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Higher interest rates and concerns about regulatory changes in the banking sectors weighed on Australian share markets in April despite modest positive returns in a number of developed markets.
In this month’s update we take a look the recent performance of our two Sustainable investment options in light of the 1 September 2014 changes. We’re pleased to note that both have outperformed their mainstream equivalents in that time thanks largely to being overweight in the property sector and underweight in resources.
Performance of key markets
|| % Change
||3 Years p.a.
||5 years p.a.
|Australian Shares (ASX 300)
|US Shares (S&P 500) in US Dollars
|US Shares (S&P 500) in Australian Dollars
|Asian Shares (MSCI Asia)
|Australian Dollar (AUD/USD)
|Australian Fixed Interest (UBSA Composite)
|Cash (UBSA Bank Bill)
|Balanced (MySuper) option*
Returns are for periods to 30 March 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.
Market movements in April
The month of April was a mixed one for global share markets with modest positive returns in a number of developed markets and an impressive 18% surge in share prices in China.
Unfortunately this didn’t translate to positive outcomes for Australian investors. Firstly, the Australian market bucked the international trend and fell in the month. Higher interest rates and concerns about regulatory changes in the banking sector (which make up nearly 31% of the local index) saw bank share prices fall by nearly 6%. This was more than enough to offset a recovery in commodity prices and strong returns in the resources sector. Additionally, a 4% rise in the Australian dollar lowered the Australian dollar value of international share portfolios, and higher interest rates weighed on the value of fixed income portfolios as well (the value of bonds moves in the opposite direction to interest rates).
Revisiting our Sustainable investment options
We offer two Sustainable investment options (previously referred to as ‘Socially Responsible’)—Sustainable High Growth and Sustainable Balanced.
In the September 2014 Investment Market Update we talked about changes that were made to these investment options, particularly regarding companies and sectors that would no longer be eligible for investment. These options have always excluded investment in companies with significant exposure to tobacco (which as of 2012 has also been excluded from the entire Fund).
Since 1 September 2014, the list of exclusions extended to companies that derive a significant proportion of their profits from alcohol, gambling, weapons and fossil fuel exploration or production. As a result, these options now exclude some of Australia’s largest companies and in some cases, entire industry sectors.
With such a significant change to the investable universe, particularly in the context of the resource-heavy Australian stock market, we expect the performance of the sustainable options to deviate from the performance of the broader Australian stock market and their mainstream equivalents (our High Growth and Balanced options).
The September 2014 Investment Market Update noted that:
…all things being equal, we could expect the Sustainable options to underperform the mainstream options if the resource sector outperforms, given the negligible exposure the former has to that sector. [Conversely] we could expect the Sustainable options to outperform the mainstream options if the Australian listed property market outperforms, given the relatively high exposure the former has to the sector.
As it turns out there has indeed been quite a significant difference in the performance of the Sustainable options versus their mainstream equivalents, since the changes were made.
PERFORMANCE SUMMARY TO 30 APRIL 2015
Prior to the 1 September 2014 changes, Sustainable Balanced and Sustainable High Growth performed broadly in line with their mainstream counterparts. This was not surprising as the asset and sector allocations for both were broadly similar.
Since the changes to the two Sustainable options were introduced, their performance has been very strong in both absolute and relative terms. Over this eight month period the Sustainable High Growth option has recorded returns of 14.1% vs. 10.4% for its mainstream equivalent (see following chart) and over the same period the Sustainable Balanced option has returned 11.6% vs. 9.2% for its mainstream equivalent.
Relative performance – value of $100,000 invested
The main reason for the relatively large disparity in performance was foreshadowed in the September 2014 update, as quoted above. The following table shows the massive difference in recent performance of the listed property and resource sectors.
|| % Change
||Since 1 Sep 14
|Australian Shares (ASX 300 Accum)
|Australian Listed Property (ASX 300 Accum A-Reit)br />
|Australian Resources (ASX 300 Accum Resources)
While the resource sector has suffered from the collapse in commodity prices, the Australian listed property sector benefited from the relentless search for higher yielding assets in a low yielding world.
Looking forward – will the outperformance of the Sustainable options be “sustained”?
Retail investors are constantly reminded that past performance is no indication of future performance. Such warnings however often go unheeded as money chases the latest outperformer. Within our own member base we often see funds being switched into “hot” performers, the most notable recent example being the Global Environmental Opportunities (GEO) option. After recording a stellar 47.1% (after taxes) over the 12 months to 31 October 2013, we saw funds being switched into the option despite a ‘caveat emptor’ signal contained in the November 2013 Investment Market Update. Unfortunately, the GEO option has since underperformed the International Shares option.
In the minds of some commentators the crash in commodity prices led by oil is consistent with their belief that the fossil fuel industry is doomed.
In this context, choosing a Sustainable option to avoid such an industry would be a logical choice, and recent returns appear to vindicate such a position. If only investing was that easy! Factors underpinning the recent crash in commodity prices look to be cyclical rather than secular in nature, relating more to excess supply rather than a collapse in demand.
In particular, the dramatic increase in the supply of oil (from the USA) and iron ore (from Australia), has not been met with a commensurate increase in demand, largely driven by a slowdown in China. However, commodity prices tend to mean-revert (go back to the mean or average) and the “best cure for low prices is low prices” when investment and production is curtailed. We are already seeing evidence of cuts in production in various commodities that has led to a rebound in price expectations. Indeed the previous table shows that in April the recent trend was reversed, with the resource sector significantly outperforming the listed property market. Accordingly, mainstream options outperformed their Sustainable equivalents over April.
Over the longer term, we seek to ensure that the investment strategies of our Sustainable options have similar risk/return characteristics to those of the ‘high growth’ and ‘balanced’ investment portfolios. Importantly, both Sustainable options maintain the same target returns as their respective mainstream equivalents.
Only time will tell what investment option (Sustainable versus mainstream) will prove to be the superior performer. However we do know that, given the structural underweight position to the resources sector in the Sustainable options, the relative performance of that sector will be a key driver in determining the relative performance of those options.