Investment market update - February 2015

US_John_Pearce_081---560x315

February 2015

To print this update, download a PDF version.

Global share markets generally started the year with a positive tone which continues into the early days of February.

2014 delivered good returns for the majority of our members in absolute terms and also relative to the performance of our peers. This month’s update outlines the drivers of the outperformance. This month, we also touch on some corporate activity in the property market which we once again find ourselves heavily involved in. One of our major investments, Novion, is the subject of a friendly merger proposal from Federation Centres. Whether or not the proposal experiences the twists and turns as the Westfield saga, time will tell.  

Performance of key markets

   % Change
Month FYTD 1 Year 3 Years p.a. 5 years p.a.
Australian Shares (ASX 300)
3.2 5.7 12.1
14.0 8.5
US Shares (S&P 500) in US Dollars
-3.0 2.9 14.2 17.5 15.6
US Shares (S&P 500) in Australian Dollars
1.9 24.7 27.9 30.3 18.7
Asian Shares (MSCI Asia)
2.5 3.6 12.1 6.1 5.3
Australian Dollar (AUD/USD)
-4.8 -17.5 -10.7 -9.8 -2.6
Australian Fixed Interest (UBSA Composite)
1.6 6.7 10.4 7.0 7.4
Cash (UBSA Bank Bill)
0.3 1.6 2.7
3.1
3.8
Balanced (MySuper) option*
2.5 8.6 13.8 14.0
9.7

Returns are for periods to 31 January 2015. Past performance is not an indication of future performance.
* Returns relate to our Accumulation (not Pension) investment options and are published after fund taxes and investment expenses, other than account-based fees. 

Easier global policy settings boosts local returns

Central bank policy actions dominated January, including the decision by the Swiss National Bank to end their Swiss Franc peg against the Euro, the announcement by the European Central Bank (ECB) to commence quantitative easing, a surprise rate cut by the Bank of Canada and increased speculation that Australia’s own Reserve Bank (RBA) would ease rates. This broad swing to more accommodative policy settings helped drive already depressed bond yields to even lower levels, boosting a number of equity markets around the world. The yield-focussed components of the Australian market (banks and property trusts in particular) were a beneficiary, resulting in one of the best returns across developed markets.

Newspaper_580x328

Balanced option outperforms peers

Given that 2014 was a reasonably good year for most Australian superannuants, it is particularly pleasing to report that our Balanced option was (in one league table at least*) the top performer. The Balanced option, with over $13 billion in funds, is our largest accumulation investment option and, as is the case with the majority of our peers, is the default investment option for most of our Accumulation 1 and 2 members.

While topping a performance table obviously has a feel-good element to it, one year returns are not of any particular significance to the vast majority of our members. However, consistently solid short-term performance will add up to good long-term performance, and it’s the latter that we pay most attention to at UniSuper. In this regard our members will be pleased to know that all of our Accumulation diversified investment options (from Capital Stable to High Growth) rank in the top quartile over periods of 5, 7 and 10 years.

The recent drivers of our outperformance relative to the broader industry are noteworthy in that we appear to have a substantially different portfolio bias than the other top performers (with the caveat that we are dealing with imperfect information). While other top performers appeared to have a strong bias towards unhedged global equities (particularly the US), our bias was in high yielding Australian equities. While the Australian market overall was a poor performer relative to the USA (5.3% versus 13.7% respectively), blue-chip high yielding Australian stocks had a great run. For example the returns on some of our largest positions were Commonwealth Bank (+15.9%), Telstra (20.1%), Scentre (29.7%), GPT (34.5%), Novion (16.1%), Transurban (33.1%), Sydney Airport (30.5%) and APA (35.5%).

In terms of current portfolio positioning we are maintaining a heavy bias towards the ‘quality yield’ theme, and time will tell whether or not this will keep us ahead of the pack. The start of 2015 has seen a continuation of strong outperformance of high yielding equities, and the recent cut in cash rates by the RBA added to the momentum. Of course the same dynamics that have placed us at the top of the pack can also work against us, and in this regard we are exposed to relative underperformance if Australian corporate earnings substantially deteriorate. Amid the gloom of crashing commodity prices we generally remain positive. Together with lower funding costs, corporate Australia will enjoy the benefits of a competitive exchange rate and some slack in the labour market that will keep a lid on wage growth. In a world gripped with fears of deflation, Australia is in a relatively sweet spot, experiencing mild inflation. Who would have thought that we would be welcoming inflation?

Federation Centres and Novion

On Monday 3 February, Federation Centres (ASX code: FDC) announced a proposed merger with Novion (ASX code: NVN). Novion was previously known as Colonial Retail Property Trust and is one of our major investments—UniSuper is the second largest shareholder with a 11% stake, currently valued at around $845 million. We therefore find ourselves once again in the thick of corporate action in the retail property sector (recall Westfield/Scentre). At the time of writing we are still digesting the details and will consider our position next week during our quarterly Investment Committee meeting.

Novion is the owner of some of the highest quality shopping centres in the country (like Chadstone in Melbourne and Chatswood Chase in Sydney) so it features prominently in a number of our portfolios. When a number of retail property trusts were close to implosion during the GFC, Novion sailed through largely unscathed, largely due to the prudent way in which it was managed. Federation has a far more chequered history, being the owner of the retail assets previously owned by Centro, a very poorly managed highly leveraged business that did implode during the GFC. Steven Sewell, who will be the CEO of the new (yet to be named), company, took over the reins of Federation in January 2012 and has done an excellent job in tuning around the business. Suffice to say that we hold Steve in very high regard.

The main reason we have not held a significant position in Federation to date is based on some concerns about the overall quality of the portfolio. Under Steven’s leadership the quality has steadily improved and we will be looking for a commitment to further upgrading.     

The deal requires 75% approval from Novion shareholders, so our 11% stake is significant. The proposal has the unanimous support of both boards and the support of Novion’s largest shareholder (the Gandel Group), so there is a very high probability a deal will get done. Of course, whether or not it is this deal remains to be seen. Watch this space.

This is not intended to be an endorsement of any of the listed securities named above for inclusion in personal portfolios and is not a recommendation of how to vote the listed securities named above. The above material reflects UniSuper’s view at a particular point in time having regard to factors specific to UniSuper and its overall investment objectives and strategies.
Past performance is not an indicator of future performance. This information is of a general nature only and may include general advice. It has been prepared without taking into account your individual objectives, financial situation or needs. UniSuper’s investment strategies will not necessarily be appropriate for other investors. Before making any decision in relation to your UniSuper membership, you should consider your personal circumstances, the relevant product disclosure statement for your membership category and whether to consult a licensed financial adviser. This information is current as at 6 February 2015.