Quarterly investment update – April to June 2015

New Australian Fixed Interest manager

In May 2015, VicSuper invested $100 million with Metrics Credit Partners ("Metrics") in their Australian Loans fund as a means to diversify VicSuper's Australian fixed interest exposure.

Metrics has an experienced management team that understands the various sources of income available from, and risks associated with, corporate loans. VicSuper believes this group is best able to implement investment strategies to maximise returns from this asset class.

Metrics believes the crossover credit segment (BBB-/BB+) of the corporate loan market represents the largest and most active segment of Australia’s corporate fixed income market and provides superior risk adjusted returns compared with other fixed income investment opportunities.

Key themes underlying financial markets in the next 12 months

  • World GDP growth will likely be moderate, led by the US and China. Australia’s GDP will also grow, albeit below the long term average trend.
  • Bond yields will likely rise in 2015. The trigger is likely to be the US Federal Reserve starting to raise interest rates.
  • Implications for the VicSuper fund:

    » From an asset allocation perspective, Equities are moderately attractive relative to bonds;
    » Alternatives are attractive as a means to diversify risk and to enhance total returns.
Table 1: Summary of VicSuper's asset class views Summary of VicSuper's asset class views

Source: VicSuper

VicSuper's investment option returns for the June quarter

VicSuper’s diversified and equity options underperformed owing to the local equity market underperformance and that of the domestic and global bond markets. The Cash option was the best performer for the quarter.

Table 2: VicSuper's Investment Option returns

VicSuper FutureSaver

Accumulation (%)

VicSuper Flexible Income (%)

Quarter 1-year 5-year 10-year Quarter 1-year 5-year 10-year
Cash 0.5% 2.1% 3.1% 4.0% 0.6% 2.6% 3.7% 4.7%
Capital Secure -0.2% 5.6% 6.2% 5.2% -0.2% 6.1% 7.1% 6.0%
Capital Stable -0.4% 8.4% 8.0% 5.9% -0.5% 8.8% 9.0% 6.8%
Balanced -0.6% 9.9% 9.5% 6.4% -0.8% 10.7% 10.7% 7.3%
Growth -0.5% 11.1% 10.6% 6.5% -0.7% 12.0% 12.0% 7.4%
Equity Growth -1.2% 12.6% 12.1% 7.0% -1.5% 13.0% 13.5% 7.8%
Equity Growth Sustainability -1.5% 11.6% 11.6% 7.6% -1.5% 12.3% 13.0% 8.4%
Australian Shares* -5.3% 5.4% N/A N/A -5.9% 6.5% N/A N/A

Source: VicSuper

Note:Past performance is not a reliable indicator of future performance. The 5 and 10-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 Flexible Income.

See the current Term Deposit rates.

Asset class performance for the June quarter

Over the 2014/2015 financial year, all of VicSuper's asset class benchmarks finished higher, with the exception of Emerging Markets.

Chart 1: Major Index Returns (VicSuper’s Asset Class Benchmarks) Major Index returns chart

Source: IRESS, Bloomberg, Barclays, MSCI

Australian Equities

Despite gains in the March quarter, the S&P/ASX 300 Accumulation Index fell 6.5% in the June quarter. The decline was driven by the stalemate in Greek debt negotiations with creditors and increased concerns that Greece may exit the Eurozone. Sharp declines in the Chinese stockmarket also contributed to the decline. Underperforming sectors included Consumer Staples, Consumer Discretionary and Financials ex REITs In contrast, to the S&P/ASX 300 Accumulation Index gained 5.6% over the 2014/2015 financial year.

The AUD/USD ended the June quarter flat. Commodity prices, the terms of trade and the trade-weighted index continue to point to downside risks to the AUD. Furthermore, RBA Governor, Glenn Steven has maintained that the AUD needs to fall further. A weaker AUD, will make exports more affordable and Australian products more competitive with imports which is pivotal to reducing Australia’s dependence on mining and broadening its investment base.

Developed Market Equities (excluding Australia)

The MSCI World (excluding Australia) was generally flat (-0.10%) over the June quarter. While Japan registered positive returns, weaker US equities and falling sharemarkets across Europe weighed on developed market equities performance. 

US equities markets began the quarter well as investors were reassured that the Federal Reserve remained on track to raise interest rates. Second quarter economic news for the US economy was strong and first quarter GDP growth was revised upwards allaying concerns about a faltering recovery. Stronger labour market results underpinned consumer confidence and increased spending. The S&P 500 Index ended May 2015 on a month end high of 2107. These gains were reversed in late June however as escalating political risk in Greece reverberated across European and global markets.

The Nikkei registered robust performance over the June quarter. Japanese wage growth in April grew at a higher rate than the cost of living for  the first time in two years and first quarter growth was strong. Notwithstanding, there are still concerns regarding second quarter growth and downside risks to external demand particularly given the fall in the Chinese sharemarket.

Emerging Market Equities

Emerging equity markets were slightly negative over the quarter with the MSCI Emerging Markets Index down -0.2%. Losses in June however were 3.2%. China which had been performing favourably for several years saw its sharemarket move into bear territory during the quarter. The People's Bank of China addressed the fall by announcing a cut to the official interest rate and the amount of reserves required by banks.

Chart 2: Shanghai Stockmarket Composite Index July 2014 - June 2015 Shanghai stockmarket chart

Source: Bloomberg

Australian and International Fixed Interest

Domestic and global fixed interest prices declined in the second quarter. The Bloomberg AusBond Index (proxy for Australian fixed interest) and the Barclay's Global Aggregate Index (proxy for international fixed interest), were down 2% and 1.7% respectively.

In Europe, a positive economic outlook and stabilising oil price led to concerns about emerging inflation and a sell-off in bonds ensued. Yields on 10- year German bunds jumped 50bps over the quarter.

Cash

The RBA cut the official cash rate to 2% from 2.25% in May 2015. The recent cut brings the official rate to a record low. The cut is intended to drive the AUD lower and support Australian economic growth. Further easing cannot be precluded however if the AUD remains at current levels.

New Australian Fixed Interest manager

In May 2015, VicSuper invested $100 million with Metrics Credit Partners ("Metrics") in their Australian Loans fund as a means to diversify VicSuper's Australian fixed interest exposure.

Metrics has an experienced management team that understands the various sources of income available from, and risks associated with, corporate loans. VicSuper believes this group is best able to implement investment strategies to maximise returns from this asset class.

Metrics believes the crossover credit segment (BBB-/BB+) of the corporate loan market represents the largest and most active segment of Australia’s corporate fixed income market and provides superior risk adjusted returns compared with other fixed income investment opportunities.

Key themes underlying financial markets in the next 12 months

  • World GDP growth will likely be moderate, led by the US and China. Australia’s GDP will also grow, albeit below the long term average trend.
  • Bond yields will likely rise in 2015. The trigger is likely to be the US Federal Reserve starting to raise interest rates.
  • Implications for the VicSuper fund:

    » From an asset allocation perspective, Equities are moderately attractive relative to bonds;
    » Alternatives are attractive as a means to diversify risk and to enhance total returns.
Table 1: Summary of VicSuper's asset class views Summary of VicSuper's asset class views

Source: VicSuper

VicSuper's investment option returns for the June quarter

VicSuper’s diversified and equity options underperformed owing to the local equity market underperformance and that of the domestic and global bond markets. The Cash option was the best performer for the quarter.

Table 2: VicSuper's Investment Option returns

VicSuper FutureSaver

Accumulation (%)

VicSuper Flexible Income (%)

Quarter 1-year 5-year 10-year Quarter 1-year 5-year 10-year
Cash 0.5% 2.1% 3.1% 4.0% 0.6% 2.6% 3.7% 4.7%
Capital Secure -0.2% 5.6% 6.2% 5.2% -0.2% 6.1% 7.1% 6.0%
Capital Stable -0.4% 8.4% 8.0% 5.9% -0.5% 8.8% 9.0% 6.8%
Balanced -0.6% 9.9% 9.5% 6.4% -0.8% 10.7% 10.7% 7.3%
Growth -0.5% 11.1% 10.6% 6.5% -0.7% 12.0% 12.0% 7.4%
Equity Growth -1.2% 12.6% 12.1% 7.0% -1.5% 13.0% 13.5% 7.8%
Equity Growth Sustainability -1.5% 11.6% 11.6% 7.6% -1.5% 12.3% 13.0% 8.4%
Australian Shares* -5.3% 5.4% N/A N/A -5.9% 6.5% N/A N/A

Source: VicSuper

Note:Past performance is not a reliable indicator of future performance. The 5 and 10-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 Flexible Income.

See the current Term Deposit rates.

Asset class performance for the June quarter

Over the 2014/2015 financial year, all of VicSuper's asset class benchmarks finished higher, with the exception of Emerging Markets.

Chart 1: Major Index Returns (VicSuper’s Asset Class Benchmarks) Major Index returns chart

Source: IRESS, Bloomberg, Barclays, MSCI

Australian Equities

Despite gains in the March quarter, the S&P/ASX 300 Accumulation Index fell 6.5% in the June quarter. The decline was driven by the stalemate in Greek debt negotiations with creditors and increased concerns that Greece may exit the Eurozone. Sharp declines in the Chinese stockmarket also contributed to the decline. Underperforming sectors included Consumer Staples, Consumer Discretionary and Financials ex REITs In contrast, to the S&P/ASX 300 Accumulation Index gained 5.6% over the 2014/2015 financial year.

The AUD/USD ended the June quarter flat. Commodity prices, the terms of trade and the trade-weighted index continue to point to downside risks to the AUD. Furthermore, RBA Governor, Glenn Steven has maintained that the AUD needs to fall further. A weaker AUD, will make exports more affordable and Australian products more competitive with imports which is pivotal to reducing Australia’s dependence on mining and broadening its investment base.

Developed Market Equities (excluding Australia)

The MSCI World (excluding Australia) was generally flat (-0.10%) over the June quarter. While Japan registered positive returns, weaker US equities and falling sharemarkets across Europe weighed on developed market equities performance. 

US equities markets began the quarter well as investors were reassured that the Federal Reserve remained on track to raise interest rates. Second quarter economic news for the US economy was strong and first quarter GDP growth was revised upwards allaying concerns about a faltering recovery. Stronger labour market results underpinned consumer confidence and increased spending. The S&P 500 Index ended May 2015 on a month end high of 2107. These gains were reversed in late June however as escalating political risk in Greece reverberated across European and global markets.

The Nikkei registered robust performance over the June quarter. Japanese wage growth in April grew at a higher rate than the cost of living for  the first time in two years and first quarter growth was strong. Notwithstanding, there are still concerns regarding second quarter growth and downside risks to external demand particularly given the fall in the Chinese sharemarket.

Emerging Market Equities

Emerging equity markets were slightly negative over the quarter with the MSCI Emerging Markets Index down -0.2%. Losses in June however were 3.2%. China which had been performing favourably for several years saw its sharemarket move into bear territory during the quarter. The People's Bank of China addressed the fall by announcing a cut to the official interest rate and the amount of reserves required by banks.

Chart 2: Shanghai Stockmarket Composite Index July 2014 - June 2015 Shanghai stockmarket chart

Source: Bloomberg

Australian and International Fixed Interest

Domestic and global fixed interest prices declined in the second quarter. The Bloomberg AusBond Index (proxy for Australian fixed interest) and the Barclay's Global Aggregate Index (proxy for international fixed interest), were down 2% and 1.7% respectively.

In Europe, a positive economic outlook and stabilising oil price led to concerns about emerging inflation and a sell-off in bonds ensued. Yields on 10- year German bunds jumped 50bps over the quarter.

Cash

The RBA cut the official cash rate to 2% from 2.25% in May 2015. The recent cut brings the official rate to a record low. The cut is intended to drive the AUD lower and support Australian economic growth. Further easing cannot be precluded however if the AUD remains at current levels.

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