Quarterly market updates
2017 June Quarterly update
“Only a matter of time
when the river runs dry…….”
Hunters and Collectors
Fiscal Year End
We end the financial year with good returns and an improving global economy, yet just a little anxious about returns from here. I know we’ve been saying this for a while, and like the boy who cried wolf the warnings get lost after repeated calls, but we cannot stress more than ever that returns WILL BE LOWER compared to the past five years. Our investment beliefs have not changed. We believe that successful long term investing requires patience, and at times an ability to be a little bit contrarian against the prevailing consensus in the markets.
Review for Financial Year 2016-17
All of the investment options end the financial year with good absolute returns. The higher-risk options did extremely well with double-digit returns for our members. Unsurprisingly cash and diversified bonds returned in the low single digits, as interest rates remain at record lows - both in Australia and globally. Despite the good returns this year, we strongly advise members to place more emphasis on longer-term results - as one year returns for the higher risk options vary considerably year to year. The table below shows the Superannuation option returns over 1, 3 and 5 years ending 30 June 2017.
|Super Returns to 30 June 2017*||1 Year||3 Years||5 Years|
*Selected Statewide Super Pre-Retirement Member Investment Options. Returns are net of fees and tax. Pension investment option returns are not shown, but are available on the website.
Statewide Super’s default MySuper option continued to outperform the median peer fund over the past financial year. The chart below shows the MySuper option relative to the median since inception (4 years). We are pleased that performance since inception has Statewide Super as one of the top-performing funds in Australia.*
*SuperRatings Fund Crediting Rate Survey June 2017
The good returns have come from a number of sources over the past 4 years. The largest contributors include the higher risk asset classes such as Equities, Property, Credit Infrastructure and Private Equity. Seven years ago we were optimistic regarding the long-term outlook of these asset classes, and recent performance seems to have more than reflected that view. However we have become more cautious in recent years, as prices in these asset classes have risen and now look fully-valued.
There has been much debate in the press about the merits of active vs. passive investing, particularly for Australian shares. We are the first to admit that retail investment fees for active management can be excessive (up to 2%), but the fees paid by institutional investors like Statewide Super are less (0.63% including performance fees). The graph below shows the long-term returns for the Statewide Super Australian Shares pension option (gross of tax and net of fees), compared to our peers and its passive equivalent - Vanguard’s Australian shares. Over 10 years, Statewide Super’s institutional active management of Australian shares has added in excess of 2% per annum over a comparable passive equivalent and pleasingly outperformed our peer average as well. We see no need to join the passive party while our institutional and hard-to-access investment managers provide a good source of excess returns for Statewide Super’s members. This also applies to the Diversified Fixed Income option, although less so in Global Equities.
Source: Statewide Super Australian Shares Pension Option, SuperRatings SRP50 Australian Shares Index Median, Vanguard Australian Shares Index Fund.
Australian and Global Economies
Some good news to report on the Australian and global economies. Economic growth coupled with employment growth has reduced unemployment rates in many parts of the world, including USA, UK, core Europe, Japan and Australia. Sure, places like Australia have further to go - but at the same time a year ago, we were a little concerned that the tepid growth rates would not improve unemployment. That’s certainly not the case, and we are happy to be proven wrong. Coupled with the improving economies, we are also finally seeing increases in interest rates within the US and Canada.
A “Martian” landing on Earth in 2017, from its past visit in 2007, would be quite perplexed at interest rates being near 1% and zero in many parts of the world - despite good growth rates and unemployment rates approaching 2007 levels. The lower rate scenario of the past 9 years that provided tail winds to asset classes globally will be headwinds for the next few years. Many parts of the world need to extract themselves from negative real rates, which have only served to fuel private debt accumulation and inflated asset class valuations. Be cautious! You should think carefully before borrowing heavily to invest or speculate in equities or property, given the low rates and high valuations on offer. As Warren Buffet is fond of saying, “when the tide goes out we will find out who’s been swimming naked” and I suspect there will be whole beaches of “investors” exposed!
The Australian economy continues to grow and has avoided the “technical” recession of two quarters of negative growth in gross domestic product. Interest rates remain at historical lows, but property prices and household debt are at all-time highs. The federal government announced a spending budget that seeks to maintain economic growth, and the Reserve Bank of Australia is in a difficult position of balancing low rates, high debt and a higher Australian dollar, complicating our transition from the post mining boom. Whilst we are still largely a nation of farming, mining and housing, there are other parts of the economy such as tourism, education and professional services adding to growth. Growing hubs of entrepreneurs and venture capital will also provide some opportunities for new businesses to develop.
The complicating factor, other than the incredibly low global interest rates, is China. China continues to grow, but its over-reliance on credit growth, over-investment, a fixed exchange rate, capital controls, and over-capacity in many industries will one day hurt its economy. The numbers out of China are impressive, and it’s leading in many areas of investment and even innovation, but the negatives of opaque state-owned lending are rising to the surface. China can only hope that the end game to this is manageable; although the history of excessive debt build up rarely ends well.
South Australia has had an interesting fiscal year with respect to power prices and energy security. I for one remember the storm and black-out only too well, given it was on my 50th birthday! Despite this setback, the local economy (like the rest of the world) has started to create more jobs and improve - although it has a long way to go.
Finally, we should say that the geopolitical ructions of last year may one day effect the markets and the global economy. We should own up and say that the past 12 months has in fact been quite stable in terms of overall market volatility, despite the unexpected events of Brexit and President Trump - although it is clear that markets cannot price or forecast geopolitical events. The best way to manage this, and other unpredictable risks, is through a well-diversified portfolio.
Outlook and Summary
We end the year with a lot to be happy about. The returns are good, global economies are improving and feared geopolitical issues haven’t eventuated. That’s the good news. The bad news unfortunately (and I’ve said this for a few years) is that returns from here are expected to be lower, there will be greater volatility, and investors seem too sanguine about future prospects. Returns are difficult to forecast, but over say 7 years, we expect cash and bonds will be in the low single digits, equities mid-single digits, and alternatives approximately the same. A long-term investment strategy that embraces diversification remains the best approach for pre and post-retirement. We thank you for your support over the past year and value your feedback.
The information provided contains general advice which does not take into account your specific objectives, financial situation or needs. You should consider the appropriateness of this general advice with regard to your personal circumstances, obtain independent financial advice, and consider any applicable Product Disclosure Statement (‘PDS’) before making an investment decision. Statewide Super’s PDS is available at www.statewide.com.au or by calling 1300 18 65 18. Investment returns are not guaranteed, all investments have risk, and past performance is not a reliable indicator of future performance.
Investment returns are not guaranteed, all investments have risk, and past performance is not an indicator of future performance