Quarterly investment update – July to September 2014

Financial year performance

During the quarterChant West's Investment Returns survey results were released for the financial year ended 30 June 2014.

Table 1 shows how VicSuper performed in the Growth (MySuper) option and in the relatively more conservative, Capital Stable option.Table 1: Chant West Super Fund survey results

Chant West category VicSuper option Financial year return VicSuper rank / total number of funds
Conservative Growth Capital Stable 10.8% 1/55
Growth Growth (MySuper) 15.8% 1/65

Source: Chant West

Investment policy statement and ESG integration guide

VicSuper's Investment Policy Statement (IPS) and ESG integration Guide are now available on our website.

What are the objectives of the IPS?

The IPS is designed to:

  • communicate VicSuper's investment principles and beliefs
  • outline the responsibilities of the Trustee, VicSuper members and investment managers when making investment decisions; and
  • describe how the Trustee formulates, implements, monitors and reviews the investment strategy.

What are the objectives of the ESG integration guide?

The ESG Integration guide articulates and defines how ESG fits into our investment process and explains:

  • How VicSuper is an ‘active owner’ in promoting better governance practices
  • How VicSuper’s investment managers integrate environmental, social and governance (ESG) factors into their investment process

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, albeit below trend of 3.25% on average for the year
  • Bond yields will likely rise in 2015 in Australia and globally

Implications for VicSuper fund:

  • We continue to prefer equities over bonds. Within Equities, emerging market valuations are relatively more attractive than developed markets. 
  • In our view, Alternatives are moderately attractive as a means to diversify risk and to enhance total return (note Private Equity is currently the only sub-asset class within Alternatives).
Table 2: Summary of VicSuper's asset class views Summary of VicSuper's asset class views

VicSuper's investment option returns for the September quarter

The Growth option returned 1.6% (accumulation) and 1.8% (pension) for the quarter ending 30 September 2014. With the exception of Australian Shares, options weighted more heavily to growth assets (Growth and Equity Growth) have outperformed those with a more defensive bias (Capital Stable and Capital Secure) on a one-year basis.

Table 3: VicSuper's Investment Option Returns

VicSuper FutureSaver

Accumulation (%)

VicSuper Flexible Income (%)

3-months 1-year 5-year 10-year 3-months 1-year 5-year 10-year
Cash 0.6% 2.3% 3.3% 4.2% 0.7% 2.7% 3.9% 4.9%
Capital Secure 1.0% 6.1% 5.8% 5.4% 1.1% 7.0% 6.7% 6.3%
Capital Stable 1.3% 8.4% 7.0% 5.9% 1.4% 9.4% 8.1% 6.9%
Balanced 1.5% 10.0% 8.0% 6.5% 1.7% 11.3% 9.2% 7.5%
Growth 1.6% 11.3% 8.5% 6.7% 1.8% 12.6% 9.8% 7.7%
Equity Growth 1.8% 12.4% 9.6% 7.2% 1.9% 13.7% 11.0% 8.1%
Equity Growth Sustainability 1.5% 11.7% 9.3% 7.7% 1.6% 12.9% 10.6% 8.7%
Australian Shares* -0.5% 5.7% N/A N/A -0.5% 5.9% N/A N/A

Source: VicSuper

* 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 September quarter

The returns for VicSuper’s investment options for the quarter and the 12 months ending 30 September 2014 broadly reflect the performance of VicSuper’s benchmarks. VicSuper measures investment performance against benchmark indices. Overall, equities ended the September quarter in the red (although performance for the 12 months to September remains positive) whilst fixed income performed well.

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

Source: IRESS, Bloomberg, Barclays, MSCI

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

Australian Equities

The ASX 300 Accumulation Index lost 1% for the quarter. After positive returns in July and August, September returns for the major banks, big miners, supermarkets and Telstra were all negative. The market was impacted in September by falling iron ore prices (due to weak Chinese steel demand and an increase in supply), combined with deteriorating growth indicators in Europe and China.

On the economic front, the Reserve Bank of Australia (RBA) kept rates on hold through the quarter at 2.5%, still signaling continuation of rate stability. The RBA noted economic indicators are consistent with moderate growth in the economy. Spending on investment in the resources sector is declining, although the RBA expects some areas of private demand to expand. The AUD lost 7% over the quarter, dropping from US$0.94 to US$0.88. This was caused largely by strength in the US dollar and falling commodity prices.

Developed Market Equities (excluding Australia)

The MSCI World index (excluding Australia, unhedged) lost 2% over the quarter, dragged by significant declines in gauges of energy and raw materials companies. Similar to Australia, global developed markets had a difficult quarter as investors grew increasingly concerned about rising geo-political tension (Russia/Ukraine, the Middle East, etc) and mixed economic data (generally positive in the US but negative in Europe). This is the biggest quarterly fall since the second quarter of 2012, when the euro zone's debt crisis peaked.

In the US, improving capital spending and hiring intentions indicated continued economic expansion at a moderate pace. While the prospect of the US Federal Reserve raising interest rates sooner than expected is concerning some investors (as they expect asset prices to fall as a result), it is also an indication of economic strength and confidence for the US. The S&P500 index gained 1% for the quarter.

In Europe, the European Central Bank president Mario Draghi said the recovery is losing pace and that officials will become more active in their fight to restore growth. Meanwhile inflation slowed to its lowest level in almost five years, giving rise to investor concerns about the potential for deflation. The bank has cut interest rates to record lows and has claimed it will buy asset-backed securities and covered bonds, an approach similar to quantitative easing in the US.

Emerging Market Equities

The MSCI Emerging Markets Index ended the September quarter down 4%, led by Brazil and Russia. Overall, fears that the US may raise interest rates sooner than expected weighed on performance. In Brazil, investors abandoned hopes that elections will bring a new government into office capable of turning around the slumping economy. Meanwhile, Russia’s equity market continued to be impacted by the crisis with Ukraine and by sanctions introduced by the US and European Union against Russian politicians and businessmen, and some of their assets, as well as major banks, oil, and defense companies.

Overall, economic fundamentals - as reflected by the Purchasing Managers Index (PMI) below – remain attractive. However, negative sentiment and rising volatility is likely to continue impacting performance in the near term.

3q14_Chart1

Source: Bloomberg, Barclays

Note: A reading above 50 indicates expansion and a reading below 50 suggests contraction.

Australian and International Fixed Interest

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), fixed interest markets in Australia and internationally were up 1% and 2% respectively. Fixed interest markets were shielded from September equity market losses by investors bidding up "safe haven" assets.

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 September.

3q14_Chart2

Source: IRESS

Financial year performance

During the quarterChant West's Investment Returns survey results were released for the financial year ended 30 June 2014.

Table 1 shows how VicSuper performed in the Growth (MySuper) option and in the relatively more conservative, Capital Stable option.Table 1: Chant West Super Fund survey results

Chant West category VicSuper option Financial year return VicSuper rank / total number of funds
Conservative Growth Capital Stable 10.8% 1/55
Growth Growth (MySuper) 15.8% 1/65

Source: Chant West

Investment policy statement and ESG integration guide

VicSuper's Investment Policy Statement (IPS) and ESG integration Guide are now available on our website.

What are the objectives of the IPS?

The IPS is designed to:

  • communicate VicSuper's investment principles and beliefs
  • outline the responsibilities of the Trustee, VicSuper members and investment managers when making investment decisions; and
  • describe how the Trustee formulates, implements, monitors and reviews the investment strategy.

What are the objectives of the ESG integration guide?

The ESG Integration guide articulates and defines how ESG fits into our investment process and explains:

  • How VicSuper is an ‘active owner’ in promoting better governance practices
  • How VicSuper’s investment managers integrate environmental, social and governance (ESG) factors into their investment process

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, albeit below trend of 3.25% on average for the year
  • Bond yields will likely rise in 2015 in Australia and globally

Implications for VicSuper fund:

  • We continue to prefer equities over bonds. Within Equities, emerging market valuations are relatively more attractive than developed markets. 
  • In our view, Alternatives are moderately attractive as a means to diversify risk and to enhance total return (note Private Equity is currently the only sub-asset class within Alternatives).
Table 2: Summary of VicSuper's asset class views Summary of VicSuper's asset class views

VicSuper's investment option returns for the September quarter

The Growth option returned 1.6% (accumulation) and 1.8% (pension) for the quarter ending 30 September 2014. With the exception of Australian Shares, options weighted more heavily to growth assets (Growth and Equity Growth) have outperformed those with a more defensive bias (Capital Stable and Capital Secure) on a one-year basis.

Table 3: VicSuper's Investment Option Returns

VicSuper FutureSaver

Accumulation (%)

VicSuper Flexible Income (%)

3-months 1-year 5-year 10-year 3-months 1-year 5-year 10-year
Cash 0.6% 2.3% 3.3% 4.2% 0.7% 2.7% 3.9% 4.9%
Capital Secure 1.0% 6.1% 5.8% 5.4% 1.1% 7.0% 6.7% 6.3%
Capital Stable 1.3% 8.4% 7.0% 5.9% 1.4% 9.4% 8.1% 6.9%
Balanced 1.5% 10.0% 8.0% 6.5% 1.7% 11.3% 9.2% 7.5%
Growth 1.6% 11.3% 8.5% 6.7% 1.8% 12.6% 9.8% 7.7%
Equity Growth 1.8% 12.4% 9.6% 7.2% 1.9% 13.7% 11.0% 8.1%
Equity Growth Sustainability 1.5% 11.7% 9.3% 7.7% 1.6% 12.9% 10.6% 8.7%
Australian Shares* -0.5% 5.7% N/A N/A -0.5% 5.9% N/A N/A

Source: VicSuper

* 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 September quarter

The returns for VicSuper’s investment options for the quarter and the 12 months ending 30 September 2014 broadly reflect the performance of VicSuper’s benchmarks. VicSuper measures investment performance against benchmark indices. Overall, equities ended the September quarter in the red (although performance for the 12 months to September remains positive) whilst fixed income performed well.

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

Source: IRESS, Bloomberg, Barclays, MSCI

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

Australian Equities

The ASX 300 Accumulation Index lost 1% for the quarter. After positive returns in July and August, September returns for the major banks, big miners, supermarkets and Telstra were all negative. The market was impacted in September by falling iron ore prices (due to weak Chinese steel demand and an increase in supply), combined with deteriorating growth indicators in Europe and China.

On the economic front, the Reserve Bank of Australia (RBA) kept rates on hold through the quarter at 2.5%, still signaling continuation of rate stability. The RBA noted economic indicators are consistent with moderate growth in the economy. Spending on investment in the resources sector is declining, although the RBA expects some areas of private demand to expand. The AUD lost 7% over the quarter, dropping from US$0.94 to US$0.88. This was caused largely by strength in the US dollar and falling commodity prices.

Developed Market Equities (excluding Australia)

The MSCI World index (excluding Australia, unhedged) lost 2% over the quarter, dragged by significant declines in gauges of energy and raw materials companies. Similar to Australia, global developed markets had a difficult quarter as investors grew increasingly concerned about rising geo-political tension (Russia/Ukraine, the Middle East, etc) and mixed economic data (generally positive in the US but negative in Europe). This is the biggest quarterly fall since the second quarter of 2012, when the euro zone's debt crisis peaked.

In the US, improving capital spending and hiring intentions indicated continued economic expansion at a moderate pace. While the prospect of the US Federal Reserve raising interest rates sooner than expected is concerning some investors (as they expect asset prices to fall as a result), it is also an indication of economic strength and confidence for the US. The S&P500 index gained 1% for the quarter.

In Europe, the European Central Bank president Mario Draghi said the recovery is losing pace and that officials will become more active in their fight to restore growth. Meanwhile inflation slowed to its lowest level in almost five years, giving rise to investor concerns about the potential for deflation. The bank has cut interest rates to record lows and has claimed it will buy asset-backed securities and covered bonds, an approach similar to quantitative easing in the US.

Emerging Market Equities

The MSCI Emerging Markets Index ended the September quarter down 4%, led by Brazil and Russia. Overall, fears that the US may raise interest rates sooner than expected weighed on performance. In Brazil, investors abandoned hopes that elections will bring a new government into office capable of turning around the slumping economy. Meanwhile, Russia’s equity market continued to be impacted by the crisis with Ukraine and by sanctions introduced by the US and European Union against Russian politicians and businessmen, and some of their assets, as well as major banks, oil, and defense companies.

Overall, economic fundamentals - as reflected by the Purchasing Managers Index (PMI) below – remain attractive. However, negative sentiment and rising volatility is likely to continue impacting performance in the near term.

3q14_Chart1

Source: Bloomberg, Barclays

Note: A reading above 50 indicates expansion and a reading below 50 suggests contraction.

Australian and International Fixed Interest

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), fixed interest markets in Australia and internationally were up 1% and 2% respectively. Fixed interest markets were shielded from September equity market losses by investors bidding up "safe haven" assets.

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 September.

3q14_Chart2

Source: IRESS

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