Quarterly investment market update for Winter 2013

Summary of key points

International

  • The US 'debt ceiling' was raised in May 2013; however global sharemarkets experienced a fall and sovereign bond markets spiked in that month after the US Federal Reserve indicated that quantitative easing (QE) may begin to taper. Federal Reserve Chairman Ben Bernanke indicated that, subject to inflation and unemployment outcomes in the coming months, the Federal Reserve may begin winding back its QE stimulus program, which has involved monthly purchases of US$85 billion in Treasury bonds and mortgage-backed securities.
  • Europe showed signs of stabilising with its central banks having successfully restored some liquidity. Unemployment and living conditions however remain a significant problem, particularly in nations facing tough austerity measures as part of bail-out agreements. French, UK and German sharemarkets all rallied over the financial year, returning 17.0%, 11.6% and 24.0% respectively.
  • In Japan, Prime Minister Shinzo Abe introduced a set of policy measures dubbed 'Abenomics', which include a 2% annual inflation rate target, devaluation of the Yen and dramatic quantitative easing. This caused the Japanese Nikkei to rally, returning 51.9% for the financial year despite a fall in global sharemarkets in May and June 2013.
  • Chinese stock market volatility increased in June 2013 due to fears of a credit (or liquidity) crisis after a sharp rise in interbank lending interest rates. This occurred when the Chinese central bank temporarily refused to assist embattled financial institutions by injecting further credit into the market. China's shadow (or informal) banking industry is most at risk after the central bank's inaction signalled a warning for credit lenders to exercise greater caution. The crisis passed as the central bank finally moved to inject new liquidity into the market. China's Shanghai Composite Index finished down 11.1% for the 2012/13 financial year.
  • The MSCI World excluding Australian Equities Index (unhedged) gained 33.1% over the financial year, with most key sharemarkets in the index rallying over the 12-month period.

Australia

  • Australian sharemarkets had a strong financial year with the S&P/ASX 300 Accumulation Index gaining 21.9% over the 12 months to 30 June 2013.
  • Growth in the Australian economy began to slow late in the financial year, with investment in the resources sector peaking and growth in non-resources sectors more moderate than expected. Falling commodity prices, Australia's weakening Terms of Trade together with a May 2013 Federal Budget that abandoned the surplus target focused attention on government spending. Both sides of Australian politics came under pressure for irresponsible spending and fears emerged over Australia's future growth in the absence of the resource revenue.
  • The Reserve Bank of Australia (RBA) continued its monetary policy easing cycle to stimulate growth and the official Cash Rate finished the financial year at 2.75%. Australia's positive Cash Rate differential to the rates of other developed countries (whose rates are mostly in the 0% to 1% range) put upward pressure on the Australian dollar.
  • Soon after the RBA decreased the Cash Rate in early May 2013, the Australian dollar lost over 7% of its value, though this was due to a combination of factors including the strength of the US dollar. Having remained within the US$1.02 to US$1.05 range for most of the financial year until May 2013, the Australian dollar dropped in the last two months of the financial year, finishing at $US0.914.

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 300 Index, which incorporates the top 300 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.

 

As at 
30 June 2013

Change over
3 months

Change over
12 months

S&P/ASX 300 Accumulation Index

38,677.45

-2.8%

21.9%

MSCI World Ex-Australia Equities Index (hedged)

4,045.05

15.3%

33.1%

MSCI Emerging Markets Equities Index (unhedged)

416.4

4.7%

15.2%

UBS Australian Composite Bond Index

7,493.99

0.4%

2.8%

Barclays Capital Global Aggregate Bond Index (hedged)

763.23

-1.2%

4.6%

Australia 90-day Bank Bills

2.79%

-0.25%

-0.74%

RBA Official Cash Rate

2.75%

-0.25%

-0.74%

CPI Rate (End June 2013 quarter)

2.4%

 

 

AUD/USD

0.9137

-12.3%

-10.8%

Source: Contango Indices June 2013, Australian Bureau of Statistics, Reserve Bank of Australia

Equities

Investment option

Capital
Secure

Capital
Stable

Balanced

Growth

Equity
Growth*

Strategic allocation

12.5%

32.5%

52.5%

67.5%

100%

*includes Equity Growth Sustainability and Australian Shares investment options.

Australian Shares

In Australia, the S&P/ASX 300 Accumulation Index lost 2.8% for the quarter but finished up 21.9% over the 12 months to 30 June 2013. Sharemarket jitters in May and June 2013 were caused by fears that the US Federal Reserve would wind back its QE program and that China would experience a liquidity crisis and a slowdown in its economy. This lead to lower demand for Australian commodities and reduced domestic economic growth.

Across the financial year, most sectors rallied with Healthcare, Telecommunications and Financials (ex LPTs) sectors gaining 42.0%, 39.4% and 38.9% respectively. The Materials sector was the only sector to finish the financial year in the negative, losing 9.2% for the 12 months to 30 June 2013. This shows the Australian sharemarket's bias towards relatively safe and high dividend yielding stocks at the expense of riskier cyclical stocks.

International developed markets

The MSCI World ex-Australia Index (hedged) gained 4.7% over the quarter and 15.2% over the 12 months to 30 June 2013. Japan's Nikkei was the strongest performing market over the financial year, gaining 51.9%, buoyed by investors' confidence in the stimulus measures orchestrated by Prime Minister Shinzo Abe who was re-elected in late 2012. In the US markets, the Dow Jones Industrial Index and S&P 500 Index posted double digit gains of 17.9% and 15.8% over the 12 months to 30 June 2013 respectively, on the back of jobs and growth data indicating economic recovery.

International emerging markets

The MSCI Emerging Markets Index gained 4.7% in the June quarter and 15.2% for the 12 months ended 30 June 2013. India's 12 month return to 30 June 2013 was 8.7%, while China's Shanghai Composite Index finished the financial year down 11.1%.

Private equity

VicSuper holds both Australian and international private equity investments, although the 3% strategic asset allocation is small compared with our holdings in listed equity markets. VicSuper's Australian private equity assets underperformed over the June quarter and over the 12 months to 30 June 2013; however international private equity added to returns over both periods. VicSuper's international private equity is unhedged and returns were therefore helped by the fall in the Australian dollar in May and June 2013.

Real assets (includes property, infrastructure, timberland and agriculture)

Investment option

Capital
Secure

Capital
Stable

Balanced

Growth

Strategic allocation

15%

15%

15%

15%

'Real assets' includes property, infrastructure, timber (forestry plantations) and agricultural assets. The asset class returned 5.1% over the 12 months to June 2013. Infrastructure, Property and Timber were all strong performers over the financial year, while Agriculture detracted from returns. Also, as infrastructure, property and timber have exposure to assets outside Australia that are partly hedged to Australian dollars, the fall in the Australian dollar in May and June 2013 detracted overall from the performance of the asset class in the June quarter.

Fixed Interest

Investment option

Capital
Secure

Capital
Stable

Balanced

Growth

Strategic allocation

36.5%

35%

27.5%

16.5%

The yield on US Treasuries and other fixed interest markets rose after the US Federal Reserve indicated during May 2013 that quantitative easing (QE) may be reduced, hence the negative returns on this asset class. The slightly higher yields attracted a flow of funds out of risky assets and into 'safe' assets. The Barclays Global Aggregate (fully hedged into Australian dollars) returned -1.2 for the quarter. In Australia, the UBS Australian Composite Bond Index returned -1.0% for the quarter.

Cash

Investment option

Cash

Capital
Secure

Capital
Stable

Balanced

Growth

Strategic allocation

100%

36%

17.5%

5%

1%

The official Cash Rate in Australia fell 0.75% over the 12 months to 30 June 2013 finishing at 2.75% as at the end of June. Returns for the Cash Option reflect this Cash Rate.

How does this impact VicSuper Fund members?

  • With the exception of the Australian Shares Option, all of VicSuper's investment options achieved positive returns over both the June quarter and 12-month period to 30 June 2013. Excluding the Australian Shares Option, those options more heavily weighted to growth assets - Balanced, Growth, Equity Growth and Equity Growth Sustainability - outperformed the investment options with less exposure to growth assets, over the quarter and the financial year.
  • Equity Growth Sustainability outperformed Equity Growth due to its lower allocation to emerging market equities which, though positive, underperformed international developed market equities.
  • The Australian Shares Option underperformed relative to Equity Growth and Equity Growth Sustainability in the June quarter as Australian sharemarkets responded to a decline in resource investment and were impacted by events in China. Most notably Australia's materials, energy and industrials sectors underperformed the safer and higher yielding sectors such as financials and telecommunications.
  • Real assets added 1.2% in the June quarter and 5.1% over the 12 months to 30 June 2013. This level of return was more useful to VicSuper's blended investment options with a higher allocation to cash and fixed interests (or defensive assets), being Capital Secure and Capital Stable, rather than the blended options more heavily weighted to equities (or growth assets), being Balanced and Growth. Real assets are classified as 50% growth and 50% defensive.
  • While the investment options more weighted to defensive assets - Capital Secure and Capital Stable - underperformed relative to the options with a higher weighting to growth assets, these options were still positive for the quarter.
  • The official Cash Rate was reduced by 0.25% over the quarter ending at 2.75%, with the Cash Option returns reflecting the monetary policy environment.

Investment option returns to 30 June 2013

VicSuper Scheme and VicSuper Beneficiary Account

Member investment option

3 months
%

12 months
%

3 years (pa)
%

Cash

0.63

2.79

3.73

Capital Secure

0.60

6.11

5.96

Capital Stable

1.14

9.37

6.97

Balanced

1.56

12.68

7.99

Growth

2.03 15.42

8.72

Equity Growth

2.61 20.32

9.85

Equity Growth Sustainability

3.41 21.41

9.56

Australian Shares#

-3.46

N/A

N/A

#Australian Shares investment option commenced on 4 February 2013 for VicSuper Scheme and VicSuper Beneficiary Account.

Please note: Past performance is not a reliable indicator of future performance.

See the current Term Deposit rates.

VicSuper Pensions

Pension investment option

3 months
%

12 months
%

3 years (pa)
%

Cash

0.78

3.33

4.41

Capital Secure

0.66

6.86

6.94

Capital Stable

1.26

10.58

8.12

Balanced

1.73

14.46

9.33

Growth

2.29

17.54

10.20

Equity Growth

2.89

23.00

11.43

Equity Growth Sustainability

3.78

24.14

11.08

Australian Shares#

-2.91

N/A

N/A

#Australian Shares investment option commenced on February 2013 for VicSuper Pensions.

Please note: Past performance is not a reliable indicator of future performance.

See the current Term Deposit rates.

VicSuper's investment option performance for the 12 months ending 30 June 2013 reflects the strong returns in developed and emerging equity markets and a weakening of fixed interest (bond) markets. The investment option returns for the June quarter can be partly explained by the sell-off in May and June 2013 as a result of announcements by the US Federal Reserve about reducing monetary stimulus. Australian sharemarkets reacted to comments from the US compounded by signs of waning growth in China and decreased Chinese demand for Australian commodities.

Long-term investing

Investments with a higher allocation to shares are volatile by their nature, but this 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 many 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.

Need help or advice?

You can call VicSuper's Member Centre on 1300 366 216 for general queries about VicSuper investment options or you can arrange to speak with one of our qualified financial planners to determine the best strategy for you and your circumstances.

Summary of key points

International

  • The US 'debt ceiling' was raised in May 2013; however global sharemarkets experienced a fall and sovereign bond markets spiked in that month after the US Federal Reserve indicated that quantitative easing (QE) may begin to taper. Federal Reserve Chairman Ben Bernanke indicated that, subject to inflation and unemployment outcomes in the coming months, the Federal Reserve may begin winding back its QE stimulus program, which has involved monthly purchases of US$85 billion in Treasury bonds and mortgage-backed securities.
  • Europe showed signs of stabilising with its central banks having successfully restored some liquidity. Unemployment and living conditions however remain a significant problem, particularly in nations facing tough austerity measures as part of bail-out agreements. French, UK and German sharemarkets all rallied over the financial year, returning 17.0%, 11.6% and 24.0% respectively.
  • In Japan, Prime Minister Shinzo Abe introduced a set of policy measures dubbed 'Abenomics', which include a 2% annual inflation rate target, devaluation of the Yen and dramatic quantitative easing. This caused the Japanese Nikkei to rally, returning 51.9% for the financial year despite a fall in global sharemarkets in May and June 2013.
  • Chinese stock market volatility increased in June 2013 due to fears of a credit (or liquidity) crisis after a sharp rise in interbank lending interest rates. This occurred when the Chinese central bank temporarily refused to assist embattled financial institutions by injecting further credit into the market. China's shadow (or informal) banking industry is most at risk after the central bank's inaction signalled a warning for credit lenders to exercise greater caution. The crisis passed as the central bank finally moved to inject new liquidity into the market. China's Shanghai Composite Index finished down 11.1% for the 2012/13 financial year.
  • The MSCI World excluding Australian Equities Index (unhedged) gained 33.1% over the financial year, with most key sharemarkets in the index rallying over the 12-month period.

Australia

  • Australian sharemarkets had a strong financial year with the S&P/ASX 300 Accumulation Index gaining 21.9% over the 12 months to 30 June 2013.
  • Growth in the Australian economy began to slow late in the financial year, with investment in the resources sector peaking and growth in non-resources sectors more moderate than expected. Falling commodity prices, Australia's weakening Terms of Trade together with a May 2013 Federal Budget that abandoned the surplus target focused attention on government spending. Both sides of Australian politics came under pressure for irresponsible spending and fears emerged over Australia's future growth in the absence of the resource revenue.
  • The Reserve Bank of Australia (RBA) continued its monetary policy easing cycle to stimulate growth and the official Cash Rate finished the financial year at 2.75%. Australia's positive Cash Rate differential to the rates of other developed countries (whose rates are mostly in the 0% to 1% range) put upward pressure on the Australian dollar.
  • Soon after the RBA decreased the Cash Rate in early May 2013, the Australian dollar lost over 7% of its value, though this was due to a combination of factors including the strength of the US dollar. Having remained within the US$1.02 to US$1.05 range for most of the financial year until May 2013, the Australian dollar dropped in the last two months of the financial year, finishing at $US0.914.

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 300 Index, which incorporates the top 300 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.

 

As at 
30 June 2013

Change over
3 months

Change over
12 months

S&P/ASX 300 Accumulation Index

38,677.45

-2.8%

21.9%

MSCI World Ex-Australia Equities Index (hedged)

4,045.05

15.3%

33.1%

MSCI Emerging Markets Equities Index (unhedged)

416.4

4.7%

15.2%

UBS Australian Composite Bond Index

7,493.99

0.4%

2.8%

Barclays Capital Global Aggregate Bond Index (hedged)

763.23

-1.2%

4.6%

Australia 90-day Bank Bills

2.79%

-0.25%

-0.74%

RBA Official Cash Rate

2.75%

-0.25%

-0.74%

CPI Rate (End June 2013 quarter)

2.4%

 

 

AUD/USD

0.9137

-12.3%

-10.8%

Source: Contango Indices June 2013, Australian Bureau of Statistics, Reserve Bank of Australia

Equities

Investment option

Capital
Secure

Capital
Stable

Balanced

Growth

Equity
Growth*

Strategic allocation

12.5%

32.5%

52.5%

67.5%

100%

*includes Equity Growth Sustainability and Australian Shares investment options.

Australian Shares

In Australia, the S&P/ASX 300 Accumulation Index lost 2.8% for the quarter but finished up 21.9% over the 12 months to 30 June 2013. Sharemarket jitters in May and June 2013 were caused by fears that the US Federal Reserve would wind back its QE program and that China would experience a liquidity crisis and a slowdown in its economy. This lead to lower demand for Australian commodities and reduced domestic economic growth.

Across the financial year, most sectors rallied with Healthcare, Telecommunications and Financials (ex LPTs) sectors gaining 42.0%, 39.4% and 38.9% respectively. The Materials sector was the only sector to finish the financial year in the negative, losing 9.2% for the 12 months to 30 June 2013. This shows the Australian sharemarket's bias towards relatively safe and high dividend yielding stocks at the expense of riskier cyclical stocks.

International developed markets

The MSCI World ex-Australia Index (hedged) gained 4.7% over the quarter and 15.2% over the 12 months to 30 June 2013. Japan's Nikkei was the strongest performing market over the financial year, gaining 51.9%, buoyed by investors' confidence in the stimulus measures orchestrated by Prime Minister Shinzo Abe who was re-elected in late 2012. In the US markets, the Dow Jones Industrial Index and S&P 500 Index posted double digit gains of 17.9% and 15.8% over the 12 months to 30 June 2013 respectively, on the back of jobs and growth data indicating economic recovery.

International emerging markets

The MSCI Emerging Markets Index gained 4.7% in the June quarter and 15.2% for the 12 months ended 30 June 2013. India's 12 month return to 30 June 2013 was 8.7%, while China's Shanghai Composite Index finished the financial year down 11.1%.

Private equity

VicSuper holds both Australian and international private equity investments, although the 3% strategic asset allocation is small compared with our holdings in listed equity markets. VicSuper's Australian private equity assets underperformed over the June quarter and over the 12 months to 30 June 2013; however international private equity added to returns over both periods. VicSuper's international private equity is unhedged and returns were therefore helped by the fall in the Australian dollar in May and June 2013.

Real assets (includes property, infrastructure, timberland and agriculture)

Investment option

Capital
Secure

Capital
Stable

Balanced

Growth

Strategic allocation

15%

15%

15%

15%

'Real assets' includes property, infrastructure, timber (forestry plantations) and agricultural assets. The asset class returned 5.1% over the 12 months to June 2013. Infrastructure, Property and Timber were all strong performers over the financial year, while Agriculture detracted from returns. Also, as infrastructure, property and timber have exposure to assets outside Australia that are partly hedged to Australian dollars, the fall in the Australian dollar in May and June 2013 detracted overall from the performance of the asset class in the June quarter.

Fixed Interest

Investment option

Capital
Secure

Capital
Stable

Balanced

Growth

Strategic allocation

36.5%

35%

27.5%

16.5%

The yield on US Treasuries and other fixed interest markets rose after the US Federal Reserve indicated during May 2013 that quantitative easing (QE) may be reduced, hence the negative returns on this asset class. The slightly higher yields attracted a flow of funds out of risky assets and into 'safe' assets. The Barclays Global Aggregate (fully hedged into Australian dollars) returned -1.2 for the quarter. In Australia, the UBS Australian Composite Bond Index returned -1.0% for the quarter.

Cash

Investment option

Cash

Capital
Secure

Capital
Stable

Balanced

Growth

Strategic allocation

100%

36%

17.5%

5%

1%

The official Cash Rate in Australia fell 0.75% over the 12 months to 30 June 2013 finishing at 2.75% as at the end of June. Returns for the Cash Option reflect this Cash Rate.

How does this impact VicSuper Fund members?

  • With the exception of the Australian Shares Option, all of VicSuper's investment options achieved positive returns over both the June quarter and 12-month period to 30 June 2013. Excluding the Australian Shares Option, those options more heavily weighted to growth assets - Balanced, Growth, Equity Growth and Equity Growth Sustainability - outperformed the investment options with less exposure to growth assets, over the quarter and the financial year.
  • Equity Growth Sustainability outperformed Equity Growth due to its lower allocation to emerging market equities which, though positive, underperformed international developed market equities.
  • The Australian Shares Option underperformed relative to Equity Growth and Equity Growth Sustainability in the June quarter as Australian sharemarkets responded to a decline in resource investment and were impacted by events in China. Most notably Australia's materials, energy and industrials sectors underperformed the safer and higher yielding sectors such as financials and telecommunications.
  • Real assets added 1.2% in the June quarter and 5.1% over the 12 months to 30 June 2013. This level of return was more useful to VicSuper's blended investment options with a higher allocation to cash and fixed interests (or defensive assets), being Capital Secure and Capital Stable, rather than the blended options more heavily weighted to equities (or growth assets), being Balanced and Growth. Real assets are classified as 50% growth and 50% defensive.
  • While the investment options more weighted to defensive assets - Capital Secure and Capital Stable - underperformed relative to the options with a higher weighting to growth assets, these options were still positive for the quarter.
  • The official Cash Rate was reduced by 0.25% over the quarter ending at 2.75%, with the Cash Option returns reflecting the monetary policy environment.

Investment option returns to 30 June 2013

VicSuper Scheme and VicSuper Beneficiary Account

Member investment option

3 months
%

12 months
%

3 years (pa)
%

Cash

0.63

2.79

3.73

Capital Secure

0.60

6.11

5.96

Capital Stable

1.14

9.37

6.97

Balanced

1.56

12.68

7.99

Growth

2.03 15.42

8.72

Equity Growth

2.61 20.32

9.85

Equity Growth Sustainability

3.41 21.41

9.56

Australian Shares#

-3.46

N/A

N/A

#Australian Shares investment option commenced on 4 February 2013 for VicSuper Scheme and VicSuper Beneficiary Account.

Please note: Past performance is not a reliable indicator of future performance.

See the current Term Deposit rates.

VicSuper Pensions

Pension investment option

3 months
%

12 months
%

3 years (pa)
%

Cash

0.78

3.33

4.41

Capital Secure

0.66

6.86

6.94

Capital Stable

1.26

10.58

8.12

Balanced

1.73

14.46

9.33

Growth

2.29

17.54

10.20

Equity Growth

2.89

23.00

11.43

Equity Growth Sustainability

3.78

24.14

11.08

Australian Shares#

-2.91

N/A

N/A

#Australian Shares investment option commenced on February 2013 for VicSuper Pensions.

Please note: Past performance is not a reliable indicator of future performance.

See the current Term Deposit rates.

VicSuper's investment option performance for the 12 months ending 30 June 2013 reflects the strong returns in developed and emerging equity markets and a weakening of fixed interest (bond) markets. The investment option returns for the June quarter can be partly explained by the sell-off in May and June 2013 as a result of announcements by the US Federal Reserve about reducing monetary stimulus. Australian sharemarkets reacted to comments from the US compounded by signs of waning growth in China and decreased Chinese demand for Australian commodities.

Long-term investing

Investments with a higher allocation to shares are volatile by their nature, but this 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 many 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.

Need help or advice?

You can call VicSuper's Member Centre on 1300 366 216 for general queries about VicSuper investment options or you can arrange to speak with one of our qualified financial planners to determine the best strategy for you and your circumstances.