well, it turns out that when it comes those most impacted by this crisis, yes, the market has marked them down the most. So, the market agrees. Your outlook's uncertain. And this is really important. It means that a fair bit of bad news is already factored into the price of these investments. At the other end, we see companies like Woolworths and Telstra also being marked down and we think the market can be a little bit overly pessimistic. So indeed, it could be a bit of upside here. And then of course you have the two in the middle, we think Transurban is a clear candidate for V-shaped recovery in about six months. Transurban was trading, you know, about 25% fall from its highs recently, which we thought was a complete exaggeration. It's promising to see the rebound in that stock. We were fortunate to pick up some at cheaper levels and same with Enbridge. Enbridge, we believe, will recover pretty soon. We think the market might be a little bit pessimistic on those two.

And there is another aspect about the defined benefit portfolio that I would like to share. I'm very fortunate to be working with some very smart people. And one of the smart strategies that we have come up with is an option protection. It's a bit like insurance. If you think about buying house insurance, you're paying a premium, insuring against a pretty disastrous situation. Well, when markets were trading much higher and insurance was a lot cheaper, we actually bought insurance against a potential fall in the market and we applied that to the defined benefit. Well, as it turns out, the market has fallen, and what was once pretty cheap insurance has now become quite valuable. Now, it's a very large position. We haven't totally eliminated the risk on the DB, but it's fair to say losses on the portfolio, given further market force, will be somewhat mitigated by this insurance position that we have put in place.

AO: There has been a lot of switching from growth assets to cash, and we now have outright withdrawals with the Government’s ‘early access’ initiative in place. The media has focussed on the liquidity strain these developments place on super funds. How has UniSuper been coping?

JP: Well, first, on the early access scheme. To date, there has been just over 6,000 members accessing about $54 million in early withdrawals. It really has not been an issue for UniSuper. Now, members have got till 30 June to put in their request for early access, so the number could get higher. But certainly, at this stage, it’s at the lower end of expectations.

Now, let's look at member switching, because a lot of this has been talked about in the press. On your screen is a slide showing daily member switches since the start of the crisis.

Graph showing daily member switching activity from defensive in late February 2020, slowly back to growth in early April, with the ASX 200 Index levelling from late March.

We see the red bars there denoting member switching out of growth or risky options into pretty much cash and conservative options, a big outflow there. And then as the markets have stabilized, we've seen this stabilize, and indeed, we've seen dribs and drabs coming back into growth options.

In total, about $2.6 billion were switched out of growth options into cash. Now, I'm really pleased to say that whether it's early redemptions, or member switching, we've been able to handle it with ease. And we've been able to do that because we run very high levels of liquidity. We have a very conservative approach to liquidity. And most importantly, not only have we been able to handle redemptions and switching with ease, we've had the wherewithal to take advantage of some fantastic opportunities in the market. You've heard the world about the capital raisings from various companies, we were a cornerstone investor in capital raising for NextDC. We were one of the largest cornerstone investors in the National Australia Bank capital raisings, and we participated in a host of others at attractive prices.

AO: Most countries in the world are still enforcing some degree of lockdown and social distancing. However, there at least appears to be a bit more optimism about the outlook. Are there any developments in particular that you find encouraging?

JP: We've all heard about the flattening of the curves, we all know how well Australia is doing. I'm particularly encouraged when I look at the performance of countries like South Korea, which really has a semblance of normality there, with people attending bars, cafes, restaurants, the movies, etc. And we have a really big balancing act here. How do we get the economy back to normal, while at the same time dealing with a virus that hasn't gone away?

Fortunately, we have a lot of well-funded innovative companies that are looking for solutions to attacking this virus, and it’s really in three broad categories: vaccination, treatment, and testing.

Now, on the vaccination front, it usually takes over a decade to come up with a vaccine. We're hearing that potentially Johnson & Johnson will be coming up with something a bit sooner. Johnson & Johnson will be performing trials in around September, and they're expressing some confidence that they could have something next year. Now, there are plenty of experts that say that this is wishful thinking, and we have to also defer to those experts. The bottom line is that we cannot rely or wait for a vaccine before we get back to normality.

In terms of treatment, once again, some very positive signs and a lot of companies throwing a lot of resources at this. Leader of the pack at the moment, is probably Gilead with their drug remdesivir. At the moment, clinical trials are proving to be promising. And if indeed they continue to be promising, it could be just a matter of months or even weeks before it is rolled out for emergency purposes.

And then we come to testing. And this really is the crux. And if we look at the success of South Korea, it's all about testing and isolating those with a positive result. That is the quickest path to getting back to normality. Once again, many companies involved in this. Probably the leader of the pack at the moment is Abbott, tests with not just accuracy around whether it's positive or negative, but also antibody testing.

Table showing the companies that are committed to developing a COVID-19 vaccine, treatment and testing. Johnson&Johnson leads the way for developing a vaccine, Gilead leads the way for treatment, and Abbott leads the way for testing.

The most important thing, if you're living in a developed market at the moment, it's pretty much the case that if you want to be tested, you can be tested, and that is the most encouraging thing.

Having said that, I don't think any of us can expect a V-shaped recovery. The best metaphor I've heard is probably is one of a dimmer switch, where we gradually just turn it on rather than flicking an on button. But at the end of the day, like every other crisis, this too shall pass.

AO: Thanks, John. And thanks for answering those questions. If you have any questions you'd like answered, please email us at Thanks for watching.

Disclaimer: Information on this web channel, including accessible video content, is provided by UniSuper Management Pty Ltd. Trustee: UniSuper Limited (ABN 54 006 027 121, AFSL No. 492806). Fund: UniSuper (ABN 91 385 943 850) Administrator: UniSuper Management Pty Ltd (ABN 91 006 961 799, AFSL No. 235907).

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