Education is a major life event which requires careful planning to best achieve the desired outcomes. A key part of a member’s relationship with ASG is the investment of their contributions and earnings and the investment returns generated over the life of their selected education product/s.
ASG is committed to informing its members about the investment strategy in our member communications.
Review of the 2016 financial year
The returns to our members this financial year (2015-16) have been solid despite the volatile investment markets. Global equity market returns have been unpredictable and interest rates globally are at all-time lows. Going forward this low return environment may impact upon medium-term outcomes.
Put into context ASG’s investment of member funds performed well particularly when compared to other balanced funds, term deposits and cash investments. ASG’s net investment returns are allocated to each member’s account as a bonus rate return. This return is calculated by taking into account the gross investment returns, expenses of the fund, taxation and any applicable prudential requirements.
Total funds under management, as at 30 June 2016, was $1.58 billion. During the year we paid out $266 million in education benefits and scholarship payments.
In Australia, the bonus rate was 2.80 per cent for the Education Fund (TEF) and 2.55 per cent for the Supplementary Education Fund (SEP). The bonus rate of return for Pathway Education Fund (PEF) in Australia was 2.55 per cent (launched during the financial year and therefore not representative of a full year return). In New Zealand the bonus rate of return for TEF was 1.15 per cent and 0.95 per cent for SEP.
This result was influenced by volatile investment markets particularly for growth assets such as domestic and global equities. Defensive assets such as fixed interest securities and money market securities performed in line with expectations during the year. In the medium-term, ASG expects that defensive assets will continue to return lower than historic levels. However, we believe that Australian defensive assets with higher yields will assist in generating solid risk adjusted returns. Additionally, the diversity of asset mix will help to reduce the overall volatility of the funds. This will lead to a more consistent investment outcome and act to protect members’ funds should markets turn down.
ASG’s approach to investment management
ASG has developed a comprehensive investment strategy which defines the investment objectives and investment risk and return expectations. The focus of ASG’s investment strategy is on meeting the long-term objectives of our members irrespective of short term volatility.
The strategic asset allocation is designed to blend the available asset types together to create an investment portfolio which is aligned with the investment strategy. A key aim in the creation of the investment portfolio is to ensure broad diversity of asset types and an asset mix that allows the long-term risk adjusted investment objectives to be achieved for our members.
ASG invests into various asset types including Australian equities, international equities, emerging market equities, unlisted and listed property, Australian, New Zealand and global fixed income and Australian and New Zealand cash. These diverse asset types combine to create the investment portfolios ASG expects to best achieve the long-term risk adjusted investment objectives.
However, investment markets, are often volatile. Events regularly occur outside of those reasonably expected which can act to create significant uncertainty and volatility in global investment markets. Over the past ten years several significant events have occurred and created instability in investment markets; e.g. US subprime mortgage crisis, Lehman Brothers collapse, global financial crisis, Greek debt issue impacting Europe, BREXIT, US elections and other political events.
Below is a chart of the declared bonus rates for The Education Fund in Australia since 2006 which depicts the volatility evident in financial markets over the period.
The chart above shows that declared bonus rates (returns after all fees and taxes) do shift around over time. ASG focuses on the long-term and does not take a short-term approach. As can be seen in the chart, the average returns over the period were 3.30 per cent. The average return over the past five years was 4.20 per cent. History has shown that investment markets rise over the long term. This is aligned with the long-term nature of ASG’s education funds and the aspirations of our members preparing for a major life event.
Given ASG’s moderate risk appetite the cash level remains at a substantial percentage of the portfolio. Over recent years the level of the Australian and New Zealand official cash interest rate has been declining in line with economic conditions and global interest rates. This has acted to lower the overall portfolio return. We have taken proactive steps to offset this impact within our overall risk appetite. Diversification of investment types is a proven way to reduce the volatility of the portfolio while improving long-term return outcomes with lower risk.
Over the long-term, a conservative balanced investment portfolio has outperformed returns generated on cash based savings accounts and bank term deposits, particularly on an after tax and fee basis. In Australia, the current Reserve Bank cash rate is at 1.50 per cent p.a and in New Zealand 2.00 per cent p.a. In some countries the official cash rate is negative. Hence, we believe a conservative balanced investment portfolio will outperform a cash savings and term deposit approach over coming years.
The table below shows a comparative performance of other relevant substitute savings products and their returns over the last year, average three years and average five years.
| ||1 year ||3 year ||5 year |
|ASG TEF Australia (1) ||2.80% ||4.02% ||4.20% |
|Savings account – Australia (2) ||1.97% ||2.28% ||2.87% |
|Term deposit ($1000) – Australia (3) ||1.40% ||2.08% ||2.18% |
|ASG TEF NZ (1) ||1.15% ||4.67% ||4.46% |
|Savings account New Zealand (4) ||2.89% ||3.14% ||2.98% |
|Term deposit ($1000) – New Zealand (5) ||3.25% ||3.40% ||3.60% |
As an additional comparison we have included a summary of longer term savings products for another major life event – retirement funding. While these funds are not able to be used for education purposes prior to retirement, they bear similar hallmarks regarding the approach to long-term savings for another major life event.
| ||1 year ||3 year ||5 year |
|Superannuation (Conservative) – Australia (6)||3.46% ||7.59% ||7.70% |
|Kiwi Saver (7)||5.50%||6.70% ||6.30% |
ASG’s products also offer members taxation benefits and qualify as scholarship plans under Australian tax law. This is a member benefit, which is more specific to each member’s circumstance and that of the beneficiary.
The future is difficult to predict and uncertainty is always present. ASG is of the view that a well-balanced and managed investment portfolio will act in the long-term interests of members. We must be cognisant of current investment markets and the impact upon the investment returns given the moderate risk appetite of the portfolios. As mentioned above, cash rates and investments into Australian and New Zealand fixed income are currently yielding lower than average returns for arguably higher risk. The market expectation is that interest rates will remain ‘lower for longer’. Australian and international equity markets are at relatively high valuation levels, however distributions have held up well. Australian property markets, particularly commercial office buildings, have performed well given the demand for yield by investors. This yield appetite has also assisted global listed infrastructure investments. Given the interaction of these factors and the risk appetite suited to ASG, investment returns over the coming five years may be below historic levels.
Several styles of investment options are available to parents which assist saving for education, however, it is important to ensure they are appropriate for the purpose intended. Some examples may include bank accounts, term deposits, target savings accounts, mortgage redraw, managed funds or unit trust, and insurance bonds. It is imperative to ensure an investment for a major life event is fit for purpose. ASG’s education savings plans are specifically designed for this important event. The positive characteristics include solid earnings potential, a focus upon risk and reducing the volatility through a diverse set of investment types, a focus upon costs, tax benefits available to members and an appropriate long-term timeframe which is aligned with the long-term planning mindset appropriate for education planning. In addition, an ASG membership offers a range of other services and products to support the overall education journey unlike other financial products mentioned above.
Meeting required aspirations
Given the volatility evident in investment markets and the likelihood of lower returns over the short to medium-term, careful planning is required to meet the outcomes sought by members. ASG will continue to maximise the available opportunities for sound returns in a prudent manner, however, this in itself may not be sufficient to meet all the educational cost requirements that members may have. Accordingly, a key action for members is to review the level of their contributions to ensure it meets their long-term objectives.
The ASG Annual Member Statement is a timely reminder to members to review their level of contributions and ultimate education goals. The Annual Member Statement will be available in November 2016.
Members seeking to review their contributions can contact ASG on 131 ASG (131 274) and discuss what other options ASG has available to assist members meet their needs.
ASG continues to adopt a long-term perspective, within a conservative risk environment, and to assist members plan for their family’s education journey and to ensure the funds are there for their intended purpose when required.
If you want more information, we encourage you to download our Summary Annual Report or contact ASG on 131 ASG (131 274).