The power of diversification - it's not all about shares!

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Our Chief Investment Officer, Andrew Howard explains that by investing across a diverse range of asset classes, VicSuper can harness difference sources of investment returns for your super.

Listen to the podcast

Our Chief Investment Officer, Andrew Howard explains that by investing across a diverse range of asset classes, VicSuper can harness difference sources of investment returns for your super.

Investing outside traditional asset classes
Investing outside traditional asset classes

Your super is one of the most important financial assets you’ll ever own. So it’s important we invest it in a way that can maximise your investment return while controlling risk.

The main way we increase the value of your super is by investing in different asset classes - allocating money to shares, bonds, cash, and other investments.

Our flagship portfolio - the VicSuper FutureSaver Growth (MySuper) Option - invests in equities (shares), fixed interest (bonds), cash, as well as real assets and alternatives (a little more about that later).

The mix of asset classes the Growth Option invests in is shown in the pie chart (right). The main asset classes are shown in the outer layers of the chart; the more specific sub-asset classes are shown in the inner layers.

Your super is one of the most important financial assets you’ll ever own. So it’s important we invest it in a way that can maximise your investment return while controlling risk.

The main way we increase the value of your super is by investing in different asset classes - allocating money to shares, bonds, cash, and other investments.

Our flagship portfolio - the VicSuper FutureSaver Growth (MySuper) Option - invests in equities (shares), fixed interest (bonds), cash, as well as real assets and alternatives (a little more about that later).

The mix of asset classes the Growth Option invests in is shown in the pie chart (right). The main asset classes are shown in the outer layers of the chart; the more specific sub-asset classes are shown in the inner layers.



VicSuper growth option chart as at 30 September 2018


Source: Bloomberg, VicSuper
VicSuper Growth
Source: Bloomberg, VicSuper

A smoother ride for the VicSuper Growth (MySuper) Option
A smoother ride for the VicSuper Growth (MySuper) Option

The recent share market volatility shows the value of investing in a well-diversified portfolio that can weather the fluctuations of the share market. The chart below tracks the returns of the Growth (MySuper) Option against the ASX 200 Index (returns are indexed to 100) over the past five years.

VicSuper growth graph Sept18

The recent share market volatility shows the value of investing in a well-diversified portfolio that can weather the fluctuations of the share market. The chart below tracks the returns of the Growth (MySuper) Option against the ASX 200 Index (returns are indexed to 100) over the past five years.

VicSuper growth graph Sept18

Key points
Key points

  • The Growth (MySuper) Option has delivered a smoother path of returns over time compared to the Australian share market. This is because the portfolio is well diversified across asset classes.

  • Put simply, this strategy does not solely rely on the Australian share market to generate investment returns.

  • As the chart shows, when the ASX has fallen sharply the Growth (MySuper) Option has tended to perform better over the same period.

  • The Growth (MySuper) Option has delivered a smoother path of returns over time compared to the Australian share market. This is because the portfolio is well diversified across asset classes.

  • Put simply, this strategy does not solely rely on the Australian share market to generate investment returns.

  • As the chart shows, when the ASX has fallen sharply the Growth (MySuper) Option has tended to perform better over the same period.

The value of real assets and alternatives in your portfolio
The value of real assets and alternatives in your portfolio

So what are real assets and alternatives? How do they compare to ‘traditional’ asset classes within a diversified portfolio?

Real assets are investments linked to physical assets like ports and toll roads (infrastructure assets), direct property, timber and agriculture. They’ve become popular with investors because their returns are typically not tied to shares or bonds, they have tangible value, they’re not as sensitive to inflation, and they provide long-term income streams.

Importantly, because the returns of real assets move independently of shares and bonds, they can be used to diversify an investment portfolio. It is also important to highlight that real assets such as infrastructure are generally not accessible to everyday investors. However, VicSuper members have some exposure to them due to VicSuper funds’ investments.

Below are some examples of our investments in real assets around the world.

Ross River Solar Farm, Queensland (infrastructure)Finerge wind farm

.

 Finerge wind farm Portugal (infrastructure)Finerge wind farm

 

 Devonshire Square, London (direct property)Devonshire square

 

Alternative assets don’t fall into the traditional shares-bonds-cash asset class line-up. They include investments like private equity (investing or buying companies not listed on stock exchanges), absolute return strategies (which look to generate positive returns in a variety of rising or falling markets), and specialist credit strategies (which look to generate positive returns in rising and falling credit markets).

Alternatives are managed by skilled fund managers who can help deliver positive returns in challenging conditions (e.g. falling share markets, rising interest rates). Alternative assets can provide both capital growth and income, as well as investment diversification and protection in market downturns.

So what are real assets and alternatives? How do they compare to ‘traditional’ asset classes within a diversified portfolio?

Real assets are investments linked to physical assets like ports and toll roads (infrastructure assets), direct property, timber and agriculture. They’ve become popular with investors because their returns are typically not tied to shares or bonds, they have tangible value, they’re not as sensitive to inflation, and they provide long-term income streams.

Importantly, because the returns of real assets move independently of shares and bonds, they can be used to diversify an investment portfolio. It is also important to highlight that real assets such as infrastructure are generally not accessible to everyday investors. However, VicSuper members have some exposure to them due to VicSuper funds’ investments.

Below are some examples of our investments in real assets around the world.

Ross River Solar Farm, Queensland (infrastructure)
Finerge wind farm  

Finerge wind farm Portugal (infrastructure)
Finerge wind farm

Devonshire Square, London (direct property)
Devonshire square

Alternative assets don’t fall into the traditional shares-bonds-cash asset class line-up. They include investments like private equity (investing or buying companies not listed on stock exchanges), absolute return strategies (which look to generate positive returns in a variety of rising or falling markets), and specialist credit strategies (which look to generate positive returns in rising and falling credit markets).

Alternatives are managed by skilled fund managers who can help deliver positive returns in challenging conditions (e.g. falling share markets, rising interest rates). Alternative assets can provide both capital growth and income, as well as investment diversification and protection in market downturns.

Investing in times of market stress
Investing in times of market stress

In the July CIO Update, I mentioned that it was risky to rely on share markets continuing to go up after years of extraordinary returns. We’ve all witnessed the market hype and bullish commentators pushing the market to new highs. However, when market sentiment becomes negative and investors start to sell, we read the dire warnings and sombre headlines as we’ve seen in October.

Wall Street Journal

Stocks Plunge

There will always be good news

...and there will always be bad news

The point is this: investors who focus on the ‘market noise’ instead of the fundamentals -who try and time the market -are not likely to ‘win’ in the long run. Always remember that you only crystalise a loss when you sell!

It is important not to dwell on the recent market falls and increase in volatility as experienced over the course of October. Our focus is forward-looking - we adopt a long-term mindset to produce solid, consistent investment outcomes for our members.

We have been commenting for some time that we expect it will become an increasingly challenging market environment to generate investment returns - and this is exactly why we continue to highlight the power of diversification in a lower return environment.

While we always have the destination in mind, we’re conscious of the journey as well - so we aim to deliver stable returns in both strong and more challenging market environments.

To help achieve this objective, our investment strategy balances a strong focus on managing risks and proactively seeking attractive investment opportunities for our members. We also believe that by understanding the importance of environmental, social and governance issues, we are well placed to deliver on our investment objectives.

In the July CIO Update, I mentioned that it was risky to rely on share markets continuing to go up after years of extraordinary returns. We’ve all witnessed the market hype and bullish commentators pushing the market to new highs. However, when market sentiment becomes negative and investors start to sell, we read the dire warnings and sombre headlines as we’ve seen in October.

Wall Street Journal
There will always be good news

Stocks Plunge
...and there will always be bad news

The point is this: investors who focus on the ‘market noise’ instead of the fundamentals -who try and time the market -are not likely to ‘win’ in the long run. Always remember that you only crystalise a loss when you sell!

It is important not to dwell on the recent market falls and increase in volatility as experienced over the course of October. Our focus is forward-looking - we adopt a long-term mindset to produce solid, consistent investment outcomes for our members.

We have been commenting for some time that we expect it will become an increasingly challenging market environment to generate investment returns - and this is exactly why we continue to highlight the power of diversification in a lower return environment.

While we always have the destination in mind, we’re conscious of the journey as well - so we aim to deliver stable returns in both strong and more challenging market environments.

To help achieve this objective, our investment strategy balances a strong focus on managing risks and proactively seeking attractive investment opportunities for our members. We also believe that by understanding the importance of environmental, social and governance issues, we are well placed to deliver on our investment objectives.

For more about how we invest on behalf of our members:

— Discover more about how we invest your super
— Discover more about the benefits you get as a VicSuper member

Important information

This advice has been prepared without taking into account your objectives, financial situation or needs. You should therefore consider the appropriateness of the advice in light of your individual circumstances before acting on the advice. You should also obtain and consider a copy of the relevant Product Disclosure Statement available at www.vicsuper.com.au before making any decisions. VicSuper Pty Ltd ABN 69 087 619 412, AFSL 237333, Trustee of Victorian Superannuation Fund ABN 85 977 964 496.

For more about how we invest on behalf of our members:

— Discover more about how we invest your super
— Discover more about the benefits you get as a VicSuper member

Important information

This advice has been prepared without taking into account your objectives, financial situation or needs. You should therefore consider the appropriateness of the advice in light of your individual circumstances before acting on the advice. You should also obtain and consider a copy of the relevant Product Disclosure Statement available at www.vicsuper.com.au before making any decisions. VicSuper Pty Ltd ABN 69 087 619 412, AFSL 237333, Trustee of Victorian Superannuation Fund ABN 85 977 964 496.