Headwinds and tailwinds
Headwinds and tailwinds

At this time of year, it’s good to take stock and look back at markets and our investment strategy—what’s gone right, what’s gone wrong, and what can be learned.

In doing this, what strikes me as important is how VicSuper has invested consistently and successfully through the market cycle. I’ve chosen 2017 and 2018 because these periods provide a reasonable framework to determine the success (or otherwise) of our investment strategy.

Comparing share markets in 2017 and 2018 certainly makes for interesting reading. Both years had a steady flow of geopolitical headlines, but the market’s response to them has been vastly different. In 2017, the market shrugged off all concerns, posting new highs and surging ahead from August that year. In 2018, however, the market reacted with much more volatility to a similar set of concerns.

To illustrate this divergence, in the chart below we track the path of global share market returns in 2017 and 2018 (indexed to 100). Next to that, we set out the key market themes and provide comments relating to them.

At this time of year, it’s good to take stock and look back at markets and our investment strategy—what’s gone right, what’s gone wrong, and what can be learned.

In doing this, what strikes me as important is how VicSuper has invested consistently and successfully through the market cycle. I’ve chosen 2017 and 2018 because these periods provide a reasonable framework to determine the success (or otherwise) of our investment strategy.

Comparing share markets in 2017 and 2018 certainly makes for interesting reading. Both years had a steady flow of geopolitical headlines, but the market’s response to them has been vastly different. In 2017, the market shrugged off all concerns, posting new highs and surging ahead from August that year. In 2018, however, the market reacted with much more volatility to a similar set of concerns.

To illustrate this divergence, in the chart below we track the path of global share market returns in 2017 and 2018 (indexed to 100). Next to that, we set out the key market themes and provide comments relating to them.

Performance of global share markets - 2018 vs 2017
Performance of global share markets - 2018 vs 2017




Performance of global share market - 2018 vs 2017

Note: returns are for the MSCI World Index in local currency indexed to 100
Performance of global share market - 2018 vs 2017
Note: returns are for the MSCI World Index in local currency indexed to 100

No 'NEW' News...

Key market themes in 2017:

  • Equity markets posted new all-time highs
  • Increased tensions on the Korean peninsula
  • Elections in various parts of Europe (Austria, Netherlands, France)
  • Brexit uncertainty and election in June
  • Trump/Republican fiscal stimulus measures
  • US Federal Reserve lifting interest rate three times

Key market themes in 2018:

  • Trump administration’s protectionist trade policies against China, Mexico, Canada and Europe
  • European geopolitical risk with Italy’s public finance issues and tensions with EU
  • Uncertainty around Brexit and Theresa May’s leadership

Comments

  • We think investors have become much more sensitive to risk, selling down equities later in 2018 on concerns about a possible (US) recession and tighter monetary conditions.
  • The market’s view that we are close to the end of a 10-year bull run in equities has also fed the equity sell-off.

No 'NEW' News...

Key market themes in 2017:

  • Equity markets posted new all-time highs
  • Increased tensions on the Korean peninsula
  • Elections in various parts of Europe (Austria, Netherlands, France)
  • Brexit uncertainty and election in June
  • Trump/Republican fiscal stimulus measures
  • US Federal Reserve lifting interest rate three times

Key market themes in 2018:

  • Trump administration’s protectionist trade policies against China, Mexico, Canada and Europe
  • European geopolitical risk with Italy’s public finance issues and tensions with EU
  • Uncertainty around Brexit and Theresa May’s leadership

Comments

  • We think investors have become much more sensitive to risk, selling down equities later in 2018 on concerns about a possible (US) recession and tighter monetary conditions.
  • The market’s view that we are close to the end of a 10-year bull run in equities has also fed the equity sell-off.

Resilience and proactivity
Resilience and proactivity

While share market performance in the last two years has flipped (and with it, it seems, the patience of some investors), we have built increased resilience into our investment strategy this year - diversifying proactively away from shares into real assets and alternatives. We continue to do this. This strategy has held the portfolio in good stead through the bouts of share volatility seen in February this year and over the last three months.

In the face of this volatility, our core message has remained the same: review the situation before making knee-jerk reactions to short-term market ‘noise’ and consider the consequences of trying to time the market by switching into and out of cash (which is a backward-looking strategy). Our investment decisions have been sound and forward-looking. Importantly, they have helped to both build and protect member returns during this time.

In the next section I’ll briefly review these key decisions, why we made them, and how they have helped investment returns.

Christmas pudding

The proof is in the pudding


After riding the share market gains in 2017 and early 2018, we have not chased short-term market performance. Our investment strategy saw us miss out on some of the equity market resurgence around mid-2018. But this situation reversed in a dramatic way over the third and fourth quarters, where our more risk-aware stance has helped protect the portfolio from fast-sliding share markets.

Highlights of our investment strategy over the last 12 months are set out below:

  • Asset allocation is key - we enhanced the investment diversification and reduced some of the risk in our diversified Options. This investment decision has proven particularly positive. In our Growth MySuper Option, for example, we reduced portfolio exposure to Shares in favour of Real Assets (such as property and infrastructure) and Alternative Assets (such as private equity).

  • We made a significant number of new investments - we invested in property, infrastructure and timber, both domestically and globally (in the US and Europe), as well as a number of investments in Alternatives. Each investment provides differentiated sources of returns which as mentioned have helped protect the portfolio in the equity downturn. Bolstering our investment team with experienced asset class specialists has enabled us to source new and attractive investment opportunities.

You can learn more about our investments in property and infrastructure by downloading our Real Asset fact sheets:


567 Collins St Melbourne!

567 Collins Street
Melbourne


Melbourne Airport

Melbourne
Airport


Ross River solar farm

Ross River Solar Farm
Queensland


Finerge wind farm

Finerge Wind Farm
Porto Portugal

  • The portfolio’s exposure to Fixed Interest has meant a lower exposure to share markets and thus a lower risk associated with shares—We expected that this position would help make our diversified options portfolio more resilient in volatile market environments, which has been evident in the last few months.

  • Bringing responsible investment mainstream - this was done to help improve outcomes on our carbon footprint reduction. This year we built on our A+ rating from the Principles of Responsible Investment (PRI) by developing our responsible investment beliefs and policy across all VicSuper Options. PRI is an independent body and the world’s leading advocate for responsible investment. We have advocated to the companies we invest in on the big issues like climate change and human rights. And we have invested in sustainable outcomes such as the $1 billion international equity customised carbon strategy, Ross River Solar Farm (refer to fact sheet above) and Scandlines hybrid ferries, measuring how the impact we create is contributing to the Sustainable Development Goals, a collection of development goals set by the United Nations General Assembly.

While share market performance in the last two years has flipped (and with it, it seems, the patience of some investors), we have built increased resilience into our investment strategy this year—diversifying proactively away from shares into real assets and alternatives. We continue to do this. This strategy has held the portfolio in good stead through the bouts of share volatility seen in February this year and over the last three months.

In the face of this volatility, our core message has remained the same: review the situation before making knee-jerk reactions to short-term market ‘noise’ and consider the consequences of trying to time the market by switching into and out of cash (which is a backward-looking strategy). Our investment decisions have been sound and forward-looking. Importantly, they have helped to both build and protect member returns during this time.

In the next section I’ll briefly review these key decisions, why we made them, and how they have helped investment returns.

Christmas pudding

The proof is in the pudding


After riding the share market gains in 2017 and early 2018, we have not chased short-term market performance. Our investment strategy saw us miss out on some of the equity market resurgence around mid-2018. But this situation reversed in a dramatic way over the third and fourth quarters, where our more risk-aware stance has helped protect the portfolio from fast-sliding share markets.

Highlights of our investment strategy over the last 12 months are set out below:

  • Asset allocation is key—We enhanced the investment diversification and reduced some of the risk in our diversified Options. This investment decision has proven particularly positive. In our Growth MySuper Option, for example, we reduced portfolio exposure to Shares in favour of Real Assets (such as property and infrastructure) and Alternative Assets (such as private equity).

  • We made a significant number of new investments—We invested in property, infrastructure and timber, both domestically and globally (in the US and Europe), as well as a number of investments in Alternatives. Each investment provides differentiated sources of returns which as mentioned have helped protect the portfolio in the equity downturn. Bolstering our investment team with experienced asset class specialists has enabled us to source new and attractive investment opportunities.

You can learn more about our investments in property and infrastructure by downloading our Real Asset fact sheets:

567 Collins St Melbourne  
567 Collins Street, Melbourne

Melbourne Airport  
Melbourne Airport

Ross River solar farm  
Ross River Solar Farm, Queensland

Finerge wind farm 
Finerge Wind Farm, Porto Portugal

  • The portfolio’s exposure to Fixed Interest has meant a lower exposure to share markets and thus a lower risk associated with shares—We expected that this position would help make our diversified options portfolio more resilient in volatile market environments, which has been evident in the last few months.

  • Bringing responsible investment mainstream—This was done to help improve outcomes on our carbon footprint reduction. This year we built on our A+ rating from the Principles of Responsible Investment (PRI) by developing our responsible investment beliefs and policy across all VicSuper Options. PRI is an independent body and the world’s leading advocate for responsible investment. We have advocated to the companies we invest in on the big issues like climate change and human rights. And we have invested in sustainable outcomes such as the $1 billion international equity customised carbon strategy, Ross River Solar Farm (refer to fact sheet above) and Scandlines hybrid ferries, measuring how the impact we create is contributing to the Sustainable Development Goals, a collection of development goals set by the United Nations General Assembly.

Pole position
Pole position

While we are forward-looking in our investment views, no-one has a crystal ball into market performance. The market has clearly taken a bearish view of shares and it appears that market volatility and uncertainty will remain dominant themes over the next few months at least. We believe our portfolio remains well positioned to weather further market volatility.

By having a resilient, proactive investment strategy, a well-diversified portfolio, and a long-term view, we can continue to source new investment opportunities and manage risk effectively on behalf of our members.

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.

While we are forward-looking in our investment views, no-one has a crystal ball into market performance. The market has clearly taken a bearish view of shares and it appears that market volatility and uncertainty will remain dominant themes over the next few months at least. We believe our portfolio remains well positioned to weather further market volatility.

By having a resilient, proactive investment strategy, a well-diversified portfolio, and a long-term view, we can continue to source new investment opportunities and manage risk effectively on behalf of our members.

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.