Investment update with John Pearce - July 2023
There was no shortage of bad news over the course of the 2022-23 financial year. War kept raging in Ukraine, inflation remained stubborn, and central banks kept up the fastest rate-hike cycle in decades.
In his latest investment update, Chief Investment Officer John Pearce gives an overview of the highlights and lowlights across companies and investment options.
Key points in Chief Investment Officer John Pearce’s video:
- All UniSuper investment options recorded positive returns, with our (default) Balanced option recording 10.3% (or 11.8% for tax-free pension accounts).
- Major drivers of performance were inflation, tight labour market, the fastest rate-hike cycle in history, and two key themes—the slump in the commercial property sector and the rise of artificial intelligence (AI).
- Our highest performing investment options were Global Companies in Asia at 21.0%, and International Shares at 16.4%.
- The Australian Bond option was our worst performing option, returning 0.9% for the year. Bond yields are ultimately driven by inflation and inflationary expectations. Where bond yields go from here will depend on the path of inflation.
- Our Listed Property option returned only 2.4% for the year. Performance was impacted by the downturn in the commercial property sector.
- Of the companies in which we invest over $1 billion, our best performers were Apple, Microsoft and BHP. Our worst performers were ASX and APA.
Watch the latest video
Read the transcript
Hello, I'm John Pearce. Welcome to this investment update. We just ruled off another financial year. So today I'd like to give a high-level overview of what drove investment returns generally. We’ll then have a look at the best and worst performing investment options. We’ll then further drill down and have a look at the best and worst performing individual investments. I’m pleased to say that over the last year, all 16 of our accumulation options recorded positive numbers. Our Balanced option—10.3% for accumulation members, and 11.8% if you're in a tax-free pension account. Those numbers actually put us pretty close to the top of the league table amongst super funds, which is great news, but we're not getting too carried away because we're only talking about one-year numbers.
Like every year, there's a range of returns across different options and this year was no different. Before we get onto the best and worst performing, however, let's talk about the major drivers generally in terms of financial markets. I'll put these drivers into three categories—economic, financial, and thematic.
Economic: inflation is falling, but it still remains too high. Unemployment is low; the labour market remains very tight.
Financial: it’s all about the fastest rate-hike cycle in decades.
Thematic: I'm going to draw on two big themes—one, the slump in the commercial property sector, and the second is the rise of artificial intelligence, AI, as a major investment theme.
So, in that context, here are the best performing investment options. Right at the top, Global Companies in Asia, 21%. It’s a great result, and it actually follows a string of strong results. Over the last decade, that option has returned about 13% per annum on average. In second place, our International Shares option.
What do both of these options have in common? They have to be fully invested in global shares. What's more, they are heavily invested in the US and that makes them heavily invested in the tech sector. I think this table sums it up perfectly.
Chart 1: Chart showing the companies comprising the 'Magnificent Seven' (Tesla, Amazon, Apple, Google, Meta, Nvidia, Microsoft) and how much of UniSuper's International Shares and Global Companies in Asia investment options are invested in them. Percentage of option invested in the tech sector: International Shares (31%), Global Companies in Asia (32%). Percentage of option invested in the 'Magnificent Seven': International Shares (16%), Global Companies in Asia (23%).
Both options—about a 30% exposure to the tech sector. And then we have this concept of the ‘magnificent seven’. These are the seven companies that the market feels are at the forefront of AI, and the market has, quite frankly, been swept up into AI euphoria.
I'll give you a classic example. In May, Nvidia announced its results. In a single day, Nvidia's market valuation increased by USD $184 billion. To put that in perspective, that's the equivalent of the total value of BHP and Macquarie combined.
The bottom of the table—the Australian Bond option, 0.9%. Why? Bond yields rose. They rose from about 3% to about 4%, and when bond yields rise, bond prices fall, and hence that subdued return. Fortunately, the coupons that we were receiving on those bonds was more than enough to compensate for the loss in capital value, so it was able to eke out a positive return.
Where do bond yields go from here? It's a bit of a toss of the coin. If inflationary expectations reduce, if the market starts to believe that the central banks will get inflation within that 2-3% target range, bonds are likely to rally. If inflation stays high and the markets lose confidence in central banks, we could see even higher yields. So, as I said, not particularly insightful—a toss of the coin.
I'd also like to mention the Listed Property option—it recorded a 2.4% return. Yes, it's positive, but this option aims to be 100% invested in growth assets so we'd like to see the returns closer to the top of the table. It’s 50% invested offshore, 50% Australia. What's dragging it down? Two things—property reacts negatively to rising rates, but it's really that commercial property sector, particularly overseas. If you look at New York, San Francisco, Chicago, it's very hard to get people back into those offices to work.
Where do we go from here with commercial property? We are getting to the point where valuations are at such a level that so much bad news is already priced in. The problem is, it's hard to see a catalyst for a rise in values anywhere in the near term.
That's the best and worst in terms of the [investment] options. What about the next level down when we talk about individual investments?
UniSuper is a $120 billion fund now, so we really need to talk about investments that make a difference to us. For the purposes of this, we're going to restrict the conversation to those investments where we have over $1 billion invested.
If I ask even non-investors to guess who the top two performers were over the last year, I reckon you’d go pretty close to guessing it. Yes, it’s those tech darlings, Apple and Microsoft. Apple, 43%. Microsoft 30%.
These are like the gifts that keep giving, and it's pretty hard to say anything about these companies that you don't already know about. There are currently about 2 billion Apple devices being used in the world. If you think about Apple, you're thinking iPhone and iPads, laptops. What about watches? What company sells the most watches in any given year? It's not a Swiss company. It's not a Japanese company. It's Apple. We look at Apple, we look at the prices they charge, and it almost doesn't matter, because once you are in that Apple ecosystem, you find it very difficult to leave.
Microsoft. Another great story, it has an install base of about 1.6 billion. If you look at Microsoft Windows, there’s no real serious competitor in terms of enterprise software. They are great stories.
If I ask you to guess the third-best performer, you might have more troubles here. Well, this is it—BHP. Yes, it's the Big Australian with a return of 25%. BHP is nowhere near as exciting as Apple or Microsoft but let me say, there is nothing boring about a company that has distributed $44 billion in dividends over the last two years. To put that in some context, that is equivalent to the total market value of Woolworths.
Another important point when we look at these three companies, have a look at this chart here. If you look at the increase in market value of BHP relative to the others, it's been a much more gradual increase. So yes, it's not as exciting, but when we do see pullbacks, corrections in stock prices, BHP’s may not be as dramatic as the other two.
Chart 2: Chart displaying the increase in market value of Apple, Microsoft, and BHP over the last 10 years.
Once again, let's have a look at the bottom of the table. We have two investments with over $1 billion that recorded negative returns for the year. The worst performer, ASX. And this is largely due to a bungled project to replace the core system, CHESS. It's really been a debacle from go to woe. It's been a failure of strategy and a failure of execution. We're still holding on to ASX for a few reasons. Firstly, the core business is actually running very well. It's very solid.
We've had a change of management and those responsible for failures have been held accountable. At current prices it's offering a dividend yield of around 5% and that well and truly meets our hurdle return for our defined benefit portfolio, which is where the bulk of this asset actually sits.
Then we have APA down 9%. This is a completely different story and APA has been well managed. The business has done very well. The issue here is just one of a correction in share price. The previous year, APA was actually up around 33%. That is a large increase for an infrastructure company, so we’re just seeing this as a pretty healthy correction. We've got a lot of confidence in APA. About 90% of its revenues are tied to inflation, so there's reason to be positive about its near-term prospects.
That's the best and the worst for the last financial year. A concluding comment. We see active traders invariably chase previous winners and dump previous losers. The story of APA of the last couple of years is a cautionary tale. It's very hard to get that timing right.
At UniSuper, we take a long-term view and our big positions are in quality companies that we pay a reasonable price for. We figure that's the best way of trying to avoid a permanent loss of capital.
When it comes to investments, it's often the case that slow and steady wins the race, which brings me back to our Balanced option. Over the last few decades, you see the performance of the Balanced option has been very consistent.
Chart 3: Chart showing that: in the Balanced investment option’s 34-year history, it has only yielded negative returns four times; the Balanced option’s negative return to 30 June 2022 was its first negative return since the global financial crisis.
Indeed, it’s the reason why we believe it's still the most suitable option for those people who don't elect to make an investment choice. It's a bit of a ‘set and forget’ strategy for those people. It sounds overly simplistic, but often in life, the simple solutions are the best.
Thank you very much for listening.
Reflections on the past financial year
For more information on what drove performance for the financial year, read John Pearce’s end-of-year reflection.
*Past performance isn’t an indicator of future performance.
This information is of a general nature and may include general advice—it doesn’t take into account your individual objectives, financial situation or needs. Our investment strategies won’t necessarily be appropriate for other investors. Before making any decision in relation to your UniSuper membership, you should consider your circumstances, the relevant PDS and TMD, and whether to consult a qualified financial adviser. For a copy of the PDS or TMD, call us on 1800 331 685 or visit unisuper.com.au/pds.
This information is current as at 20 July 2023. Holdings are as at 30 June 2023 and are subject to change without notice. Comments on the companies we invest in aren’t intended as recommendations of those companies for inclusion in personal portfolios. UniSuper’s portfolios have been designed to suit UniSuper, and may not be appropriate for others. The above material reflects our view at a point in time, having regard to factors specific to us and our overall investment objectives and strategies.
Prepared by UniSuper Management Pty Ltd (ABN 91 006 961 799, AFSL No. 235907) on behalf of UniSuper Limited (ABN 54 006 027 121) the trustee of UniSuper (ABN 91 385 943 850, AFSL No.492806) the fund.