Reflections on the past financial year from Chief Investment Officer, John Pearce
With global share and bond markets down around 10% on average, the 2022 financial year was generally a poor one for superannuation returns. Our (default) Balanced option recorded its first loss (-4.2%) since the Global Financial Crisis. It was only the fourth loss since the inception of the Balanced option 20 years ago and followed a record 17.6% posted in the 2021 financial year.
As we do every year, the following takes a look at the highlights and lowlights across individual companies and investment options. In a year that had many lowlights there were still some silver linings to be found.
Best performing companies (of significance to UniSuper)
With our funds under management now topping $110 billion, our big investments are usually confined to large companies. Our three top performing companies, where we have invested at least $1 billion are Sydney Airport, APA, and BHP.
Sydney Airport
After a round of rejections a consortium led by IFM Investors and Global Infrastructure Partners were ultimately successful in leading a takeover of Sydney Airport at a price of $8.75 per share. The price represented a significant 50% increase on the price at which the airport was trading before the bid was announced. With a 15% holding, UniSuper was the largest single owner of Sydney Airport and the takeover offer was conditional on UniSuper agreeing to maintain its holding in an unlisted structure. Of course we were very comfortable to maintain our position in what we believe to be one of the best infrastructure assets in the world.
APA Group
APA, Australia's largest natural gas infrastructure business, performed strongly through the financial year with the share price rising 33%. This represented a welcome bounce from the prior year when it was one of our worst performers. The company is benefitting from the increasing recognition that natural gas will be required as a transitional fuel as Australia reduces its reliance on coal fired generation and progressively shifts to renewables. APA also benefits in the current environment of rising inflation as over 80% of group revenue is linked to increases in the Consumer Price Index.
As an aside our Defined Benefit Division (DBD) has very significant holdings in both Sydney Airport and APA. The strong performance of both companies is a key factor underpinning the very healthy surplus of the DBD.
BHP
BHP benefited from high commodity prices as supply constraints were further impacted by the war in Ukraine. Furthermore, BHP’s strong operational and financial position (which is historically not typical of mining companies at this point in the cycle), resulted in a record US$17.7bn in declared dividends paid to shareholders. To put this number in perspective, it is equivalent to the total dividends paid by Microsoft, a company whose market capitalisation is more than 10 times BHP’s. BHP management also made structural changes to the business, unifying its corporate structure and sale (via merger) of its Petroleum business to Woodside Energy. These changes should see BHP well positioned to take advantage of the trend towards electrification.
Best performing investment option
In a sign of just how tough the last year was, the best performing option was Australian Equity Income (AEI) with +4.5%. It was certainly a far cry from the 48.9% posted by Global Environmental Opportunities over the prior year. The return did, however, compare favourably to the return of the broader Australian share market which fell -5.4% on an after-tax basis. AEI focuses on dividend paying stocks and benefitted from holdings in Macquarie Group, APA and BHP while avoiding many of the high-flying growth companies that fell with a thud during the year.
Worst performing companies (of significance to UniSuper)
GPT
Coming off a strong return (+24%) over the prior year, GPT recorded a total return of -9.6%. The listed property sector was one of the hardest hit by the sharp increase in interest rates. GPT also suffered from its significant exposure to the Melbourne CBD which has been impacted by COVID restrictions and delayed return to office of CBD workers. Whilst GPT’s earnings growth is expected to be dampened by rising debt costs in coming years we remain confident about our investment. The company has a quality diversified asset base, a strong balance sheet, and excellent management.
CSL
Built on home grown scientific excellence CSL could arguably lay claim to being Australia’s greatest company and has been a great investment for long term holders. Last financial year saw a rare negative performance of -4.6% as the company undertook a large capital raising to fund the acquisition of Swiss company, Vifor Pharma. The company also suffered from shortages of plasma collections (the building block of its major product lines), due to Covid restrictions.
Commonwealth Bank Australia
Against the backdrop of a rising interest rate environment, falling house prices, and the threat of higher defaults banks generally performed poorly over the year. CBA shares were down -4.5% which placed it in the middle of the pack. While we hold reasonably large positions in other banks, CBA is the only one in which our holding exceeds $1 billion.
We remain comfortable with the medium term outlook for Australian banks, as we do for the Australian economy. It’s also worth noting that one should avoid drawing comparisons between the COVID crisis and GFC in relation to impact on the banking system. By definition the GFC was basically a banking crisis, and the regulatory response has been one of strengthening banks capital and liquidity positions. Suffice to say that they are now in a strong position to withstand a downturn in economic conditions.
Worst performing investment option
Following a decade of very strong performance (14.1% per annum to June 2021), the International Shares option had a poor year returning -16.7%. The option has a strong bias to the (previously high flying) technology sector which has been brought back to earth with the rise in interest rates. While UniSuper’s in-house portfolios tend to focus on large companies with high profit generation, some of our external managers were exposed to the smaller (and less profitable) tech companies. In aggregate the exposure to small unprofitable companies is very low but with many of them experiencing losses the impact was still high - some of these companies experienced losses in excess of 50%.
The option also has a very small exposure to the energy sector given our long term (negative) outlook for fossil fuel related companies. As it turned out, energy was the strongest performing sector - up more than 30% for the year. This also led to the option lagging the broader equity market indices.
Concluding comment
As is always the case when markets experience steep losses there is no shortage of doom and gloom. And with central banks determined to aggressively hike rates until inflation is under control, it’s easy to make a case that the remainder of 2022 could be rocky. However, there are good reasons to be positive in the medium term. Ultra-low interest rates were required in an emergency, but their unintended consequences are a build-up of excesses and bubbles. Many bubbles have now been deflated and markets find themselves on a much more solid footing.
For more on how the economic cycle has played out and our short to medium term outlook, watch our latest investment update.
Please note that past performance is not a reliable indicator of future performance. The information above is of a general nature and may include general advice. It doesn’t take into account your personal financial situation, needs or objectives. Before making any decision in relation to your UniSuper membership, you should consider your circumstances, the PDS and TMD relevant to you (these are on our website), and whether to consult a qualified financial adviser. Comments on the companies we invest in aren't intended as a recommendation of those companies for inclusion in personal portfolios.