Quarterly investment market update for April to June 2014

New Strategic Asset Allocation (SAA) from 1 July 2014

In the previous quarterly update, we introduced the ‘Alternatives’ asset class, within which only VicSuper's private equity investments are included.

From 1 July 2014, VicSuper has increased its SAA to the alternatives asset class from 3% to 6% at the overall fund level. This has been funded by a 1.5% reduction to equities (growth) and a 1.5% reduction to fixed income (defensive). The reasoning behind this move is to improve diversification of both risk and return within the fund and to provide flexibility to add further sub-asset classes to the Alternatives asset class when opportunities arise.

Following the changed SAA, the risk and return objectives for each investment option remain largely unchanged. Chart 1 shows the strategic asset allocation from 1 July 2014 across VicSuper's investment options.

Chart 1: VicSuper investment option strategic asset allocation - from 1 July 2014

VicSuper investment option strategic asset allocation – from 1 July 2014

*Also applies to Equity Growth Sustainability

Key themes underlying financial markets in the next 12 months

  • World GDP growth will be moderate, led by the US, China and Japan
  • Australia should have reasonable GDP growth - below trend of 3.25% on average for the year – despite the higher-than-expected March quarter GDP growth of 3.5% year-on-year (which was supported by mining investment and resources exports)
  • Bond yields will likely rise in the back of half of 2014 and in 2015 in Australia and globally
  • Implications for VicSuper fund – overall, we continue to prefer equities over bonds. Within Equities, emerging market valuations are relatively more attractive than developed markets (particularly the US).
Table 1: Summary of VicSuper's asset class views Table 1: Summary of VicSuper's asset class views

VicSuper's investment option returns for the June quarter

The Growth option returned 2.8% (accumulation) and 3.1% (VicSuper Flexible Income) for the quarter ending 30 June 2014.

Given the strong performance of equity markets in the 12 months to June, options weighted more heavily to growth assets (Growth and Equity Growth) have significantly outperformed those with a more defensive bias (Capital Stable and Capital Secure) on a one-year basis.

Table 2: VicSuper's investment option returns

VicSuper FutureSaver

Accumulation (%)

VicSuper Flexible Income (%)

3-month 1-year 5-year 10-year 3-month 1-year 5-year 10-year
Cash 0.6% 2.3% 3.4% 4.2% 0.7% 2.7% 4.0% 5.0%
Capital Secure 1.8% 7.5% 6.1% 5.4% 2.0% 8.5% 7.1% 6.3%
Capital Stable 2.3% 10.8% 7.6% 5.9% 2.5% 12.1% 8.8% 6.9%
Balanced 2.6% 13.7% 9.1% 6.5% 2.9% 15.2% 10.5% 7.5%
Growth 2.8% 15.8% 10.1% 6.6% 3.1% 17.5% 11.7% 7.6%
Equity Growth 2.8% 18.6% 11.7% 7.0% 3.0% 20.3% 13.4% 8.0%
Equity Growth Sustainability 2.1% 18.0% 11.7% 7.6% 2.3% 19.5% 13.3% 8.6%
Australian Shares* 0.9% 16.1% N/A N/A 1.0% 18.2% N/A N/A

Source: VicSuper. Note: Past performance is not a reliable indicator of future performance. The 3-year return is annualised.

* The Australian Shares investment option was introduced on 4 February 2013 for VicSuper FutureSaver and on 5 February 2013 for VicSuper Pensions.

See the current Term Deposit rates.

Asset class performance for the June quarter

The returns for VicSuper's investment options for the quarter and the 12 months ending 30 June 2014 broadly reflect the performances of VicSuper's benchmarks. VicSuper measures investment performance against benchmark indices.

Chart 2: Major Index Returns (VicSuper’s Asset Class Benchmarks) Major Index Returns (VicSuper’s Asset Class Benchmarks)

Source: IRESS, Bloomberg, Barclays, MSCI

Note: the ASX300 Accumulation index differs from the ASX300 given in that it incorporates reinvestment of dividends

Australian Equities

The ASX 300 Accumulation Index gained 1% for the quarter. While companies’ balance sheets remain generally healthy with high cash balances, the market's performance in the quarter was impacted by the continued lack of revenue growth; uncertainties associated with the May Federal Budget and its potential impact on consumer sentiment; and continued geopolitical risks (Russia/Ukraine and Iraq). Over the 12 months to 30 June however, the ASX300 Accumulation Index finished up by 17%.This was driven largely by a solid performance from the banking sector – the big 4 banks' share of the ASX100 rose to 30.6% (vs 26.8% two years ago), reinforcing the dominance of the financial sector in the Australian share market.

Developed Market Equities (excluding Australia)

The MSCI World excluding Australian Equities Index (unhedged) gained 4% over the quarter and 22% over the 12 months ending 30 June 2014. The strong 12-month performance was led largely by the US (which accounts for about 57% of the index).

International Emerging Market Equities

The MSCI Emerging Markets Index ended the June quarter 6% higher, despite tensions between Russia/Ukraine failing to abate and despite increasing tension in the Middle East. Over the year to June, emerging markets have underperformed developed markets. This has resulted in current valuations offering more attractive investment opportunities.

Australian and International Fixed Interest

Fixed interest markets finished the June quarter and the 12 months to June in the black, as reflected by the UBSA Composite Bond Index (proxy for Australian fixed interest) and the Barclay's Global Aggregate Index (proxy for international fixed interest). This was driven by declining bond yields in Australia and globally, reflecting the market’s expectations for a continued low interest rate and low inflationary environment.

Cash

The 1-year return for the Cash Option broadly reflects the official Cash Rate in Australia, which was 2.5% at the end of June.

Market and economic summary

Chart 3: Major Equity Market Price Returns to 30 June 2014  Major Equity Market Price Returns to 30 June 2014

Source: IRESS. Note these returns are in local currency terms (not AUD terms)

All major indices around the world finished the June quarter and the 12 months to June on a high note. Below, we have summarised the key economic-related events of the last quarter:

  • Australia - The "tough" May Federal Budget combined with the generally rising cost of living has contributed to relatively weak consumer spending. Indeed, Consumer confidence in Australia remains muted and fragile, partly reflected by several earnings downgrades from retailers in the last couple of months (e.g. Noni B, Athlete’s Foot owner RCG Corp, The Reject Shop and Super Retail Group). A pick up in retail (~60% of GDP) is crucial to support economic growth particularly at a time when the contribution from the mining sector is expected to slow.
  • US - The US Federal Reserve continued to taper its bond-buying program during the quarter, dropping monthly purchases to US$45bn/month in May. Despite US quantitative easing slowly coming to an end, bond yields remain low and are yet to price in a rise in interest rates (both in the US and globally). On the economic front, the US Federal Reserve reduced its 2014 GDP growth guidance to 2.1-2.3% (from 2.8-3.0%). This was a major downward revision and came on the back of a -2.9% 1Q GDP number, which had been substantially impacted by an unusually cold winter. Despite the negative 1Q number, most economists expect a strong rebound in the June quarter.
  • China - In June, business activity across China’s factories increased for the first time in 6 months (HSBC/Markit’s PMI rose to 50.8), as domestic consumption strengthened and the country’s biggest trading partners increased their export orders. It is the first time the index has been above 50 in 2014 and it is the highest reading in 7 months (note a reading above 50 suggests that business activity expanded from the previous month).
  • Europe - In Europe, the last 12 months has failed to show any concrete sign of recovery. In an attempt to boost economic activity, the European Central Bank (ECB) cut one of its key interest rates below zero and offered up to €400bn in cheap loans to banks who agree to lend to small businesses. While the International Monetary Fund (IMF) welcomed this move, it stated that US-style quantitative easing measures (i.e. buying bonds) may be required.

Quarterly investment market update for April to June 2014

New Strategic Asset Allocation (SAA) from 1 July 2014

In the previous quarterly update, we introduced the ‘Alternatives’ asset class, within which only VicSuper's private equity investments are included.

From 1 July 2014, VicSuper has increased its SAA to the alternatives asset class from 3% to 6% at the overall fund level. This has been funded by a 1.5% reduction to equities (growth) and a 1.5% reduction to fixed income (defensive). The reasoning behind this move is to improve diversification of both risk and return within the fund and to provide flexibility to add further sub-asset classes to the Alternatives asset class when opportunities arise.

Following the changed SAA, the risk and return objectives for each investment option remain largely unchanged. Chart 1 shows the strategic asset allocation from 1 July 2014 across VicSuper's investment options.

Chart 1: VicSuper investment option strategic asset allocation - from 1 July 2014

VicSuper investment option strategic asset allocation – from 1 July 2014

*Also applies to Equity Growth Sustainability

Key themes underlying financial markets in the next 12 months

  • World GDP growth will be moderate, led by the US, China and Japan
  • Australia should have reasonable GDP growth - below trend of 3.25% on average for the year – despite the higher-than-expected March quarter GDP growth of 3.5% year-on-year (which was supported by mining investment and resources exports)
  • Bond yields will likely rise in the back of half of 2014 and in 2015 in Australia and globally
  • Implications for VicSuper fund – overall, we continue to prefer equities over bonds. Within Equities, emerging market valuations are relatively more attractive than developed markets (particularly the US).
Table 1: Summary of VicSuper's asset class views Table 1: Summary of VicSuper's asset class views

VicSuper's investment option returns for the June quarter

The Growth option returned 2.8% (accumulation) and 3.1% (VicSuper Flexible Income) for the quarter ending 30 June 2014.

Given the strong performance of equity markets in the 12 months to June, options weighted more heavily to growth assets (Growth and Equity Growth) have significantly outperformed those with a more defensive bias (Capital Stable and Capital Secure) on a one-year basis.

Table 2: VicSuper's investment option returns

VicSuper FutureSaver

Accumulation (%)

VicSuper Flexible Income (%)

3-month 1-year 5-year 10-year 3-month 1-year 5-year 10-year
Cash 0.6% 2.3% 3.4% 4.2% 0.7% 2.7% 4.0% 5.0%
Capital Secure 1.8% 7.5% 6.1% 5.4% 2.0% 8.5% 7.1% 6.3%
Capital Stable 2.3% 10.8% 7.6% 5.9% 2.5% 12.1% 8.8% 6.9%
Balanced 2.6% 13.7% 9.1% 6.5% 2.9% 15.2% 10.5% 7.5%
Growth 2.8% 15.8% 10.1% 6.6% 3.1% 17.5% 11.7% 7.6%
Equity Growth 2.8% 18.6% 11.7% 7.0% 3.0% 20.3% 13.4% 8.0%
Equity Growth Sustainability 2.1% 18.0% 11.7% 7.6% 2.3% 19.5% 13.3% 8.6%
Australian Shares* 0.9% 16.1% N/A N/A 1.0% 18.2% N/A N/A

Source: VicSuper. Note: Past performance is not a reliable indicator of future performance. The 3-year return is annualised.

* The Australian Shares investment option was introduced on 4 February 2013 for VicSuper FutureSaver and on 5 February 2013 for VicSuper Pensions.

See the current Term Deposit rates.

Asset class performance for the June quarter

The returns for VicSuper's investment options for the quarter and the 12 months ending 30 June 2014 broadly reflect the performances of VicSuper's benchmarks. VicSuper measures investment performance against benchmark indices.

Chart 2: Major Index Returns (VicSuper’s Asset Class Benchmarks) Major Index Returns (VicSuper’s Asset Class Benchmarks)

Source: IRESS, Bloomberg, Barclays, MSCI

Note: the ASX300 Accumulation index differs from the ASX300 given in that it incorporates reinvestment of dividends

Australian Equities

The ASX 300 Accumulation Index gained 1% for the quarter. While companies’ balance sheets remain generally healthy with high cash balances, the market's performance in the quarter was impacted by the continued lack of revenue growth; uncertainties associated with the May Federal Budget and its potential impact on consumer sentiment; and continued geopolitical risks (Russia/Ukraine and Iraq). Over the 12 months to 30 June however, the ASX300 Accumulation Index finished up by 17%.This was driven largely by a solid performance from the banking sector – the big 4 banks' share of the ASX100 rose to 30.6% (vs 26.8% two years ago), reinforcing the dominance of the financial sector in the Australian share market.

Developed Market Equities (excluding Australia)

The MSCI World excluding Australian Equities Index (unhedged) gained 4% over the quarter and 22% over the 12 months ending 30 June 2014. The strong 12-month performance was led largely by the US (which accounts for about 57% of the index).

International Emerging Market Equities

The MSCI Emerging Markets Index ended the June quarter 6% higher, despite tensions between Russia/Ukraine failing to abate and despite increasing tension in the Middle East. Over the year to June, emerging markets have underperformed developed markets. This has resulted in current valuations offering more attractive investment opportunities.

Australian and International Fixed Interest

Fixed interest markets finished the June quarter and the 12 months to June in the black, as reflected by the UBSA Composite Bond Index (proxy for Australian fixed interest) and the Barclay's Global Aggregate Index (proxy for international fixed interest). This was driven by declining bond yields in Australia and globally, reflecting the market’s expectations for a continued low interest rate and low inflationary environment.

Cash

The 1-year return for the Cash Option broadly reflects the official Cash Rate in Australia, which was 2.5% at the end of June.

Market and economic summary

Chart 3: Major Equity Market Price Returns to 30 June 2014  Major Equity Market Price Returns to 30 June 2014

Source: IRESS. Note these returns are in local currency terms (not AUD terms)

All major indices around the world finished the June quarter and the 12 months to June on a high note. Below, we have summarised the key economic-related events of the last quarter:

  • Australia - The "tough" May Federal Budget combined with the generally rising cost of living has contributed to relatively weak consumer spending. Indeed, Consumer confidence in Australia remains muted and fragile, partly reflected by several earnings downgrades from retailers in the last couple of months (e.g. Noni B, Athlete’s Foot owner RCG Corp, The Reject Shop and Super Retail Group). A pick up in retail (~60% of GDP) is crucial to support economic growth particularly at a time when the contribution from the mining sector is expected to slow.
  • US - The US Federal Reserve continued to taper its bond-buying program during the quarter, dropping monthly purchases to US$45bn/month in May. Despite US quantitative easing slowly coming to an end, bond yields remain low and are yet to price in a rise in interest rates (both in the US and globally). On the economic front, the US Federal Reserve reduced its 2014 GDP growth guidance to 2.1-2.3% (from 2.8-3.0%). This was a major downward revision and came on the back of a -2.9% 1Q GDP number, which had been substantially impacted by an unusually cold winter. Despite the negative 1Q number, most economists expect a strong rebound in the June quarter.
  • China - In June, business activity across China’s factories increased for the first time in 6 months (HSBC/Markit’s PMI rose to 50.8), as domestic consumption strengthened and the country’s biggest trading partners increased their export orders. It is the first time the index has been above 50 in 2014 and it is the highest reading in 7 months (note a reading above 50 suggests that business activity expanded from the previous month).
  • Europe - In Europe, the last 12 months has failed to show any concrete sign of recovery. In an attempt to boost economic activity, the European Central Bank (ECB) cut one of its key interest rates below zero and offered up to €400bn in cheap loans to banks who agree to lend to small businesses. While the International Monetary Fund (IMF) welcomed this move, it stated that US-style quantitative easing measures (i.e. buying bonds) may be required.