Crypto and your super: An expert’s perspective

Hi, everyone. Welcome to today's education session. My name is Michael Kemplen. I'm an education manager here at Colonial First State. And today we're talking about a topic that's a little bit different and something that not many super funds will normally talk about, and that is crypto. Before we get started, take a moment to think about crypto and the words that come to your head when you think about the topic. Some of the words you could be thinking maybe you're seeing dollar signs and thinking it's a way to make money, whereas others may be on the other side and feeling a little bit skeptical and not exactly sure how to feel about crypto as a whole. That's why we're running today's session. It's to give you a fresh perspective from someone that's got a lot of industry insight and a lot of knowledge from experience as a chief investment officer, that chief investment officer, of course, is Jonathan Armitage. How are you today, Jonathan? 

I'm well, thanks a lot for having me along today.  

Thanks for being here. We're very lucky to have you here. Jonathan is a very experienced and respected chief investment officer within the superannuation industry. Prior to being at CFS, he was the chief investment officer at MLC. He also spent a while as the head of US equities at Schroders, which is one of the largest asset management companies in the world. So what we're offering you today is a fresh perspective from someone that really knows what they're talking about, and can also give you some ideas that you can consider when it comes to how you invest, whether that's in your super or outside of super as well. The land on which we're presenting today is the Gadigal people of the Eora nation. The word Gadi is actually derived from the Dharug language and means grass tree. Gal is also derived from the Dharug language and means people. So you could say the Gagigal people are the people of the grasstree. That's a nice fun fact. Did you know that, Jonathan?  

I did not, but there you go.  

If we can start by teaching Jonathan something, you know we're going to have a good session today, so that's all good. With that said, many of you will also be dialing in from other lands throughout Australia. And as such, I pay my respects to elders past, present and emerging throughout all of Australia. As we go through today's presentation, it's also really important to keep in mind that anything we discuss is general in nature, and we're not able to take into account any of your personal circumstances. If you do have questions about your personal financial situation, you can get in touch with our guidance team who can help you get in contact with a financial adviser. Otherwise, if you have general questions about your super, you can speak to your employer, if you're a part of the FirstChoice employer plan. Or feel free to give us a call to ask any of those more general questions as well. So without further ado, we can get into today's topic, which is a very interesting topic and like I said, something that not many super funds have spoken about in much detail. But before we sort of get into your thoughts on crypto and I guess your perspective, what do we actually mean by crypto? That's a lot of confusing terminology. Bitcoin blockchain. Talk us through it.  

So I think that it's a very important starting point. So cryptocurrencies, it is around a digital currency. So something that doesn't involve cash and takes place on an exchange run by a network of computers. One of the critical things is that, here in Australia, the Reserve Bank is responsible for issuing currency, monitoring the financial system, promoting financial stability and also has overall responsibility for the payment system. Cryptocurrency has none of those safeguards. And I think that that is something that as we go through, and talk about not just crypto, but also the sort of technology that sits behind it, that's one of the things that will be important for people to bear in mind.  

Sure. So rather than having a Reserve Bank or a centralised body, it's really run by computers or people as opposed to a centralised body. Is that right?  

It is right. So, one of the proponents of crypto will argue that its real benefits are that it's decentralised. So it sits outside what we might regard as the traditional banking system. And that means that it's not subject to oversight by governments and regulators. We'll probably touch on that later as to why that presents some challenges. And which is why you will hear this word decentralised used quite a bit. People refer to crypto and the technology that sits behind it.  

Okay. That's really interesting. And the term decentralisation I guess now makes a bit more sense. And with that said, you mentioned the underlying technology behind crypto. Would you be able to walk through that and what that is?  

Yeah. So the technology that sits behind digital currencies is referred to as blockchain. And that sort of technology is also one of the drivers as to why it's possible to have a digital currency without a central bank sitting behind, providing security and oversight. So it's effectively almost like a public ledger where all transactions can be validated. All crypto transactions can be validated. Perhaps another way of thinking about it is that if you want to take a mining analogy, it's the sort of picks and shovels that sit behind the cryptocurrencies.  

Gotcha. So it's a technology that really sits behind cryptocurrency in general and lets it all run and helps it all work. We won't get too much into the weeds because that's definitely not the purpose of today's presentation. But there's also bitcoin. Bitcoin is synonymous with crypto. How is it different to a crypto? Where does it sit in this definition? 

Well, it's actually just one example of a cryptocurrency. So there are a large number of different types of cryptocurrency. But it's probably the best well known. And it's almost become the sort of vernacular for talking about these types of instruments. If you want to use an analogy. It's a bit like, we all call vacuum cleaners Hoovers, or we have a lot of us who have grown up using that word. But Hoover is just one brand name of vacuum cleaners, but it's sort of entered into the language as the sort of, the key way to describe that type of product. And so Bitcoin has now sort of become synonymous with cryptocurrencies.  

That makes sense, I guess. Similar to how you say you would Google something.  

Absolutely. 

It's just like searching something on the internet. So that's a great example. And just to recap there. So we've got crypto digital currencies. Blockchain is the technology that underlies that. And then Bitcoin is an example and the best-known example of cryptocurrency. Crypto is an extremely popular investment. It's owned by over 4.5 million Australians, or at least it was from July 2023. That's over 23% of Australians. And amongst millennials actually over 40% of Australians have owned crypto before. So it's really significant. I guess you could call it cultural movement or new type of investment or trading, whatever you'd like to call it, but its popularity is undeniable. So I wanted to ask you, with the size that it's at, why do you think crypto has become such a popular investment and really been embraced by retail investors and regular investors as well?  

Yeah, it's a good question. It's a very important one. There is possibly one simple thing is that there are quite a few people who have made money, or they've made gains out of crypto. And therefore something that has gone up a lot, but it's also come down a lot as well. That tends to attract people's attention. It is, it's something new. It's probably got an excitement, an aura around it. And one of the things that will probably come and touch on, some of the underlying technology is incredibly interesting and has got applications in many, many sorts of financial transactions. But I think it is, that's probably those are the sort of key reasons as to why crypto has gained an awful lot of attention.  

That makes sense. And I don't think anyone has come across a person who doesn't have a story about a friend that's made money from crypto or a family barbecue, where it seems to be a very popular topic of conversation. But, you know, even in the media it can be a really tough thing to ignore, especially when it's on those runs up in value and it can be a bit of a pandemonium at times. But there is a part of crypto, as you sort of alluded to, where it also does go down in value. And the word to capture that would be volatility. But how would you describe the risk and return characteristics of crypto from your perspective?  

So I think a couple of things that we think about when we think about these types of investments. The first one is that it has been very volatile. You will hear an awful lot of stories from people about when they have made gains. Those same people tend to go quite silent when crypto or bitcoin goes down. And I think it's worth reminding people that there have been several occasions where crypto currencies have fallen over 60% in a very short period of time. We are talking weeks. And so that is one of the, I think, one of the features for something that has been around for a relatively short space of time, but it has moved up and down. And so I think that, that's one of the things that when we think about it in the context of a superannuation fund, it is probably one of the more volatile types of investments that we look at.  

I think a very common question as well is that the word investing and crypto or bitcoin are often used in the same sentence, in the same, you know, sort of ways of thinking. What are people actually investing in when they buy crypto or they're using crypto? 

You know, I think that that is probably one of the sort of key questions, because it is as much, crypto currencies are as much a concept as they are an actual investment. I think one of the things that if you sort of step back and think about an equity which is a share in a company, what you're doing is you’re owning a slice of the cash flows of that business. Whether or not it's an old or a mature business, like a mining company or a bank or something that's much more sort of recent, you know, in a sort of technology or perhaps the healthcare areas, essentially, you're buying a slice of the current or future cash flows. Bitcoin has none of those characteristics and I think that is an important thing to differentiate it. It is a currency, as we talked about in the definitions, it's a digital currency where there is actually nothing that sits behind it. And so essentially you are buying a concept, albeit a concept with some interesting technology sitting behind it. But the actual currency itself actually has no underlying fundamentals in terms of cash flows. It doesn't pay a dividend. So those are reasons why, I think it does stand out on its own. And arguably you would say that that sort of has a fairly speculative nature about it.  

Absolutely. That makes sense. And I do want to spend a little bit more time on this concept of when you make an investment and what you're looking for, because we make plenty of investments here at CFS on behalf of our members. What are the key characteristics of an investment that is attractive to you and would make you think we will put our members' money here? 

So I think the key thing for us is to have a very clear understanding about the nature of the investment, the certainty that we can have around the future returns of that investment will give us. Whether or not it's a share or an equity in a company. It's a fixed income or a bond instrument, where we know that we're going to get, a coupon or a dividend on a regular basis. When we think about unlisted assets, when we're investing in things like airports or solar farms, there's a physical asset that we can point to. And in large part, you know, we will invest in an awful lot of well-known household companies. And you can point to the products that those companies manufacturer or the services that they provide. That's in real contrast to a digital currency where you may be able to look at a token, you may have a login password that's connected with it, but you are dealing with something that sits on a network of computers. But it's very difficult to point out what that actually, really sort of physically manifests itself. And importantly has, other than a price that's moved up and down a lot, there are no real physical assets that sit behind it. 

That makes sense. And one thing that you said to me as we were preparing for this session that I really liked was, it's not about always being right. It's about when we're wrong, you know, knowing why we were wrong. Would you be able to elaborate on a little bit on what you mean by that? 

Yeah. So I think the nature of investing and one of the reasons why we have diversification across our investment portfolios, and in the super assets that we invest in on behalf of our members is that we, you know, we will not always be right. And equity prices go down. The values of investments, whether or not they're equities, fixed income or unlisted assets can go down as well up. Our job is to make sure that we avoid as many of those as possible. But the key point is that, when we make an investment and perhaps things don't turn out in the way that we anticipated, it is normally quite easy for us to point to the reasons why an investment has changed price in ways that we may not have predicted, or it's gone down. Either market conditions have changed. A new competitor has emerged. There may be a change in government policy which has supported a particular investment. All those things are very easy to point to. The challenge with the volatility of cryptocurrencies is that quite often it's difficult to point to the real reason as to why a price is moving up and down and we've talked about some of the quite large declines. But it is not unusual for cryptocurrencies to move up and down 10% in a day. 

I've actually got a stat here on that, which is that bitcoin, or I’ll start with the ASX from 1987, which is 37 years ago. There's been 21 days where the ASX has dropped by more than 5% in a day. That's a fair few days, 21 in 37 years. Whereas Bitcoin has dropped over 5% 96 times in the last five years. So if that doesn't highlight a bit of the volatility, I'm not sure what will. And while we're on that point as well, I think it's really important to remind our members what we are thinking when we're investing. You know, we're a super fund, it is for people's retirement. What sort of message do you want to give to our members when it comes to how we're investing their money and the sort of way we approach that? 

So I think our focus very much is on generating consistent and strong long-term returns. So superannuation is a long-term investment for people who sort of start their super with a sort of first job. That may well be something that you're sort of entering into in your late teens. That's certainly true of my own children. And that is something that is designed to provide you with real support as you finish your working years and move into retirement, whatever that looks like for an individual. But people can do that with the sure fire knowledge that they've got some significant security behind them, that as they move into their later years, that they're able to live comfortably and with the sort of support that everyday items will be covered by their superannuation. And that essentially is one of the critical things that sits behind our own day to day thinking when we're constructing our portfolios. It is a huge privilege to invest our members money on their behalf. Informs the way that we think about the different investments that we make. And making sure that we've got a good understanding about the future returns of those businesses. The timeframe that you'd be thinking about those investments, and it may differ with equities and bonds to something that's unlisted, an airport for example. But the underlying focus has being on, how is this investment going to help continue to build the wealth of the members who sit within our super fund. 

And it's a really key point, and it's always important to remember that super is a long term game, of course. And, Jonathan is probably a bit too humble to say this, but since joining the business he has really made a significant impact on our returns and on our performance. In fact, in the last financial year we had a number of our products top the charts, and when it came to their performance as well. So, just a friendly reminder about who we're talking to here. And, I guess the achievements that he's had since joining the business as well. And there is one last question I wanted to ask you about. You've used the word diversification a few times throughout this presentation, and it's a really important concept for our members to understand. Would you be able to give us a quick, high level introduction to what we mean by diversification and how it helps members? 

Yeah. So, we think about diversification from a number of different angles, I think. So we want to have a portfolio that has got a wide range of investments that produce returns in different ways. So if we think about our equity portfolios, we want them to be diversified by the industries they operate in, the markets they operate in, geography, different currencies. Because that reduces the fact that you may have just one particular factor that drives your investments. Diversification removes that risk, essentially. So that is something that is key, whether or not it's in equities, it's in our fixed income portfolios. It also includes the way that we think about some of our unlisted assets as well. So it's making sure that we're not reliant on one particular thing, one particular factor to drive our returns. And that's why for us, that's a very important thing. Diversification essentially helps us manage the risk within the portfolios. And properly done, strong diversification significantly reduces the risk, but also the volatility of the returns that we will be able to produce for our super fund members. 

One final question. Would we ever invest in crypto or what would it take for someone like CFS to invest in crypto? 

I think there are a couple of things that, for us, are very important. We've touched on these, which is volatility and diversification, and crypto really doesn't provide those characteristics. And certainly, more recently it's been very volatile. And even when equity markets have declined, it's not actually provided any form of protection. And there are some who have made the analogy that crypto could be a form of digital gold. But I think some of the recent volatility we've seen in markets, crypto has fallen faster than certain equity markets. So I think, for us, we don't think that the characteristics that crypto has are the right ones to have within a superannuation portfolio. What we do think is interesting is the underlying technology that sits behind cryptocurrencies. We refer to this as blockchain. The opportunity to use that technology to perhaps reduce the friction that sits within the financial system, we do think is very, very interesting. And there are a number of companies, particularly the listed arena predominately in the US, that we're invested in, that do provide access to those sort of underlying technologies and that we do think is going to be fascinating. Like a lot of things, you know, you can use an old-fashioned analogy, you're much better off owning the picks and shovels behind a new phenomenon than spending your time looking for the gold. And actually, if you take that analogy, we go back to the gold rush that took place in Australia towards the back end of the 19th century. The people who made all the money were the people providing the picks and shovels and the services and the goods to all those miners. Not very many of the miners made much money. 

That's a that's a great analogy. And I guess, what you're hearing there is, you know, you might not read the headlines CFS buys Bitcoin. But potentially you'll see some interesting developments in the business or the underlying technology behind crypto. So that's a really interesting thing. And you can see how investing in a business is very different to investing in a concept, as you put it, like cryptocurrency. And it's a great way to, to cap off today's session as well. So we really hope that that was interesting and engaging for you and that you learned something from hearing Jonathan's perspective. Thank you so much for joining us. Have a great day.