Quarterly investment update – January to March 2016

Investing in Real Assets

With all the recent media focus on global sharemarkets, it's easy to overlook the other four asset classes VicSuper invests in on behalf of members.

Our Chief Investment Officer, Oscar Fabian, talks about VicSuper's real assets, and how VicSuper uses real assets to help with diversification and spread sources of risk and return.

Time to watch: 3:03

Oscar Fabian, VicSuper Chief Investment Officer talks Real Assets

Quarterly Investment Update - 1 January to 31 March 2016

Share markets in early 2016 have been volatile, with markets in March recovering from losses in January and February as oil prices recovered. Also helping markets were better economic releases such as improvements in inflation in the USA and PMI in Europe. There was also a cut in the deposit rate in Europe by the European Central Bank (ECB) along with the Peoples Bank of China (PBoC) cutting the bank reserve requirement ratio by 0.5%.

World GDP growth will likely be moderate, led by the US and China and to a lesser extent Europe, as their respective governments and policy makers continue their pro-growth stances.

In Australia, the outlook for growth remains steady and will continue to be influenced by the outlook for China. GDP growth surprised on the upside in December with Q4 Dec 2015 GDP showing the economy grew 3% year on year, and the unemployment rate falling to 5.8% in February. These factors and the rally in the AUD/USD to 0.765 at the end of March means that the market has lowered its expectations of further interest rate cuts to stimulate the economy.

Chart 1: Real GDP (Annual YoY%)

Real GDP

Source: Bloomberg

Implications for VicSuper fund:

  • From an asset allocation perspective, Equities remain moderately attractive relative to bonds.
  • Alternatives are attractive as a means to diversify risk and to enhance total returns.

VicSuper's investment option returns for the March 2016 quarter

VicSuper's member investment choice (MIC) options registered mixed returns over the first quarter of 2016. The Australian share market (S&P/ASX 300 Accumulation Index) lost 2.6% over the quarter while the US share market (S&P 500 Index) rose by only 0.8%. The Capital Secure Pension option was the best performing MIC for the quarter.

Table 1: VicSuper's Investment Option returns

Swipe to see more

 

VicSuper FutureSaver

Accumulation (%)

VicSuper Flexible Income (%)

Quarter 1-year 5-year 10-year Quarter 1-year 5-year 10-year
Cash 0.50% 1.95% 2.76% 3.77% 0.58% 2.29% 3.29% 4.46%
Capital Secure 1.31% 2.35% 5.60% 4.80% 1.49% 2.56% 6.30% 5.51%
Capital Stable 0.52% 0.49% 6.69% 5.00% 0.59% 0.31% 7.43% 5.71%
Balanced -0.31% -0.97% 7.39% 5.03% -0.35% -1.29% 8.26% 5.73%
Growth -1.08% -1.93% 7.71% 4.67% -1.19% -2.32% 8.62% 5.29%
Equity Growth -2.73% -5.21% 8.10% 4.61% -3.05% -6.01% 8.91% 5.10%
Equity Growth Sustainability -3.16% -6.25% 7.70% 5.02% -3.55% -7.15% 8.37% 5.48%
Australian Shares* -1.89% -5.95% N/A N/A -2.16% -5.75% 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 March 2016 quarter

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

Source: Bloomberg, Barclays, MSCI

Global and Australian Equities

Equity market performance was subdued in the first quarter of 2016. US share markets ended the period broadly unchanged (S&P 500 Index USD up 0.8%). Australian and UK markets closed slightly lower (S&P/ASX 300 Accumulation Index down 2.6% and FTSE Index GBP down 1.1%) while European markets fell substantially (EuroStoxx Index EUR down 8%).

The first half of the quarter was characterized by increasing volatility and falling sharemarkets. In the US, soft data early in the quarter, threatened to hamper the recovery and markets moved lower as a result. The Federal Reserve (Fed) addressed these concerns by announcing a more gradual pace of policy tightening over 2016 than was initially expected. The expectation is now for two 0.25% interest rate rises this year as opposed to four. US equity markets rallied in response.

In Europe, equity markets performed poorly and reached their lowest point in mid-February. Declines were driven by concerns about global growth, particularly in China, as well as the collapse in oil prices. Security was also a concern for European markets in the wake of the Brussels terrorist attacks in March. Also in March, the European Central Bank (ECB) announced additional stimulus and moved rates further into negative territory in an effort to support the Eurozone economy.

Australian equities sold off in January and February. Losses were driven primarily by fears of global recession. February also saw investors turn their attention to reporting season. Almost 90% of companies reporting half year earnings reported a profit which is close to the record high. The market performed well in second half of the quarter following strong economic data releases and the Fed announcement that interest rate increases would be deferred.

Source: Bloomberg

Emerging Market Equities

Emerging markets equities outperformed developed markets in the first quarter with Brazil being one of the strongest contributors. However gains in the MSCI Emerging Markets Index AUD were wiped out by the appreciating Australian dollar (AUD). The adjusted index ended flat. This compares favourably however to the MSCI World ex Australia Index AUD. When adjusted for the appreciating AUD, the index lost 5.8%.

Emerging markets saw a weak start to the quarter, however the Fed announcement that it was deferring the tightening of monetary policy in the US as well as the easing in the strength of the US dollar (USD) underpinned a rebound in emerging markets equities later in the quarter. This is because when interest rates rise a higher currency generally ensues. A higher USD impacts emerging countries in two ways: firstly, capital is attracted away from emerging markets and secondly, USD denominated debt becomes more expensive.

The Chinese economy is showing further evidence of shifting from a manufacturing to a consumption based economy. The slowing pace of economic growth is more consistent with a 'soft' than a 'hard' landing. Notwithstanding, Chinese equity market performance was one of the weakest in the Asia region in the first quarter. 

Source: Bloomberg

Australian and International Fixed Interest

Following tumbling equity markets and oil prices early in the quarter, investors bought into Treasuries, pushing government bond yields lower as a result.

Revised rate hike expectations later in the quarter also weighed on government bond yields and they closed lower at the end of the quarter.

The 10 year US Treasury yield fell from 2.27% at the end of December 2015 to 1.77% at the end of March 2016. Interest rates across the yield curve decreased as highlighted in the graph below. There was also a flattening of the 10Year - 2Year yield curve. A flattening curve is important because it is a sign that markets view rates staying lower for longer.

Chart: US Treasury Yield Curve (%)

US Treasury Yield Curve chart

Source: Bloomberg

Yields on UK government bonds (Gilts) also declined from 1.96% to 1.42%. A primary factor underpinning the decline in Gilt yields is the upcoming Referendum in June that will determine whether Britain will leave the European Union. The 10 Year Bund yield also declined from 0.63% to 0.15%. Australian 10 Year Government Bonds also saw their yields decline from 2.88% to 2.49%.

The Barclays Capital Global Aggregate Hedged AUD Index rose 3.7% over the quarter. This was driven primarily by Treasuries which rose by 4.3% outperforming corporate bonds which rose by 3.7%.

Cash

The Reserve Bank of Australia (RBA) maintained the official cash rate at 2.0% throughout the quarter. RBA Governor, Glenn Stevens, also expressed concern about the impact the appreciating AUD may have on the economy. The AUD has appreciated 5.1% against the US dollar in in the first quarter of 2016

Investing in Real Assets

With all the recent media focus on global sharemarkets, it's easy to overlook the other four asset classes VicSuper invests in on behalf of members.

Our Chief Investment Officer, Oscar Fabian, talks about VicSuper's real assets, and how VicSuper uses real assets to help with diversification and spread sources of risk and return.

Time to watch: 3:03

Oscar Fabian, VicSuper Chief Investment Officer talks Real Assets

Quarterly Investment Update - 1 January to 31 March 2016

Share markets in early 2016 have been volatile, with markets in March recovering from losses in January and February as oil prices recovered. Also helping markets were better economic releases such as improvements in inflation in the USA and PMI in Europe. There was also a cut in the deposit rate in Europe by the European Central Bank (ECB) along with the Peoples Bank of China (PBoC) cutting the bank reserve requirement ratio by 0.5%.

World GDP growth will likely be moderate, led by the US and China and to a lesser extent Europe, as their respective governments and policy makers continue their pro-growth stances.

In Australia, the outlook for growth remains steady and will continue to be influenced by the outlook for China. GDP growth surprised on the upside in December with Q4 Dec 2015 GDP showing the economy grew 3% year on year, and the unemployment rate falling to 5.8% in February. These factors and the rally in the AUD/USD to 0.765 at the end of March means that the market has lowered its expectations of further interest rate cuts to stimulate the economy.

Chart 1: Real GDP (Annual YoY%)

Real GDP

Source: Bloomberg

Implications for VicSuper fund:

  • From an asset allocation perspective, Equities remain moderately attractive relative to bonds.
  • Alternatives are attractive as a means to diversify risk and to enhance total returns.

VicSuper's investment option returns for the March 2016 quarter

VicSuper's member investment choice (MIC) options registered mixed returns over the first quarter of 2016. The Australian share market (S&P/ASX 300 Accumulation Index) lost 2.6% over the quarter while the US share market (S&P 500 Index) rose by only 0.8%. The Capital Secure Pension option was the best performing MIC for the quarter.

Table 1: VicSuper's Investment Option returns

Swipe to see more

 

VicSuper FutureSaver

Accumulation (%)

VicSuper Flexible Income (%)

Quarter 1-year 5-year 10-year Quarter 1-year 5-year 10-year
Cash 0.50% 1.95% 2.76% 3.77% 0.58% 2.29% 3.29% 4.46%
Capital Secure 1.31% 2.35% 5.60% 4.80% 1.49% 2.56% 6.30% 5.51%
Capital Stable 0.52% 0.49% 6.69% 5.00% 0.59% 0.31% 7.43% 5.71%
Balanced -0.31% -0.97% 7.39% 5.03% -0.35% -1.29% 8.26% 5.73%
Growth -1.08% -1.93% 7.71% 4.67% -1.19% -2.32% 8.62% 5.29%
Equity Growth -2.73% -5.21% 8.10% 4.61% -3.05% -6.01% 8.91% 5.10%
Equity Growth Sustainability -3.16% -6.25% 7.70% 5.02% -3.55% -7.15% 8.37% 5.48%
Australian Shares* -1.89% -5.95% N/A N/A -2.16% -5.75% 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 March 2016 quarter

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

Source: Bloomberg, Barclays, MSCI

Global and Australian Equities

Equity market performance was subdued in the first quarter of 2016. US share markets ended the period broadly unchanged (S&P 500 Index USD up 0.8%). Australian and UK markets closed slightly lower (S&P/ASX 300 Accumulation Index down 2.6% and FTSE Index GBP down 1.1%) while European markets fell substantially (EuroStoxx Index EUR down 8%).

The first half of the quarter was characterized by increasing volatility and falling sharemarkets. In the US, soft data early in the quarter, threatened to hamper the recovery and markets moved lower as a result. The Federal Reserve (Fed) addressed these concerns by announcing a more gradual pace of policy tightening over 2016 than was initially expected. The expectation is now for two 0.25% interest rate rises this year as opposed to four. US equity markets rallied in response.

In Europe, equity markets performed poorly and reached their lowest point in mid-February. Declines were driven by concerns about global growth, particularly in China, as well as the collapse in oil prices. Security was also a concern for European markets in the wake of the Brussels terrorist attacks in March. Also in March, the European Central Bank (ECB) announced additional stimulus and moved rates further into negative territory in an effort to support the Eurozone economy.

Australian equities sold off in January and February. Losses were driven primarily by fears of global recession. February also saw investors turn their attention to reporting season. Almost 90% of companies reporting half year earnings reported a profit which is close to the record high. The market performed well in second half of the quarter following strong economic data releases and the Fed announcement that interest rate increases would be deferred.

Source: Bloomberg

Emerging Market Equities

Emerging markets equities outperformed developed markets in the first quarter with Brazil being one of the strongest contributors. However gains in the MSCI Emerging Markets Index AUD were wiped out by the appreciating Australian dollar (AUD). The adjusted index ended flat. This compares favourably however to the MSCI World ex Australia Index AUD. When adjusted for the appreciating AUD, the index lost 5.8%.

Emerging markets saw a weak start to the quarter, however the Fed announcement that it was deferring the tightening of monetary policy in the US as well as the easing in the strength of the US dollar (USD) underpinned a rebound in emerging markets equities later in the quarter. This is because when interest rates rise a higher currency generally ensues. A higher USD impacts emerging countries in two ways: firstly, capital is attracted away from emerging markets and secondly, USD denominated debt becomes more expensive.

The Chinese economy is showing further evidence of shifting from a manufacturing to a consumption based economy. The slowing pace of economic growth is more consistent with a 'soft' than a 'hard' landing. Notwithstanding, Chinese equity market performance was one of the weakest in the Asia region in the first quarter. 

Source: Bloomberg

Australian and International Fixed Interest

Following tumbling equity markets and oil prices early in the quarter, investors bought into Treasuries, pushing government bond yields lower as a result.

Revised rate hike expectations later in the quarter also weighed on government bond yields and they closed lower at the end of the quarter.

The 10 year US Treasury yield fell from 2.27% at the end of December 2015 to 1.77% at the end of March 2016. Interest rates across the yield curve decreased as highlighted in the graph below. There was also a flattening of the 10Year - 2Year yield curve. A flattening curve is important because it is a sign that markets view rates staying lower for longer.

Chart: US Treasury Yield Curve (%)

US Treasury Yield Curve chart

Source: Bloomberg

Yields on UK government bonds (Gilts) also declined from 1.96% to 1.42%. A primary factor underpinning the decline in Gilt yields is the upcoming Referendum in June that will determine whether Britain will leave the European Union. The 10 Year Bund yield also declined from 0.63% to 0.15%. Australian 10 Year Government Bonds also saw their yields decline from 2.88% to 2.49%.

The Barclays Capital Global Aggregate Hedged AUD Index rose 3.7% over the quarter. This was driven primarily by Treasuries which rose by 4.3% outperforming corporate bonds which rose by 3.7%.

Cash

The Reserve Bank of Australia (RBA) maintained the official cash rate at 2.0% throughout the quarter. RBA Governor, Glenn Stevens, also expressed concern about the impact the appreciating AUD may have on the economy. The AUD has appreciated 5.1% against the US dollar in in the first quarter of 2016

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