Investment update

30 June 2016

Share markets struggle amid political and economic uncertainty

The 2015-16 financial year was one dominated by sluggish economic growth and an increasingly unstable political environment.

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On the economic front, US economic growth has softened to 1.2%, though overall economic activity is solid and unemployment is low. In Europe and Japan there are more serious questions around the health of their economies. There has been aggressive central bank action, for example interest rates are zero or negative in both countries, but the measures don’t seem to be taking hold.

Economic growth in China slowed a little with investors concerned by talk of a housing bubble and banks having exposure to bad loans. However, lost in all the negative headlines was news that the Chinese economy grew at nearly 7% over the past year.

Australia bucked the global trend with the economy growing an impressive 3.1% on the back of strong exports and household spending. Our economy was also buoyed by low unemployment, low interest rates and low inflation.

There are a few concerns, such as no new industries emerging to make up for softer employment conditions in mining and manufacturing, but the outlook remains reasonably positive.

Emerging economies posted mixed performance, with some doing well and others struggling, particularly those dependent on commodities.

Commodity prices remain depressed relative to a few years ago, notably the oil price, on the back of oversupply and sluggish demand from China. Emerging economies dependent on commodity prices such as Brazil, took a big hit.

The political environment contributed to the uncertainty in investment markets. Britain voted to leave the European Union, the European migrant crisis worsened while a controversial US election campaign continued to create concern amongst investors. 

Looking at the asset classes

  • International shares lost 2.7% in their own currencies. Shares in emerging markets, which were most affected by the oil price fall, fell sharply by 14.2%.
  • Australian shares posted a small 0.6% positive return, with returns bolstered by dividend payments from companies. Small companies outperformed larger ones.
  • Australian and global listed property shares bucked the trend delivering strong returns, with investors attracted to their regular income payments.
  • Direct property, which makes up the bulk of our property investments, delivered a strong result on the back of increased investor interest in the sector’s secure income. 
  • Bonds performed strongly with bond prices spiking on the back of falling global interest rates. Many investors looked to park their money in the relative safety of bonds amid the global uncertainty. Indeed a large proportion of government bonds around the world traded at negative yields.
  • Cash returns were modest, but greater than inflation, with central banks around the world slashing interest rates in an effort to boost their economies.
Asset class performance – one year return to 30 June 2016
Asset class % pa, dividends and interest reinvested
Australian shares 0.6
International shares – in local currencies -2.7
International shares – hedged1 -1.4
International shares – unhedged2 0.4
Emerging market shares – unhedged2 -14.2
Australian listed property shares 24.6
Global listed property shares – hedged1 12.3
Direct property 13.4
Australian bonds
7.0
International bonds 8.6
Cash 2.2

Source: Invesco, Bloomberg, Mercer
1. Hedged means the returns from international assets are fully protected from movements in international currencies.
2. Unhedged means the returns from international assets will be fully impacted by movements in international currencies.

How have your investment options performed?

Here's a summary of how your investment options have performed over the 2015-16 financial year and over the long term.

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How have your investment options performed?

The financial year to 30 June 2016

Despite the doom and gloom and sluggish performance from share markets, performance for the financial year has been reasonable. Our diversified options, which most members invest in, returned: 

  • between 2.5% and 3.5% after fees and taxes for super 
  • between 3% and 4% after fees for pensions. 

International shares posted negative returns, mirroring the performance of global share markets.

There are two investment options I’d like to highlight.

  • The Australian shares investment option returned 4.8% for super after fees and taxes and 4.9% for pension after fees. This was an impressive 3.2% / 3.3% outperformance over the year. The option benefited from two things: favourable exposure to sectors and good stock picking. 
    • Sectors – we were overweight in sectors that performed well, such as industrial, consumer discretionary and healthcare companies and underweight in sectors which struggled such as financial companies. 
    • Stock picking – although the portfolio is well diversified, a handful of companies stood out as top contributors: Domino’s Pizza Enterprises, REA Group Limited and Fisher & Paykel Healthcare.
  • The Australian bonds investment option returned 2.8% for super and 3.3% for pension. While this was well below the market return, we don’t manage the portfolio in line with the benchmark, instead taking a long term focus. While this means we might miss out on some short term performance, we’re comfortable our approach will deliver members a better result over the long term.
Investment options performance – one year return to 30 June 2016
  Super
% pa, after fees and taxes
Pension
% pa, after fees
Aggressive 2.7 3.2
Growth 3.1 3.6
Balanced 3.2 3.7
Stable 3.1 3.5
Capital Guarded n/a 3.2
Australian shares 4.8 4.9
International shares -3.1 -2.0
Property
8.9 10.0
Bonds 2.8 3.3
Cash 1.8 2.5

Long term results

When looking at your super, it’s important to remember that it’s a long term investment. So the focus should be on long term returns.

Our investment philosophy is a simple one; to provide you with strong, consistent and importantly, sustainable investment returns over the medium to long term. Our investment options’ long term objectives are built around this philosophy.

Each investment option has an investment objective linked to the Consumer Price Index or CPI, the main measure of change in the prices of goods and services. We then look to add extra returns on top of the CPI. The amount of extra return you can expect is linked to the amount of risk you’re willing to take: investment options with the greatest risk, that is exposure to shares and property, have the greatest potential for extra returns, but also the greatest risk of negative returns.

Here are two tables: one listing returns over 10 years, the other over five years.

Investment options performance versus investment objective – five years to 30 June 2016

Each option delivered strong results over five years, beating their investment objective. Pleasingly each of the diversified options, which most members invest in, beat their benchmark by between 1% and 2% for super and 2% and 3% for pension. The international shares option stood out, delivering a double digit return, well above its objective.

The super return for the Cash investment option was the only one to marginally miss its objective.

  Investment
objective
Super
% pa, after fees and taxes
 Pension
% pa, after fees
 
Aggressive 6.8 8.5 9.7
Growth 5.8 7.8 9.0
Balanced 5.3
6.9 8.2
Stable 4.8 5.9 7.0
Capital Guarded n/a n/a n/a
Australian shares 6.8 6.9 7.5
International shares 6.8 10.3 12.8
Property 5.3 7.3 8.8
Bonds 3.8 5.0 6.2
Cash 2.8 2.7 3.5
Investment options performance versus investment objective – 10 year return to 30 June 2016

Looking over 10 years, the results were mixed. The dominant event of the past 10 years was the global financial crisis of late 2007. The sharp fall in share markets at the time is still having an impact on returns, albeit this is reducing over time. 

As a result, you can see from the table that all investment options missed their investment objectives. Both growth assets, such as shares, and defensive assets, such as bonds, underperformed their investment objectives.


Investment
objective
Super
% pa, after fees and taxes
Pension
% pa, after fees
Aggressive 7.4 5.1 6.1
Growth 6.4 5.3 6.4
Balanced 5.9 5.4 6.5
Stable 5.4 5.2 6.2
Capital Guarded n/a n/a n/a
Australian shares 7.4 5.4 6.5
International shares 7.4 3.9 5.4
Property 5.9 3.5 4.4
Bonds 4.4 5.7 6.9
Cash 3.4 3.6 4.4
 Investment objective  Super % pa, after fees and taxes  Pension % pa, after fees 
Aggressive 6.8 8.5 9.7
Growth 5.8 7.8 9.0
Balanced 5.3
6.9 8.2
Stable 4.8 5.9 7.0
Capital Guarded n/a n/a n/a
Australian shares 6.8 6.9 7.5
International shares 6.8 10.3 12.8
Property 5.3 7.3 8.8
Bonds 3.8 5.0 6.2
Cash 2.8 2.7 3.5

Looking to the future

A key part of the work we do is to consider the range of possible market outcomes and structure our portfolios and investment options around this.

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Looking to the future

One point I always highlight up front is that the economic outlook and what happens in financial markets don’t always align. Predicting what can happen in markets, particularly over the short term, is also fraught with danger.

However, a key part of the work we do is to consider the range of possible market outcomes and structure our portfolios and investment options around this.

Economically our base case scenario hasn’t changed from previous updates. We have a positive view on the prospects for the global economy and in turn investment markets. Interest rates remain low, and the world’s largest economy, the USA, is showing solid growth characteristics. Meanwhile, economic growth has slowed in China but the numbers are still strong. We also expect the Australian economy to continue performing strongly. The short term outlook for emerging markets is mixed but medium term looks positive. Europe and Japan are a worry and we’re keeping a close eye on how things play out.

There are risks to this, most notably the political outcome in the US, ongoing weakness in the European and Japanese economies and concerns around the size of bad loans in China. An emerging risk is rising nationalism, particularly in Europe. With nationalism comes a closing of borders which would see less trade which in turn leads to lower global economic growth.

For investment markets, we believe the outlook for growth assets such as shares isn’t outstanding but it’s reasonable in an environment of low inflation and very low interest rates.

Looking at the asset classes

  • Share prices look expensive but given the low returns expected from cash and bonds we hold the view that it’s appropriate to remain invested in riskier assets. We also expect company profits to hold up well. Returns though are still expected to be only modest.
  • Direct property looks attractive given the regular income stream from rent these assets deliver, particularly given interest rates are so low.
  • Alternative assets are an interesting sector and one we’re increasingly focused on. They include infrastructure, private debt and hedge funds. We’ve been able to find some good opportunities in a range of areas in recent times and we expect this to continue. Watch this space.
  • The outlook for bonds and cash is challenged given low interest rates.

Signing off

David Bell
Chief Investment Officer

While every care has been taken in the preparation of this material, neither AUSCOAL Superannuation Pty Ltd (the “Trustee”) ABN 70 003 566 989, AFSL 246864 nor Mine Wealth and Wellbeing Superannuation Fund (the “Fund”) ABN 16 457 520 308 makes any representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.  Past performance is not a reliable indicator of future performance.  This material has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs.  An investor should, before making any investment decisions, consider the appropriateness of the information in this material, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.  This material is for the use of members of Mine Wealth and Wellbeing Superannuation Fund only and is provided solely in the context of their superannuation investment.