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Our Chief Investment Officer, Andrew Howard looks at the key investment themes moving into 2019 and how they will shape our investment strategy this year. More importantly, he reminds us that a sound investment strategy is not based on reacting to short term ‘noise’ but one that is proactive, focused on delivering long term investment objectives.

Listen to the podcast

Our Chief Investment Officer, Andrew Howard looks at the key investment themes moving into 2019 and how they will shape our investment strategy this year. More importantly, he reminds us that a sound investment strategy is not based on reacting to short term ‘noise’ but one that is proactive, focused on delivering long term investment objectives.

Playing the long game
Playing the long game

As we move into 2019, the key themes in financial markets of the last few months are still in play. We can also be reasonably confident that others will arise that are not yet in the headlines. Then there are the ‘black swan’ events—those negative surprises that no one saw coming. Our job at VicSuper is to assess the opportunities and risks in markets and asset classes so that we can deliver solid, consistent investment returns for our members over the long term.

One of the most important lessons from last year was to look through the ‘market noise’ and focus on the investment themes that truly mattered. By investing ‘through the cycle’ and managing risk through a well-diversified portfolio, our flagship Growth Option was able to deliver a positive return (1.02%) in calendar year 2018 against a backdrop that saw all major developed equity markets fall over the same period. In addition to a diversified, risk-aware investment strategy, our exposure to a falling Australian dollar helped boost the return.

In the context of falling share markets (see chart below), the positive return for our Growth Option was especially encouraging and shows the success of our investment decisions to date. It’s also worth noting the seven year return of the Growth Option (9.45% per annum; not shown in the chart) to demonstrate the solid and sustainable long-term performance we’re delivering for our members.

As we move into 2019, the key themes in financial markets of the last few months are still in play. We can also be reasonably confident that others will arise that are not yet in the headlines. Then there are the ‘black swan’ events—those negative surprises that no one saw coming. Our job at VicSuper is to assess the opportunities and risks in markets and asset classes so that we can deliver solid, consistent investment returns for our members over the long term.

One of the most important lessons from last year was to look through the ‘market noise’ and focus on the investment themes that truly mattered. By investing ‘through the cycle’ and managing risk through a well-diversified portfolio, our flagship Growth Option was able to deliver a positive return (1.02%) in calendar year 2018 against a backdrop that saw all major developed equity markets fall over the same period. In addition to a diversified, risk-aware investment strategy, our exposure to a falling Australian dollar helped boost the return.

In the context of falling share markets (see chart below), the positive return for our Growth Option was especially encouraging and shows the success of our investment decisions to date. It’s also worth noting the seven year return of the Growth Option (9.45% per annum; not shown in the chart) to demonstrate the solid and sustainable long-term performance we’re delivering for our members.

VicSuper Growth Option returns in 2018 vs major share markets

VicSuper Growth option returns in 2018



Source: VicSuper; returns are total returns expressed in local currency (except China)

VicSuper Growth Option returns in 2018 vs major share markets

VicSuper Growth option returns in 2018

Source: VicSuper; returns are total returns expressed in local currency (except China)

Themes vs. fundamentals

Two main themes dominated share markets last year and remain relevant today. The first theme is rising US interest rates. The US Federal Reserve’s decision to turn off the ‘money tap’ by raising rates caused markets and assets to be re-priced globally and has been a major driver of the market volatility of the last few months. The second theme is geopolitical uncertainty. The market has become more anxious about the escalation of the US-China trade war and US fiscal problems (soaring US debt/tax cuts), and within the EU, the continued uncertainty surrounding Brexit and by Italy’s fiscal tensions.

The market is broadly positive on the economic fundamentals. In the US, inflation and unemployment are low, Chinese growth (running at about 6%) is slowing but still positive, and growth in the Eurozone is gradually improving. In Australia, inflation, employment and interest rates remain low but debt levels are high, the housing market has softened, and the upcoming federal election will create investment uncertainty in the coming months.

So how will these themes and drivers impact on our investment strategy in 2019? What have we learned from last year that will benefit member returns this year? 

Balancing act

It was easy for investors to become complacent as we entered 2018. Equity markets went from strength to strength, interest rates were low, company profits delivered record highs on a frequent basis and economic growth was synchronised globally. Which is exactly why we began to ‘de-risk’ the investment strategy in the second half of 2017 and into the first half of 2018.

So it’s no big surprise that 2018 again reminded us of the importance of asset allocation and diversification. Being proactive by adding or removing risk in the portfolio was crucial to our investment strategy in 2018. So was being ‘true to label’ across our asset classes and investment options—being ‘authentic’ in the way we invest, protecting the portfolio when required while taking up attractive return opportunities as they arose. While markets continued to rise steadily for much of the year, we were not chasing these short-term returns, preferring to take risk ‘off the table’ by reducing our equity exposure and maintaining our fixed interest exposure.

Themes vs. fundamentals

Two main themes dominated share markets last year and remain relevant today. The first theme is rising US interest rates. The US Federal Reserve’s decision to turn off the ‘money tap’ by raising rates caused markets and assets to be re-priced globally and has been a major driver of the market volatility of the last few months. The second theme is geopolitical uncertainty. The market has become more anxious about the escalation of the US-China trade war and US fiscal problems (soaring US debt/tax cuts), and within the EU, the continued uncertainty surrounding Brexit and by Italy’s fiscal tensions.

The market is broadly positive on the economic fundamentals. In the US, inflation and unemployment are low, Chinese growth (running at about 6%) is slowing but still positive, and growth in the Eurozone is gradually improving. In Australia, inflation, employment and interest rates remain low but debt levels are high, the housing market has softened, and the upcoming federal election will create investment uncertainty in the coming months.

So how will these themes and drivers impact on our investment strategy in 2019? What have we learned from last year that will benefit member returns this year? 

Balancing act

It was easy for investors to become complacent as we entered 2018. Equity markets went from strength to strength, interest rates were low, company profits delivered record highs on a frequent basis and economic growth was synchronised globally. Which is exactly why we began to ‘de-risk’ the investment strategy in the second half of 2017 and into the first half of 2018.

So it’s no big surprise that 2018 again reminded us of the importance of asset allocation and diversification. Being proactive by adding or removing risk in the portfolio was crucial to our investment strategy in 2018. So was being ‘true to label’ across our asset classes and investment options—being ‘authentic’ in the way we invest, protecting the portfolio when required while taking up attractive return opportunities as they arose. While markets continued to rise steadily for much of the year, we were not chasing these short-term returns, preferring to take risk ‘off the table’ by reducing our equity exposure and maintaining our fixed interest exposure.

Why did we ‘de-risk’ the portfolio in 2018?

  • We saw threats on the horizon in share markets, especially around geopolitical issues and US monetary policy, not to mention share markets becoming more expensively priced.
  • Our exposure to fixed interest was a good way to reduce share market risk to protect members’ retirement savings.
  • We enhanced the diversification of the portfolio by selectively investing in new property, infrastructure and timber assets.

How is the portfolio positioned moving into 2019?

  • Our portfolio is relatively well positioned with enhanced downside protection from a year ago to weather further share market volatility as well as take advantages of investment opportunities that arise from continued volatility.
  • We will continue to invest proactively and in a responsible manner, investing in sustainable outcomes across all our investment options.

Why did we ‘de-risk’ the portfolio in 2018?

  • We saw threats on the horizon in share markets, especially around geopolitical issues and US monetary policy, not to mention share markets becoming more expensively priced
  • Our exposure to fixed interest was a good way to reduce share market risk to protect members’ retirement savings.
  • We enhanced the diversification of the portfolio by selectively investing in new property, infrastructure and timber assets.

How is the portfolio positioned moving into 2019?

  • Our portfolio is relatively well positioned with enhanced downside protection from a year ago to weather further share market volatility as well as take advantages of investment opportunities that arise from continued volatility.
  • We will continue to invest proactively and in a responsible manner, investing in sustainable outcomes across all our investment options.

The smoother the better - our aim is to deliver a consistent pattern of returns

In pursuing our mission of optimising members’ retirement savings, we must remain true to our investment principles. By doing this, investment returns for all VicSuper Options (excluding cash) are ahead of their individual objectives. What is also important is how we deliver investment returns.

You can see in the chart below the smoothness and consistency of the VicSuper Growth Option’s returns over time. A critical part of this is our ability to manage risk in the portfolio in times of share market turbulence. This provided significant protection for investment returns in the latter months of 2018.

VicSuper Growth Option vs ASX 200 - Performance over last five years

VicSuper Growth Option vs ASX200 

Source: VicSuper

The smoother the better - our aim is to deliver a consistent pattern of returns

In pursuing our mission of optimising members’ retirement savings, we must remain true to our investment principles. By doing this, investment returns for all VicSuper Options (excluding cash) are ahead of their individual objectives. What is also important is how we deliver investment returns.

You can see in the chart below the smoothness and consistency of the VicSuper Growth Option’s returns over time. A critical part of this is our ability to manage risk in the portfolio in times of share market turbulence. This provided significant protection for investment returns in the latter months of 2018.

VicSuper Growth Option vs ASX 200 - Performance over last five years

VicSuper Growth Option vs ASX200 

Source: VicSuper

Well placed for 2019

Time will tell as to how the above-mentioned investment themes will play out in 2019. It seems that markets will remain risk-averse until there is more certainty on big issues like the US-China trade dispute, interest rate policy (particularly in the US) and Eurozone geopolitics, at the very least.

We will continue to maintain a diversified approach, managing risk effectively in asset classes (e.g. equities) where that is required while being proactive and flexible in other asset classes (e.g. infrastructure, direct property), taking up new investment opportunities as they arise.

What is most important is our ability to operate an investment strategy that can negotiate challenging markets, source new investment opportunities, and manage risk effectively on behalf of our members.

Any investment decision made is not done in the context of the short term outlook but rather taking a proactive approach to ensuring that the investment strategy has every opportunity to deliver on the long term investment objectives.

In times when the market is more volatile, it can help to talk to someone about your super. Talk to us before you consider switching portfolios. At VicSuper, you get financial advice at no additional cost in most cases. For more about our advice services, go to vicsuper.com.au/help-and-advice

For more about how we harness different sources of investment returns for our members:

— Discover more about how we invest your super
— Read other articles in Investment News
— Discover more about the benefits you get as a VicSuper member

Important information

This advice has been prepared without taking into account your objectives, financial situation or needs. You should therefore consider the appropriateness of the advice in light of your individual circumstances before acting on the advice. You should also obtain and consider a copy of the relevant Product Disclosure Statement available at www.vicsuper.com.au before making any decisions. VicSuper Pty Ltd ABN 69 087 619 412, AFSL 237333, Trustee of Victorian Superannuation Fund ABN 85 977 964 496.

Well placed for 2019

Time will tell as to how the above-mentioned investment themes will play out in 2019. It seems that markets will remain risk-averse until there is more certainty on big issues like the US-China trade dispute, interest rate policy (particularly in the US) and Eurozone geopolitics, at the very least.

We will continue to maintain a diversified approach, managing risk effectively in asset classes (e.g. equities) where that is required while being proactive and flexible in other asset classes (e.g. infrastructure, direct property), taking up new investment opportunities as they arise.

What is most important is our ability to operate an investment strategy that can negotiate challenging markets, source new investment opportunities, and manage risk effectively on behalf of our members.

Any investment decision made is not done in the context of the short term outlook but rather taking a proactive approach to ensuring that the investment strategy has every opportunity to deliver on the long term investment objectives.

In times when the market is more volatile, it can help to talk to someone about your super. Talk to us before you consider switching portfolios. At VicSuper, you get financial advice at no additional cost in most cases. For more about our advice services, go to vicsuper.com.au/help-and-advice

For more about how we harness different sources of investment returns for our members:

— Discover more about how we invest your super
— Read other articles in Investment News
— Discover more about the benefits you get as a VicSuper member

Important information

This advice has been prepared without taking into account your objectives, financial situation or needs. You should therefore consider the appropriateness of the advice in light of your individual circumstances before acting on the advice. You should also obtain and consider a copy of the relevant Product Disclosure Statement available at www.vicsuper.com.au before making any decisions. VicSuper Pty Ltd ABN 69 087 619 412, AFSL 237333, Trustee of Victorian Superannuation Fund ABN 85 977 964 496.