This investment overview expands on the outline included in the 2019 AvSuper Annual Trustee Report.
Investment Option 2018–19 returns^
|1 Year returns||10 Year rolling returns||Rolling years||Investment Objective|
|Cash||1.8%||2.8%||10||Bloomberg Ausbond Bank Bill Index||2.0%|
|Conservative Growth||4.5%||N/A#||10||CPI + 1.0%||2.0%|
|Stable Growth||5.3%||6.9%||10||CPI + 2.0%||3.0%|
|Balanced Growth||5.6%||N/A#||10||CPI + 3.0%||4.0%|
|Growth (MySuper)||6.3%||8.5%||10||CPI + 3.5%||4.6%|
|High Growth||6.6%||10.2%||10||CPI + 4.5%||5.5%|
|Australian Shares||5.9%||N/A#||10||S&P/ASX 300 Accumulation Index||11.4%|
|International Shares||6.5%||N/A#||10||MSCI World Ex Australia Index||8.2%|
^Returns are net of fees and taxes
#Long term data is unavailable for these options
In a year of the lowest cash rates on record, we are pleased to return positive results above our targets for the financial year for all AvSuper members. The global stock markets had a wild ride with a rise, fall and eventual rise again with positive investment returns across all AvSuper investment options for 30 June 2019. Members in the default investment option, Growth (MySuper) achieved a 6.3% return after fees and taxes, which was above the CPI + 3.5% investment objective. The most important return metric for members is the long-term investment return which has continued to strengthen (measured over 10 years in the above table).
Results for Key Asset Classes
The global economy in general has slowed further during the financial year, largely restrained by the US-China trade conflict. Central banks have favouring rate cuts over rate hikes mainly due to inflationary lows. The US economy remains robust whilst China has been stimulating their economy in response to the trade dispute with the US. The Australian economy grew 1.8% but this was the slowest pace in 9.5 years, noting falling house prices across Australia. The Reserve Bank reassessed policy settings in response to stubbornly low inflation and believes that unemployment can fall further. The Australian dollar fell by 5.1% over the year whilst the ASX All Ordinaries was up 6.5%. Australia was one of the strongest bourses for the year. Infrastructure is expected to continue be a key driver of performance in the next year with AvSuper appointing new Managers which should be seen in the next financial year. AvSuper’s returns in 2019 were broadly above benchmarks and held strongly across the various options in line with their associated risk profiles. AvSuper has continued its conservative but active investment approach while maintaining strong cash balances and positioning itself to be overweight in traditional sectors (Real assets – Property & Infrastructure). The active approach remains robust and we continue to monitor our investments carefully. Our expectation is more volatile markets but we are ensuring that the portfolio delivers results that can withstand any unexpected downturn in the continued low growth environment.
The Australian share market (All Ords) was up approx. 6.5% for the financial year. AvSuper’s Australian Shares portfolio finished the year below the benchmark for the first time in many years but has produced a return of over 9% in rolling 10 years. AvSuper’s value manager, Schroders performed below expectations due to unexpected events quarantined in few stocks. Cooper Investors has returned over 12.9% on average since inception and has been AvSuper’s best performing manager for seven years. The outlook for the sector remains strong, yet uncertain and has been dominated by the banking royal commission. Falling house prices have also affected the sector however trade exports were strong with record trade surplus recorded.
The major shift in monetary policy from tightening to easing has significantly increased the volatility of global share markets. The US Fed was a dominant factor in volatility as equity markets fell sharply in the last quarter of 2018 but then rebounded in 2019 when it reversed to more supportive actions going forward. AvSuper’s International shares performance was 6.99% for the full financial year after taking into account AvSuper’s currency hedging strategy. Exceptional performance was shown from MFS (17.7%) with Ariel producing average returns of 9.0%. Our emerging markets manager Martin Currie had a difficult year with emerging market currencies wavering against the US Dollar and returned 4.0% for the year.
Real Assets consists of both Infrastructure and property assets including commercial, office and retail assets. Property had a healthy 9.0% return and Infrastructure 13.0%. The manager with the largest weighting to our property, Investa benefited this sector with a 12.1% return for members. QIC Global Infrastructure Fund produced a healthy 15.4% return while our investment in RARE Listed Infrastructure produced 15.8%.
The sector performed in line with expectations at 10.5%. All managers produced solid returns with Coller International our secondaries manager providing 19.6% and our star performer Partners Group giving members 20.8% return for the year. Private debt manager Hayfin also produced good returns in AUD being 15.7% and 7.8% in respective funds we are invested in.
Alternatives & Fixed Income
The Alternative sector was renamed in 2017 to enable investments in both growth and defensive characteristics. This sector returned 3.5% during the year. Underlying managers include a credit manager Bentham (2.3%) and Kapstream (3.8%) and Aurum (4.2%) who is a hedge fund of funds manager. In Fixed Income, Loomis Sayles, AvSuper’s longest standing managers returned 7.3%, while AMP Australian Bonds produced an outstanding 9.7% return for the year.
Currency & Cash
The Australian dollar had another volatile year trading for the year down by 5.1% against the USD finishing the year around AUD 0.69c vs USD. The currency decline has a drag mainly on the International equities returns but also other sectors such as Private Markets. AvSuper had a defensive passive hedging currency strategy in place to help reduce the impact of volatility in currencies felt by members.
Interest rates remained at historical lows with AvSuper’s cash returning 2.2% before tax and fixed interest an exceptional 7.2% mainly from Australian bonds. Further to this, our in-house management of term deposits provided 2.6% which added to the returns in this space. Cash remains as vanilla cash as possible with capital preservation the driving factor.
A cautious but positive outlook for public markets and sentiment into private sector expansion is continuing. There is continual market obsession looking for the next recession as there hasn’t been a recession for a record number of years and there is a consensus that the markets are all in a late cycle phase. The flattening of the yield curve in the US has been signalling a downturn, together with stagnating inflation. There still appears to be a consensus with investment managers that there may not be a recession in the following year. The Trustee remains vigilant and continues to seek the best positions to gain returns in these constrained conditions.
During 2018-19 there was a number of new manager appointments in Brookfield, North Haven Infrastructure Partners, and a further take-up to Coller Capital and Partners Group, all of which will make their way into the portfolio in 2019-20 and provide members with new exposures in infrastructure and private equity. We continue to look for new opportunities as they arise and review and monitor our existing suite of managers for member best outcomes.