Introducing ‘Alternatives’ as a new asset class

From 1 January 2014, VicSuper’s private equity investments (previously a sub-asset class within the ‘Equities’ asset class), were reclassified as part of a new asset class labelled ‘Alternatives’.

While this reclassification has had no impact on investment management and performance, further sub-asset classes may be added to Alternatives in the future.

Chart 1 shows the strategic asset allocation from 1 January 2014 across VicSuper’s diversified investment options.

Chart 1: VicSuper investment option strategic asset allocation Major Index Returns (VicSuper’s Asset Class Benchmarks)

*Also applies to Equity Growth Sustainability.

Chart 1 highlights our ‘diversified’ investment options given they are invested in more than one asset class. The Cash (100% invested in cash), Term Deposit (100% cash) and Australian Shares (100% Equities) investment options are not diversified.

Key themes underlying financial markets in the next 12 months

  • World growth will be moderate, led by the US, China and Japan
  • Overall emerging market valuations look attractive but sentiment remains negative and fundamentals are unclear
  • Australia should have reasonable GDP growth despite remaining below trend of 3.25
  • Bond yields will likely rise moderately in 2014 both locally and globally
  • Overall, we continue to prefer equities over bonds
Table 1: Summary of VicSuper's asset class views Table 1: Summary of VicSuper’s asset class views

Investment option returns for the March quarter

  • In the three months ending 31 March 2014, Australian equities outperformed international equities. However a weak performance by emerging markets completely offset the positive return from developed markets.
  • The Cash Option was the weakest performer over the quarter, reflecting the low interest rate environment.
  • Within the diversified category, options more heavily weighted to growth assets (Balanced, Growth, Equity Growth and Equity Growth Sustainability) underperformed those with less exposure to growth assets over the March quarter. This was primarily driven by the relatively flat performance of international equities.
  • Over the 12 months to 31 March 2014, returns still reflected the solid performance of equity markets over fixed interest and cash markets. As a result, options more heavily weighted to growth assets outperformed those more weighted to defensive assets over the longer time frame.
Table 2: VicSuper investment option returns

VicSuper FutureSaver (%)

VicSuper Flexible Income (%)

3-month FYTD 1-year 3-year 3-month FYTD 1-year 3-year
Cash 0.5% 1.7% 2.4% 3.2% 0.6% 2.0% 2.8% 3.8%
Capital Secure 1.5% 5.7% 6.3% 6.0% 1.7% 6.3% 7.0% 6.9%
Capital Stable 1.5% 8.4% 9.6% 7.3% 1.7% 9.3% 10.7% 8.3%
Balanced 1.3% 10.8% 12.5% 8.3% 1.5% 11.9% 13.9% 9.5%
Growth 1.2% 12.7% 15.0% 8.8% 1.3% 13.9% 16.5% 10.0%
Equity Growth 0.7% 15.3% 18.4% 10.0% 0.8% 16.8% 20.2% 11.3%
Equity Growth Sustainability 1.1% 15.6% 19.5% 10.1% 1.3% 16.9% 21.3% 11.4%
Australian Shares 2.0% 15.1% 11.1% N/A* 2.2% 17.0% 13.6% N/A*

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 Flexible Income.

See the current Term Deposit rates.

Asset class performance for the March quarter

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 Accumulation 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.

Chart 2: Major Index Returns (VicSuper’s Asset Class Benchmarks) Major Equity Market Price Returns to 31 March 2014

Source: Bloomberg, IRESS, Barclays

Australian Equities

The S&P/ASX 300 Accumulation Index gained 2% for the quarter and finished up 13% over the 12 months to 31 March 2014. The index fell in January as investors focused on the increased risk and instability in the emerging market region, particularly from the “Fragile five” economies (India, Turkey, Indonesia, Brazil and South Africa and their significant current account deficits) and Argentina (whose currency fell by over 10% due to major economic concerns). However, a strong Australian earnings reporting season in February highlighted the strength of the local market and provided some reassurance to investors that company earnings would continue to grow in the near term.

International Developed Market Equities

The MSCI World excluding Australian Equities Index (unhedged) gained 1% over the quarter and 17% over the 12 months ending 31 March 2014. The strong 12-month performance was led by the US and Japan (which account for about 57% and 8% of the index respectively). Fears over Russia’s intervention in Ukraine, slowing growth in China and the tapering of quantitative easing (i.e. the US Federal Reserve’s bond-buying program) contributed to a slight increase for US markets over the quarter. However, the Japanese and UK markets ended the quarter lower.

International Emerging Market Equities

The MSCI Emerging Markets Index ended the quarter and the 12 months to March closing down 1% and 4% respectively. Late in the March quarter, there were signs of strength in Latin America however Eastern European markets were dragged down by a negative performance from Russia.

Australian and International Fixed Interest

Fixed interest markets finished the March quarter in the black, with the UBSA Composite Bond Index (proxy for Australian fixed interest) gaining 1% and the Barclay’s Global Aggregate Index (proxy for international fixed interest) gaining 3%. This was driven by declining bond yields (10-year yields on US and Australian treasury notes fell 10.4% and 3.5% respectively), reflecting capital flow out of emerging markets into perceived safe havens and the market’s expectations for a continued low interest rate and low inflationary environment. The Bond market thus overlooked falling support from the Fed, which reduced its bond purchases at each meeting in the quarter.

Real assets

'Real assets' includes property, infrastructure, timber (forestry plantations) and agricultural assets. The asset class returned 4% over the March quarter (+10% over the 12 months).

Cash

The official Cash Rate in Australia was 2.5% at the end of March. Returns for the Cash Option reflect the Cash Rate.

Market summary

Chart 3: Major Equity Market Price Returns to 31 March 2014 VicSuper Investment Option Strategic Asset Allocation

Source: IRESS

  • Most share markets were either flat or negative for the March quarter. Japan underperformed significantly (-9.0%) as investors began to doubt the resolve of Prime Minister Shinzo Abe's plan for growth and the nation's first consumption tax rise since 1997. China also underperformed (-3.9%) due to doubts about it meeting its 7.5% growth target for 2014.
  • Despite signs of a strong housing market and retail sales, weak global macroeconomic factors and geopolitical instability limited the performance of the Australian markets to +1% in the March quarter.
  • In its March Federal Open Market Committee (FOMC) meeting, the US Federal Reserve announced it will continue to taper its bond-buying program, reducing monthly purchases by a further US$10bn to US$55bn. However, the Reserve's chair Janet Yellen announced in late March that this “extraordinary commitment” (to Quantitative easing and low interest rates) would still be needed for some time to stimulate the economy.
  • The Reserve Bank of Australia (RBA) has kept the Cash Rate at 2.5% since August 2013. In March, the RBA’s Governor Glenn Stevens noted the past year of strong rises in residential property prices and mentioned that “a renewed increase in household leverage would be unwelcome”. This supports our view that bond yields will likely rise in 2014, as central banks start to adopt a restrictive monetary policy on the back of all-time low interest rates.
  • The AUD gained 3.9% in the March quarter, closing at US$0.927 on 31 March 2014.

Introducing ‘Alternatives’ as a new asset class

From 1 January 2014, VicSuper’s private equity investments (previously a sub-asset class within the ‘Equities’ asset class), were reclassified as part of a new asset class labelled ‘Alternatives’.

While this reclassification has had no impact on investment management and performance, further sub-asset classes may be added to Alternatives in the future.

Chart 1 shows the strategic asset allocation from 1 January 2014 across VicSuper’s diversified investment options.

Chart 1: VicSuper investment option strategic asset allocation Major Index Returns (VicSuper’s Asset Class Benchmarks)

*Also applies to Equity Growth Sustainability.

Chart 1 highlights our ‘diversified’ investment options given they are invested in more than one asset class. The Cash (100% invested in cash), Term Deposit (100% cash) and Australian Shares (100% Equities) investment options are not diversified.

Key themes underlying financial markets in the next 12 months

  • World growth will be moderate, led by the US, China and Japan
  • Overall emerging market valuations look attractive but sentiment remains negative and fundamentals are unclear
  • Australia should have reasonable GDP growth despite remaining below trend of 3.25
  • Bond yields will likely rise moderately in 2014 both locally and globally
  • Overall, we continue to prefer equities over bonds
Table 1: Summary of VicSuper's asset class views Table 1: Summary of VicSuper’s asset class views

Investment option returns for the March quarter

  • In the three months ending 31 March 2014, Australian equities outperformed international equities. However a weak performance by emerging markets completely offset the positive return from developed markets.
  • The Cash Option was the weakest performer over the quarter, reflecting the low interest rate environment.
  • Within the diversified category, options more heavily weighted to growth assets (Balanced, Growth, Equity Growth and Equity Growth Sustainability) underperformed those with less exposure to growth assets over the March quarter. This was primarily driven by the relatively flat performance of international equities.
  • Over the 12 months to 31 March 2014, returns still reflected the solid performance of equity markets over fixed interest and cash markets. As a result, options more heavily weighted to growth assets outperformed those more weighted to defensive assets over the longer time frame.
Table 2: VicSuper investment option returns

VicSuper FutureSaver (%)

VicSuper Flexible Income (%)

3-month FYTD 1-year 3-year 3-month FYTD 1-year 3-year
Cash 0.5% 1.7% 2.4% 3.2% 0.6% 2.0% 2.8% 3.8%
Capital Secure 1.5% 5.7% 6.3% 6.0% 1.7% 6.3% 7.0% 6.9%
Capital Stable 1.5% 8.4% 9.6% 7.3% 1.7% 9.3% 10.7% 8.3%
Balanced 1.3% 10.8% 12.5% 8.3% 1.5% 11.9% 13.9% 9.5%
Growth 1.2% 12.7% 15.0% 8.8% 1.3% 13.9% 16.5% 10.0%
Equity Growth 0.7% 15.3% 18.4% 10.0% 0.8% 16.8% 20.2% 11.3%
Equity Growth Sustainability 1.1% 15.6% 19.5% 10.1% 1.3% 16.9% 21.3% 11.4%
Australian Shares 2.0% 15.1% 11.1% N/A* 2.2% 17.0% 13.6% N/A*

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 Flexible Income.

See the current Term Deposit rates.

Asset class performance for the March quarter

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 Accumulation 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.

Chart 2: Major Index Returns (VicSuper’s Asset Class Benchmarks) Major Equity Market Price Returns to 31 March 2014

Source: Bloomberg, IRESS, Barclays

Australian Equities

The S&P/ASX 300 Accumulation Index gained 2% for the quarter and finished up 13% over the 12 months to 31 March 2014. The index fell in January as investors focused on the increased risk and instability in the emerging market region, particularly from the “Fragile five” economies (India, Turkey, Indonesia, Brazil and South Africa and their significant current account deficits) and Argentina (whose currency fell by over 10% due to major economic concerns). However, a strong Australian earnings reporting season in February highlighted the strength of the local market and provided some reassurance to investors that company earnings would continue to grow in the near term.

International Developed Market Equities

The MSCI World excluding Australian Equities Index (unhedged) gained 1% over the quarter and 17% over the 12 months ending 31 March 2014. The strong 12-month performance was led by the US and Japan (which account for about 57% and 8% of the index respectively). Fears over Russia’s intervention in Ukraine, slowing growth in China and the tapering of quantitative easing (i.e. the US Federal Reserve’s bond-buying program) contributed to a slight increase for US markets over the quarter. However, the Japanese and UK markets ended the quarter lower.

International Emerging Market Equities

The MSCI Emerging Markets Index ended the quarter and the 12 months to March closing down 1% and 4% respectively. Late in the March quarter, there were signs of strength in Latin America however Eastern European markets were dragged down by a negative performance from Russia.

Australian and International Fixed Interest

Fixed interest markets finished the March quarter in the black, with the UBSA Composite Bond Index (proxy for Australian fixed interest) gaining 1% and the Barclay’s Global Aggregate Index (proxy for international fixed interest) gaining 3%. This was driven by declining bond yields (10-year yields on US and Australian treasury notes fell 10.4% and 3.5% respectively), reflecting capital flow out of emerging markets into perceived safe havens and the market’s expectations for a continued low interest rate and low inflationary environment. The Bond market thus overlooked falling support from the Fed, which reduced its bond purchases at each meeting in the quarter.

Real assets

'Real assets' includes property, infrastructure, timber (forestry plantations) and agricultural assets. The asset class returned 4% over the March quarter (+10% over the 12 months).

Cash

The official Cash Rate in Australia was 2.5% at the end of March. Returns for the Cash Option reflect the Cash Rate.

Market summary

Chart 3: Major Equity Market Price Returns to 31 March 2014 VicSuper Investment Option Strategic Asset Allocation

Source: IRESS

  • Most share markets were either flat or negative for the March quarter. Japan underperformed significantly (-9.0%) as investors began to doubt the resolve of Prime Minister Shinzo Abe's plan for growth and the nation's first consumption tax rise since 1997. China also underperformed (-3.9%) due to doubts about it meeting its 7.5% growth target for 2014.
  • Despite signs of a strong housing market and retail sales, weak global macroeconomic factors and geopolitical instability limited the performance of the Australian markets to +1% in the March quarter.
  • In its March Federal Open Market Committee (FOMC) meeting, the US Federal Reserve announced it will continue to taper its bond-buying program, reducing monthly purchases by a further US$10bn to US$55bn. However, the Reserve's chair Janet Yellen announced in late March that this “extraordinary commitment” (to Quantitative easing and low interest rates) would still be needed for some time to stimulate the economy.
  • The Reserve Bank of Australia (RBA) has kept the Cash Rate at 2.5% since August 2013. In March, the RBA’s Governor Glenn Stevens noted the past year of strong rises in residential property prices and mentioned that “a renewed increase in household leverage would be unwelcome”. This supports our view that bond yields will likely rise in 2014, as central banks start to adopt a restrictive monetary policy on the back of all-time low interest rates.
  • The AUD gained 3.9% in the March quarter, closing at US$0.927 on 31 March 2014.