Quarterly investment update – July to September 2015

New Australian Unlisted Infrastructure manager

During the quarter, VicSuper appointed Palisade Investment Partners Limited to manage a AUD100million mandate.

Palisade is an independent Australian unlisted mid-market infrastructure manager, targeting low to mid-teen gross returns by investing in high quality, mid-market infrastructure assets. The appointment provides an opportunity to complement our existing Australian infrastructure managers (IFM and Hastings) and diversify away from VicSuper’s existing large core infrastructure exposures (transactions greater than $1 billion).

Updated Strategic Asset Allocation

VicSuper adjusted the fund's strategic asset allocation in the third quarter, decreasing the allocation to Equities by 4% (this will come from Australian equities) and increasing the allocation to Alternatives by the same amount. The strategic asset allocation to Alternatives is now around 10%. The objective of the change is to diversify the equity risk in the Fund.

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 2016. 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 September quarter

VicSuper's member investment choice options more heavily weighted to growth assets underperformed owing to the disappointing outcomes in equity markets globally. The local market (ASX 200) closed down 8.0% for the quarter while the S&P500 declined sharply over the quarter by -6.9% to close at 1,920.0. 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 0.47% 2.02% 3.00% 3.91% 0.55% 2.51% 3.57% 4.63%
Capital Secure 0.05% 4.68% 5.70% 5.01% -0.04% 4.86% 6.44% 5.77%
Capital Stable -1.20% 5.75% 7.10% 5.45% -1.47% 5.72% 7.96% 6.24%
Balanced -2.19% 5.93% 8.15% 5.68% -2.52% 6.11% 9.18% 6.50%
Growth -2.99% 6.05% 8.86% 5.53% -3.34% 6.32% 10.01% 6.29%
Equity Growth -4.46% 5.65% 9.85% 5.77% -4.93% 5.44% 10.97% 6.41%
Equity Growth Sustainability -4.57% 4.92% 9.41% 6.28% -5.43% 4.51% 10.40% 6.92%
Australian Shares* -5.21% 0.35% N/A N/A -5.53% 1.08% 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 quarter, only VicSuper’s fixed income asset class benchmarks finished higher. All equity indices closed lower for the quarter and the year to 30 September.

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

Source: IRESS, Bloomberg, Barclays, MSCI

Global and Australian Equities

September was another volatile quarter for equities globally with most markets posting negative returns.

The S&P/ASX300 Accumulation index fell -6.5% for the September quarter with an annual return of -0.7%. Global equity markets were also down with the S&P500 falling -6.9%, the UK (FTSE100) falling -7% and Japan (Nikkei) falling -14.1%.

Markets both in Australia and globally have been driven by global themes - namely, concerns about Chinese growth and the corresponding impact on commodity prices alongside an eventual interest rate increase by the US Federal Reserve. The expectation of slowing global growth is in spite of what should be considered as reasonable momentum in the US economy in key areas such as payroll gains, construction activity and consumer spending.

Within Australia at a sector level the best performing stocks were within the Industrials and Utilities sector. Industrial companies, particularly companies that had USD revenues benefited as the AUD continued to fall, whilst investors once again turned to the relative safety of Utilities. The worst performers at a sector level for the quarter were the commodity related sectors, namely Energy (-25.9%) and Materials (-12.8%) which fell in line with the oil and metals related commodities.

Outside of Australia the worst performing developed markets were mostly within Asia and in particular Japan (-14.1%), Singapore (-15.9%) and Hong Kong (-20.6%) which bore the brunt of negative investor sentiment emanating from the poor performance of China and other Emerging Markets along with the timing of any potential interest rate increases by the US Federal Reserve.

Emerging Market Equities

Emerging equity markets performed very poorly during the September quarter with the MSCI Emerging Markets Index down almost 19%. China's economy continued to weaken combined with big falls in their sharemarket. The Chinese manufacturing sector contracted further – the Markit Flash manufacturing PMI eased to 47.0 in September, its lowest level since April 2009. This contraction also caused damage to the economies of other emerging markets dependent on China's growth.

Australian and International Fixed Interest

In the US, 10-year benchmark treasury yields fell -32bps over the quarter to close at 2.04%. The yield traded down at just over 2.0% in late August after which it reached close to 2.3% before decreasing again following the RBA’s decision to leave rates on hold in September.

The local yield curve followed the US and flattened during the quarter as the spread between the 10 year-2 year yields decreased by -41bps to 0.78%. The 10-year Commonwealth yield decreased by -41bps over the quarter to 2.61%.

Cash

The RBA left the cash rate steady at 2.0% throughout the quarter. The latest Board statement gave no clear policy guidance, only the self-evident remark that current settings are "appropriate" and that "further information" will "inform the Board" ongoing assessment.

New Australian Unlisted Infrastructure manager

During the quarter, VicSuper appointed Palisade Investment Partners Limited to manage a AUD100million mandate.

Palisade is an independent Australian unlisted mid-market infrastructure manager, targeting low to mid-teen gross returns by investing in high quality, mid-market infrastructure assets. The appointment provides an opportunity to complement our existing Australian infrastructure managers (IFM and Hastings) and diversify away from VicSuper’s existing large core infrastructure exposures (transactions greater than $1 billion).

Updated Strategic Asset Allocation

VicSuper adjusted the fund's strategic asset allocation in the third quarter, decreasing the allocation to Equities by 4% (this will come from Australian equities) and increasing the allocation to Alternatives by the same amount. The strategic asset allocation to Alternatives is now around 10%. The objective of the change is to diversify the equity risk in the Fund.

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 2016. 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 September quarter

VicSuper's member investment choice options more heavily weighted to growth assets underperformed owing to the disappointing outcomes in equity markets globally. The local market (ASX 200) closed down 8.0% for the quarter while the S&P500 declined sharply over the quarter by -6.9% to close at 1,920.0. 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 0.47% 2.02% 3.00% 3.91% 0.55% 2.51% 3.57% 4.63%
Capital Secure 0.05% 4.68% 5.70% 5.01% -0.04% 4.86% 6.44% 5.77%
Capital Stable -1.20% 5.75% 7.10% 5.45% -1.47% 5.72% 7.96% 6.24%
Balanced -2.19% 5.93% 8.15% 5.68% -2.52% 6.11% 9.18% 6.50%
Growth -2.99% 6.05% 8.86% 5.53% -3.34% 6.32% 10.01% 6.29%
Equity Growth -4.46% 5.65% 9.85% 5.77% -4.93% 5.44% 10.97% 6.41%
Equity Growth Sustainability -4.57% 4.92% 9.41% 6.28% -5.43% 4.51% 10.40% 6.92%
Australian Shares* -5.21% 0.35% N/A N/A -5.53% 1.08% 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 quarter, only VicSuper’s fixed income asset class benchmarks finished higher. All equity indices closed lower for the quarter and the year to 30 September.

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

Source: IRESS, Bloomberg, Barclays, MSCI

Global and Australian Equities

September was another volatile quarter for equities globally with most markets posting negative returns.

The S&P/ASX300 Accumulation index fell -6.5% for the September quarter with an annual return of -0.7%. Global equity markets were also down with the S&P500 falling -6.9%, the UK (FTSE100) falling -7% and Japan (Nikkei) falling -14.1%.

Markets both in Australia and globally have been driven by global themes - namely, concerns about Chinese growth and the corresponding impact on commodity prices alongside an eventual interest rate increase by the US Federal Reserve. The expectation of slowing global growth is in spite of what should be considered as reasonable momentum in the US economy in key areas such as payroll gains, construction activity and consumer spending.

Within Australia at a sector level the best performing stocks were within the Industrials and Utilities sector. Industrial companies, particularly companies that had USD revenues benefited as the AUD continued to fall, whilst investors once again turned to the relative safety of Utilities. The worst performers at a sector level for the quarter were the commodity related sectors, namely Energy (-25.9%) and Materials (-12.8%) which fell in line with the oil and metals related commodities.

Outside of Australia the worst performing developed markets were mostly within Asia and in particular Japan (-14.1%), Singapore (-15.9%) and Hong Kong (-20.6%) which bore the brunt of negative investor sentiment emanating from the poor performance of China and other Emerging Markets along with the timing of any potential interest rate increases by the US Federal Reserve.

Emerging Market Equities

Emerging equity markets performed very poorly during the September quarter with the MSCI Emerging Markets Index down almost 19%. China's economy continued to weaken combined with big falls in their sharemarket. The Chinese manufacturing sector contracted further – the Markit Flash manufacturing PMI eased to 47.0 in September, its lowest level since April 2009. This contraction also caused damage to the economies of other emerging markets dependent on China's growth.

Australian and International Fixed Interest

In the US, 10-year benchmark treasury yields fell -32bps over the quarter to close at 2.04%. The yield traded down at just over 2.0% in late August after which it reached close to 2.3% before decreasing again following the RBA’s decision to leave rates on hold in September.

The local yield curve followed the US and flattened during the quarter as the spread between the 10 year-2 year yields decreased by -41bps to 0.78%. The 10-year Commonwealth yield decreased by -41bps over the quarter to 2.61%.

Cash

The RBA left the cash rate steady at 2.0% throughout the quarter. The latest Board statement gave no clear policy guidance, only the self-evident remark that current settings are "appropriate" and that "further information" will "inform the Board" ongoing assessment.

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