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Investment strategy

By Brian Parker - July 2018

Sunsuper Chief Economist Brian Parker explains what’s happening around the world and at home, where markets are heading and what it all means for your super investment.

The Sunsuper Balanced option for Super-savings accounts produced a 3.8 per cent return for the June quarter, and 10.7 per cent for the financial year ended June 2018. Longer-term returns remain solid, with the Balanced option posting returns of 8.6 per cent p.a. over the last three years and 9.8 per cent p.a. over the five years to the end of June. Returns from the major publicly traded asset classes are shown in the table below.

Returns to 30 June 2018 3 months % 1 year % 3 year % p.a. 5 year % p.a. 10 year % p.a.
Cash – Bloomberg AusBond bank bill index 0.5 1.8 1.9 2.2 3.3
Australian diversified fixed income – Bloomberg AusBond Composite Bond Index 0.8 3.1 3.4 4.4 6.1
Global diversified fixed income – Citigroup World BIG hedged to $A 0.1 1.7 3.7 4.9 6.9
Australian listed property – S&P/ASX300 REITs Index 9.8 13.2 10.0 12.2 6.1
Global listed property – FTSE EPRA/NAREIT Index hedged into A$ 7.6 7.5 7.9 9.7 7.6
Australian shares – S&P/ASX300 Accumulation Index 8.4 13.2 9.1 10.0 6.3
Developed market shares – MSCI World, unhedged in $A 5.8 16.0 10.5 15.4 9.7
Developed market shares - MSCI World, hedged in $A 4.0 12.1 10.4 13.4 9.5
Emerging market shares – MSCI EM, unhedged in A$ -4.3 12.7 7.4 10.0 5.3

Sources: Datastream, Bloomberg. Past performance is not a reliable indication of future performance.

Share market returns

After a disappointing start to 2018, share markets in the developed world produced solid returns in the June quarter. All the major developed share markets produced positive returns, with shares in the UK, Canada and France among the stronger performers.

In contrast, share prices in the emerging markets generally declined over the quarter as global trade tensions weighed heavily on sentiment. Emerging economies tend to be highly trade dependent. Shares in China and Brazil were among the worst performing in the emerging world.

A generally weaker Australian dollar during the quarter boosted the returns from unhedged international shares.

Australian shares outperformed developed markets over the quarter and were among the best performing in the world. Telstra’s woes dragged down the performance of the Telecommunications sector, but all other major industry sectors gained ground.

Both Australian and global listed real estate securities (REITs) performed very strongly over the quarter. This partly reflected some easing in the upward pressure on bond yields. However, it is also something of a correction after the significant sell off in these securities during the March quarter.

Fixed income markets

Longer-term bond yields declined in Germany and the UK, but rose in the US and other major bond markets. Political turmoil in Italy prompted a sharp rise in Italian bond yields in May. Australian fixed income outperformed both cash and global fixed income over the quarter. Sovereign bonds tended to outperform corporate and other non-government securities over the quarter. Australian 10-year bond yields continue to trade below US 10-year yields.

The global economic environment

The world economy accelerated during 2017, across both the developed and emerging economies. However, inflation in most major economies generally fell short of market expectations and central bank objectives.

Economic growth in the major economies softened somewhat at the start of 2018, although more recent data suggest that conditions improved in the June quarter. While geopolitical and trade tensions remain a source of uncertainty for financial markets, neither are expected to be severe enough to have a significant negative impact on the global economy, at least in the near term. At this stage we believe the combination of accommodative monetary policy, a generally healthy financial system, and easier fiscal policy (particularly in the US) makes a major global downturn unlikely.

The Australian economy

Australia’s economy grew by 1.0 per cent in the March quarter and by 3.1 per cent over the year to March, a marked improvement on a somewhat lacklustre second half of 2017. Business surveys show high levels of business activity and confidence. However, there remains significant slack in the labour market: last year’s surge in full-time employment appears to have stalled in 2018. Wage and price inflation remain subdued: headline CPI inflation has been below the Reserve Bank’s target range for 13 of the last 14 quarters and key measures of wages growth have only barely accelerated. We continue to expect a further, gradual acceleration in overall economic growth and inflation, but neither is likely to be soon enough or fast enough to force the RBA to raise interest rates any time soon.

What is Sunsuper doing?

In traditional asset classes, the strong performance of emerging markets during 2017 reduced their relative attractiveness and we eliminated our overweight exposure to those markets prior to their June quarter sell-off. Concurrently, we increased foreign currency exposure on the basis of its relative attractiveness versus the Australian dollar and defensive characteristics.

In developed share markets, our managers consider shares in Europe and Asia more attractive than in the US, where finding value remains more challenging. Our fixed income portfolios continue to favour higher quality corporate bonds over sovereign bonds; although, over the past year we have increased our exposure to sovereign bonds as yields became more attractive.

We view the diversification benefits provided by unlisted assets, as well as carefully selected hedge funds and alternative strategies as very attractive. Despite prospective returns in unlisted and alternative assets coming down, we continue to find opportunities in these asset classes that offer attractive medium to long-term returns, particularly relative to listed markets. During the June quarter, our private equity team made investments in GFL Environment (a Canadian waste management and recycling business) and we acquired the Siemens’ Power Services Division headquarters in Orlando, Florida for our property portfolio.

Help to choose your investments

There are a number of Sunsuper options that give exposure to a diversified range of asset classes, including both public market and unlisted investments. In fact, Sunsuper offers members a range of 20 investment options to allow you to tailor your investments to your needs.

If you want more information or advice to decide which investment option or group of options best meets your needs, our financial advisers are here to help. Please give Sunsuper a call on 13 11 84.

Past performance is not a reliable indication of future performance. Sunsuper employees provide advice as representatives of Sunsuper Financial Services Pty Ltd (ABN 50 087 154 818 AFSL No. 227867) (SFS), wholly owned by the Sunsuper Superannuation Fund.