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Summary of key points
- Investors around the world shifted away from risky assets, most likely because of events such as elections in Europe, a quasi-referendum in Greece over the agreed austerity measures, and speculation about Eurobonds being issued.
- Stubborn recovery in the United States (US) as elections, high unemployment and the debt-ceiling loom, while the benefits of quantitative easing and 'Operation Twist' begin to fade.
- The Australian dollar remains high even as the Reserve Bank of Australia (RBA) commences easing. Australia continues to be the envy of the developed world.
- China's growth slows and inflation eases, meaning expansionary monetary and fiscal policy is likely given a forthcoming change in leadership.
Whilst the Australian economy has been labelled 'the envy of the developed world', we are not immune from the spill over of the European debt crisis and the sluggish recovery in the US. For the year ending 30 June 2012, the ASX 200 Index returned -7% and Australia also underperformed the returns of the MSCI World Ex-Australia Index (which captures the performance of the world's developed markets). The reasons for this are partly political and partly economic. The Australian Federal Government has targeted a budget surplus for the 2012/13 financial year, which has meant fiscal tightening (reduced spending) on various government services and programs. This decreases aggregate demand, which in turns means less spending on goods and services.
From an economic perspective, the strength of the Australian dollar, the relatively high official interest rate and the combination of sovereign uncertainty in the Eurozone and China's slowing demand for raw materials (which has meant declining commodity prices) have encouraged consumers to save rather than spend, further reducing demand. In the face of declining demand and the challenging business environment (in part due to the high Australian dollar), many companies have reduced staff numbers and rationalised their operations in recent months. However, it is worth noting that the current unemployment rate of 5.1% is quite low when compared to other developed market economies and the longer-term trends within Australia.
In the quarter ending 30 June 2012, we witnessed a resurgence of fear as global equity markets sold-off, whilst cash and bond markets provided positive returns as the beneficiary of capital flows. The 10-year US Treasury Yields moved to 1.64%, the lowest yield since the early 1800s, and UK 10-year Gilts fell to 1.73%, their lowest level since records for benchmark borrowing costs began in 1703.
Government Bond Yield Chart 2011/12
All of the themes we discussed in previous quarterly reviews - the European debt crisis, mixed economic signals from the US and deceleration of China's economy - continued to 30 June 2012 and beyond. China confirmed a slowing economy by releasing GDP growth numbers of 7.6% along with slowing inflation. This means that China now has the capacity to stimulate growth with less risk of overheating their economy. Commentators have stated that the European debt crisis has transformed from a financial to a political issue. However, with downgrades to the French sovereign debt rating and Germany fighting not to be the 'lender of last resort', it would seem that the focus on politics is merely delaying necessary economic reform. In the US, looming elections, deadlocks in congress and further credit being extended to stimulate the anaemic economy is pushing the US close to its debt ceiling. Meanwhile unemployment remains very high and US housing prices appear to have bottommed out. On a brighter note, US equity markets remain resilient (positive returns in local currency) on a one-year basis.
How does this impact VicSuper fund members?
- For those options with a higher exposure to equity markets - Balanced, Growth, Equity Growth and Equity Growth Sustainability - VicSuper Fund's allocation to international developed market equities relative to Australian equities and emerging market equities helped to limit losses. The MSCI World ex-Australia Index (partially hedged into Australian dollars) outperformed the ASX 300 by 1.1% over the quarter and 7.4% over the financial year. The ASX 300 had negative absolute returns for the financial year to 30 June 2012. For the quarter ended 30 June, all equity markets declined.
- Double-digit returns from the fixed interest (bonds) asset class continued to surprise given that yields, particularly on US treasuries but broadly on German and UK sovereign bonds, are being compressed to historic lows as investors seek the theoretical safety and capital protection of these countries' debt securities. This helped to bolster returns in VicSuper's Capital Secure and Capital Stable Options in particular.
- The unlisted property asset class continued to perform well through the market cycle and for the financial year, providing positive absolute returns in line with expectations. The return reflects the stable (but low) interest rate environment, which influences valuation of the underlying assets, and the income derived from the consumption of essential services (such as electricity and water) and commercial buildings assets. The performance of unlisted property contributed to positive returns in options such as Capital Stable and balanced the poorer performance of equity markets in options such as Growth.
Crediting rates for periods ending 30 June 2012 -
VicSuper Scheme & VicSuper Beneficiary Account*
Member investment option
Equity Growth Sustainability
Crediting rates for periods ending 30 June 2012 -
Pension investment option
Equity Growth Sustainability
*Please note: Past performance is not a reliable indicator of future performance
VicSuper's crediting rates for the 12 months ending 30 June 2012 reflect the generally poor returns in equity markets counterbalanced by strong returns in fixed interest (bonds) and cash markets. Asset class returns are discussed in more detail below.
Asset class performance
VicSuper measures investment performance against benchmark indices. A benchmark index is a collection of securities grouped together. An example is the S&P/ASX 200 Index, which incorporates the top 200 companies by market capitalisation listed on the Australian Securities Exchange. The performance of the index provides a benchmark against which VicSuper can assess the performance of its fund managers.
Dow Jones Industrial Average
Source: Contango Indices June 2012; Bloomberg
In Australia, the S&P/ASX 300 Index declined 5% for the quarter, and declined 7% for the 12 months ending 30 June 2012. The disappointing returns over the quarter and the financial year reflect the multitude of worries concerning the US, Europe and closer to home, China.
The MSCI World ex-Australia Index (in fully-hedged Australian dollar terms) declined 3.9% over the quarter and returned a mediocre 0.4% for the 12 months ended 30 June 2012. Over the quarter, all developed equity markets declined in the range from -2.5% (US) to -10.7% (Japan), as investors shifted away from equity markets and moved to sovereign bonds.
The MSCI Emerging Markets Index, with its major country constituents being Brazil, India, Russia and China, fell by 7.9% in the June quarter and fell 12.2% over the financial year to 30 June. The Shanghai Composite Index declined by 19.4% over the year.
Unlisted property markets, in which VicSuper includes commercial property, infrastructure, timberland (forestry plantations) and agricultural assets, had a 12-month return of approximately 8.5%. The declining (or low) official interest rate environment, combined with strong economic fundamentals within Australia and the largely defensive characteristics of infrastructure assets led to this return. These asset classes, often referred to as 'real assets' by virtue of representing a stock of capital which generate a real income, were generally sought after during the year by investors who were seeking both income yield and to diversify away from sovereign bond risk.
Fixed interest market returns remain strong, with the Barclays Global Aggregate (fully hedged into Australian dollars) returning 12.33% for the 12 months ending 30 June 2012, and 2.58% for the quarter. In Australia, the UBS Australian Composite Bond Index returned a strong 4.6% for the quarter and 12.4% for the 12 months ending 30 June 2012.
The RBA cut official interest rates by 0.75% over the quarter and 1.25% over the year. Flowing from these cuts, the Australian three-month bank bill rate tightened by 0.75% over the quarter and 1.43% over the year to close at 3.53% as at 30 June 2012. With the 10-year Australian Bond Rate closing at 3.03% (which is below the current official cash rate), the market expects further rate cuts in the near future.
Over the quarter and the financial year, the Australian dollar weakened against the US dollar and Japanese Yen but strengthened against the Euro. The Australian dollar sat above parity against the US for most of the financial year.
Markets at a glance
As at 30 June 2012
Change over 3 months
Change over 12 months
S&P/ASX 300 Equities Index
MSCI World Ex-Australia Equities Index (hedged)
MSCI Emerging Markets Equities Index (unhedged)
UBS Australian Composite Bond Index
Barclays Capital Global Aggregate Bond Index (hedged)
Australia 90-day Bank Bills
Reserve Bank of Australia Official Cash Rate
CPI Rate (End March 2012 Quarter)
Need help or advice?
VicSuper's Member Centre on 1300 366 216 can answer general queries about VicSuper investment options or you can speak with one of our VicSuper's superannuation advisers to determine the best strategy for you given your risk appetite.
Investments with higher allocation to shares are volatile by their nature, but it is the trade-off between risk and return. Those options with more exposure to growth assets experience greater volatility. That is, the lows are lower but the highs are higher. While negative investment returns feel uncomfortable, trying to time the market by switching in and out of investment options makes it difficult to recover any losses already incurred. The best option for most people is to remain in their current investment options and not change them for the wrong reasons. However, it is important that you feel comfortable with the investment option you have chosen. If you would like to review your investment options and strategy, you may like to make an appointment with a VicSuper superannuation adviser.