Quarterly investment update – October to December 2015

Watch: VicSuper's approach to managing volatility with Chief Investment Officer, Oscar Fabian

Video - Managing volatility a three-pronged approach

New Global Alternatives manager

During the quarter, VicSuper appointed Wellington Management to manage a AUD360million portfolio known as the Wellington Management Liquid Alternatives Portfolio. This is a bespoke alternatives strategy that has been developed by the Wellington Management Liquid Alternatives team in consultation with VicSuper Investments.

The appointment forms part of the Fund’s Alternatives Strategic Asset Allocation which was increased during 2015 from 6% to 10%. The VicSuper Liquid Alternatives Portfolio aims to deliver key objectives including: attractive returns, risk diversification and volatility smoothing as well as capital preservation.

Key themes underlying financial markets in the next 12 months

2016 is likely to be characterised by ongoing central bank policy divergence. For example, while the US Federal Reserve has entered a tightening cycle and raised interest rates by 0.25% in December, the European Central Bank (ECB) moved in the opposite direction providing stimulus with an interest rate cut pushing interest rates further into negative territory. The Bank of Japan and People's Bank of China are also likely to remain in easing mode (leaving interest rates at current levels or potentially decreasing interest rates in an effort to stimulate growth) in 2016.

US Government bond yields should also rise moderately as inflation is expected to increase, especially if interest rates in the US rise faster than investors expect.

World GDP growth will likely be moderate, led by the US and China and to a lesser extent Europe, which should be helped by reasonable job creation in Europe and the US. Lower oil prices should also provide support for moderate global GDP growth. Australia's GDP should also grow as the impact of the lower AUD and lower oil price begins to flow through the broader economy, albeit below the long term average trend.

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.
Table 1: Summary of VicSuper's view on asset classes
  Highly
Unattractive
Moderately
Unattractive
Neutral Moderately
Attractive 
Highly
Attractive 
Equities          
Fixed Income          
Real Assets          
Alternatives          
Cash          

Source: VicSuper

VicSuper’s investment option returns for the December 2015 quarter

All of VicSuper’s member investment choice (MIC) options registered positive returns over the quarter. The Australian share market (S&P/ASX 300 Accumulation Index) gained 6.5% over the quarter while the US share market (S&P500 Index) also rose 6.5%. The Australian Shares option was the best performing MIC for the quarter.

Table 2: 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 0.48% 2.02% 2.88% 3.83% 0.56% 2.38% 3.43% 4.54%
Capital Secure 1.17% 3.64% 5.68% 4.91% 1.33% 4.05% 6.42% 5.65%
Capital Stable 1.58% 4.20% 7.04% 5.33% 1.76% 4.48% 7.86% 6.09%
Balanced 2.17% 4.70% 8.01% 5.56% 2.41% 5.02% 9.00% 6.35%
Growth 2.73% 5.23% 8.60% 5.42% 3.03% 5.59% 9.67% 6.14%
Equity Growth 3.21% 4.82% 9.40% 5.66% 3.58% 4.99% 10.43% 6.27%
Equity Growth Sustainability 3.03% 4.09% 9.06% 6.15% 3.36% 4.29% 9.97% 6.74%
Australian Shares* 6.78% 4.69% N/A N/A 8.34% 6.62% 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 December quarter

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

Source: Bloomberg, Barclays, MSCI

Global and Australian Equities

Notwithstanding the negative returns posted in the third quarter, equity markets rallied in the December quarter. The Australian sharemarket (S&P/ASX 300 Accumulation Index) returned 6.5% for the December quarter compared to 2.8% for the year. The S&P 500 Index also gained 6.5% for the quarter compared to a loss of 0.7% for the year.

Sharemarket gains globally occured early in the December quarter as volatility subsided and US Federal Reserve watchers anticipated a delay in interest rate rises. December saw the US Federal Reserve raise rates by 0.25% for the first time since 2006 following strengthening in the US labour market. The quarterly market gains were underpinned by larger capitalisation stocks which bounced back from the volatile third quarter. Merger and acquisition activity also remained buoyant.

The Energy sector across most global share markets weighed on performance over the quarter. The weakness was driven by the fall in oil prices and other commodities and concern that OPEC’s refusal to lower production will lead to a global oil glut.

The strong quarterly performance in Australian equities was driven by the Consumer Discretionary (+13.1%) and Health (12.3%) sectors while the Materials (-7.2%) sector dragged on performance.

As interest rates in the US begin to increase, the European Central Bank (ECB) continues to ease its monetary policy. Speculation in the Eurozone that the ECB would ease monetary policy substantially, pushed equity markets higher over October and November. The ECB’s December announcement however did not meet expectations and this was reflected in weak December performance. The EuroStoxx Index gained 5.4% in the December quarter.

Japan was the strongest performing equity market in this December quarter. The Tokyo Stock Exchange Tokyo Price Index (TOPIX) returned a strong 9.6% return. The greater part of these gains occurred in October.

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

Despite a strong start to the quarter Emerging Markets ended the quarter down with the MSCI Emerging Markets Index (Net in AUD) returning -2.8% and a return for the 2015 calendar year of -4.3%.

Markets in Eastern Europe and Latin America underperformed Asia with Greece, the Czech Republic and Poland being the main underperformers in Eastern Europe, whilst all countries in the MSCI Latin America index fell during the quarter.

Asian markets on the other hand performed better during the quarter, with Indonesia, China, Malaysia and India all posting positive (local currency) returns for the quarter. Indonesia performed well aided by a bounce in the rupiah and an improvement in investor sentiment towards President Joko Widodo’s industrial policy implementation.  Chinese shares rebounded as investors went back into the market as both currency and stock markets stabilised helped by a robust services sector.

Australian and International Fixed Interest

Government bonds in Australia and abroad were driven by the policy trajectories of central banks. The US Federal Reserve implemented the first rate rise in almost ten years and forecast additional interest rate rises in 2016. The pace of tightening monetary policy is expected to be gradual.

In the US, the yield on the two-year US Treasury bonds bounced from 0.63%  to 1.05%over the quarter. The 10-year US Treasury bond yields rose to 2.27% from 2.04% in the previous quarter.

Locally, the Bloomberg Sovereign Australian Bond Index fell -0.5% over the quarter but performed well in 2015 rising 2.6% over the full year.

Cash

The Reserve Bank of Australia (RBA) left the official cash rate steady at 2.0% throughout the quarter. Despite ending the quarter on a more optimistic note, the RBA maintained its easing bias and implied that if an interest rate change was to occur it would be a decrease in interest rates down rather than an increase. The next RBA meeting will be held on February 2 2016.

Watch: VicSuper's approach to managing volatility with Chief Investment Officer, Oscar Fabian

Video - Managing volatility a three-pronged approach

New Global Alternatives manager

During the quarter, VicSuper appointed Wellington Management to manage a AUD360million portfolio known as the Wellington Management Liquid Alternatives Portfolio. This is a bespoke alternatives strategy that has been developed by the Wellington Management Liquid Alternatives team in consultation with VicSuper Investments.

The appointment forms part of the Fund’s Alternatives Strategic Asset Allocation which was increased during 2015 from 6% to 10%. The VicSuper Liquid Alternatives Portfolio aims to deliver key objectives including: attractive returns, risk diversification and volatility smoothing as well as capital preservation.

Key themes underlying financial markets in the next 12 months

2016 is likely to be characterised by ongoing central bank policy divergence. For example, while the US Federal Reserve has entered a tightening cycle and raised interest rates by 0.25% in December, the European Central Bank (ECB) moved in the opposite direction providing stimulus with an interest rate cut pushing interest rates further into negative territory. The Bank of Japan and People's Bank of China are also likely to remain in easing mode (leaving interest rates at current levels or potentially decreasing interest rates in an effort to stimulate growth) in 2016.

US Government bond yields should also rise moderately as inflation is expected to increase, especially if interest rates in the US rise faster than investors expect.

World GDP growth will likely be moderate, led by the US and China and to a lesser extent Europe, which should be helped by reasonable job creation in Europe and the US. Lower oil prices should also provide support for moderate global GDP growth. Australia's GDP should also grow as the impact of the lower AUD and lower oil price begins to flow through the broader economy, albeit below the long term average trend.

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.
Table 1: Summary of VicSuper's view on asset classes
  Highly
Unattractive
Moderately
Unattractive
Neutral Moderately
Attractive 
Highly
Attractive 
Equities          
Fixed Income          
Real Assets          
Alternatives          
Cash          

Source: VicSuper

VicSuper’s investment option returns for the December 2015 quarter

All of VicSuper’s member investment choice (MIC) options registered positive returns over the quarter. The Australian share market (S&P/ASX 300 Accumulation Index) gained 6.5% over the quarter while the US share market (S&P500 Index) also rose 6.5%. The Australian Shares option was the best performing MIC for the quarter.

Table 2: 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 0.48% 2.02% 2.88% 3.83% 0.56% 2.38% 3.43% 4.54%
Capital Secure 1.17% 3.64% 5.68% 4.91% 1.33% 4.05% 6.42% 5.65%
Capital Stable 1.58% 4.20% 7.04% 5.33% 1.76% 4.48% 7.86% 6.09%
Balanced 2.17% 4.70% 8.01% 5.56% 2.41% 5.02% 9.00% 6.35%
Growth 2.73% 5.23% 8.60% 5.42% 3.03% 5.59% 9.67% 6.14%
Equity Growth 3.21% 4.82% 9.40% 5.66% 3.58% 4.99% 10.43% 6.27%
Equity Growth Sustainability 3.03% 4.09% 9.06% 6.15% 3.36% 4.29% 9.97% 6.74%
Australian Shares* 6.78% 4.69% N/A N/A 8.34% 6.62% 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 December quarter

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

Source: Bloomberg, Barclays, MSCI

Global and Australian Equities

Notwithstanding the negative returns posted in the third quarter, equity markets rallied in the December quarter. The Australian sharemarket (S&P/ASX 300 Accumulation Index) returned 6.5% for the December quarter compared to 2.8% for the year. The S&P 500 Index also gained 6.5% for the quarter compared to a loss of 0.7% for the year.

Sharemarket gains globally occured early in the December quarter as volatility subsided and US Federal Reserve watchers anticipated a delay in interest rate rises. December saw the US Federal Reserve raise rates by 0.25% for the first time since 2006 following strengthening in the US labour market. The quarterly market gains were underpinned by larger capitalisation stocks which bounced back from the volatile third quarter. Merger and acquisition activity also remained buoyant.

The Energy sector across most global share markets weighed on performance over the quarter. The weakness was driven by the fall in oil prices and other commodities and concern that OPEC’s refusal to lower production will lead to a global oil glut.

The strong quarterly performance in Australian equities was driven by the Consumer Discretionary (+13.1%) and Health (12.3%) sectors while the Materials (-7.2%) sector dragged on performance.

As interest rates in the US begin to increase, the European Central Bank (ECB) continues to ease its monetary policy. Speculation in the Eurozone that the ECB would ease monetary policy substantially, pushed equity markets higher over October and November. The ECB’s December announcement however did not meet expectations and this was reflected in weak December performance. The EuroStoxx Index gained 5.4% in the December quarter.

Japan was the strongest performing equity market in this December quarter. The Tokyo Stock Exchange Tokyo Price Index (TOPIX) returned a strong 9.6% return. The greater part of these gains occurred in October.

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

Despite a strong start to the quarter Emerging Markets ended the quarter down with the MSCI Emerging Markets Index (Net in AUD) returning -2.8% and a return for the 2015 calendar year of -4.3%.

Markets in Eastern Europe and Latin America underperformed Asia with Greece, the Czech Republic and Poland being the main underperformers in Eastern Europe, whilst all countries in the MSCI Latin America index fell during the quarter.

Asian markets on the other hand performed better during the quarter, with Indonesia, China, Malaysia and India all posting positive (local currency) returns for the quarter. Indonesia performed well aided by a bounce in the rupiah and an improvement in investor sentiment towards President Joko Widodo’s industrial policy implementation.  Chinese shares rebounded as investors went back into the market as both currency and stock markets stabilised helped by a robust services sector.

Australian and International Fixed Interest

Government bonds in Australia and abroad were driven by the policy trajectories of central banks. The US Federal Reserve implemented the first rate rise in almost ten years and forecast additional interest rate rises in 2016. The pace of tightening monetary policy is expected to be gradual.

In the US, the yield on the two-year US Treasury bonds bounced from 0.63%  to 1.05%over the quarter. The 10-year US Treasury bond yields rose to 2.27% from 2.04% in the previous quarter.

Locally, the Bloomberg Sovereign Australian Bond Index fell -0.5% over the quarter but performed well in 2015 rising 2.6% over the full year.

Cash

The Reserve Bank of Australia (RBA) left the official cash rate steady at 2.0% throughout the quarter. Despite ending the quarter on a more optimistic note, the RBA maintained its easing bias and implied that if an interest rate change was to occur it would be a decrease in interest rates down rather than an increase. The next RBA meeting will be held on February 2 2016.

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