Reflections on the past financial year
Even the rampant spread of COVID-19 wasn’t enough to stop global share markets soaring over the past financial year.
The Australian market’s return of around 28%, impressive as it seemed, was only a middle-of-the-pack result. The US market, home to the world’s dominant IT behemoths, continued to be the standout performer.
Against this backdrop, our Balanced investment option (the default for most of our members) was up 17.6% for the financial year—a record since it began in 2000. It’s an outcome that would’ve been considered highly improbable, if not impossible, at the start of July 2020.
While most members can look forward to healthier account balances, the rising tide didn’t lift all boats equally—with some companies and sectors faring much better than others.
With our funds under management now topping $100 billion, our big investments are usually confined to large companies. Therefore, in this article we’ll just look at companies in which we’ve invested at least $500 million.
Here are our top three performers.
James Hardie was a standout performer, returning +68% over the financial year. The company is the leading global manufacturer of fibre cement siding products used in new home construction and renovation. The combination of the expanded role of the home, low mortgage rates, and limited ability to spend on areas such as travel has seen spending on the home become a priority. This has resulted in a significant increase in demand for James Hardie products as people seek to move into larger detached homes and renovate existing homes.
After topping the table in the previous financial year with a return of +86.5%, the Apple juggernaut added another 51% over the latest financial year. When the largest company in the world is growing profits by around 40% it’s doing something right, and most of us know the story. Anyone who joins the Apple ecosystem tends to find that it’s hard to leave.
A result that would’ve surprised most observers is the dramatic reversal of fortunes of our major banks. Westpac led the way, returning 50%. Our four major banks are effectively highly leveraged to the health of the Australian economy—and as the economy staged a V-shaped recovery, so did the banks. It’s worth bearing in mind, of course, that they all entered this crisis with better looking balance sheets than when they entered the GFC.
For the second year running, our best performing investment option was Global Environmental Opportunities, up a whopping 48.9%. The drivers of this performance are the same drivers that underpinned its top ranking in the 2020 financial year. It invests in companies that contribute to, and benefit from, pervasive and secular environmental themes. The three biggest contributors to the option’s return were Tesla (+189%), SolarEdge (+83%), and Enphase Energy (+254%). Everyone now knows the Tesla story. SolarEdge and Enphase Energy manufacture inverters, which are necessary in the installation of solar panels. Taken together, they dominate the US residential solar market.
With a torrent of money continuing to flow into environmental, social and governance (ESG) themed funds, companies that are directly involved in the ‘green theme’ are in high demand. It’s got to the point where, in public markets at least, there is evidence to suggest that the growth in capital chasing the theme is much faster that the growth in investment opportunities. The result is valuations that keep rising to seemingly unjustifiable levels. Then again, readers might recall that we alluded to lofty valuations in last year’s version of this article—and they’ve just gotten loftier.
Worst performer (of significance to us)
Two of our large investments actually recorded negative returns for the financial year—ASX (-6%) and APA Group (-16%).
After featuring as one of our top three performers in two of the past three years, ASX was getting ‘priced to perfection’. It needed more good news to justify the high price and anything negative was likely to spur an exaggerated reaction to the downside. Accordingly, the market didn’t take it well when the ASX announced a further delay in the expected launch date of its core systems (CHESS) replacement. Adding to this were technical incidents including a site crash and market outage.
APA’s share price has been impacted by the possibility of the company acquiring offshore assets, which in turn would necessitate a capital raising. To raise capital, a company typically sells shares at a price below the prevailing market price. There’s also a possible ESG discount being applied to APA, given its primary source of revenue is gas transportation. APA currently has a small exposure to renewables (5% of revenues) but we fully expect this to grow over time. Indeed, APA was a recent underbidder for a renewables asset portfolio. They have our full support to diversify to enhance long-term sustainability, and we accept this could be at the expense of lower returns in the short term.
While it’s obviously disappointing to see major investments deliver negative returns in such a strong year, we take some comfort that both companies remain operationally sound and highly profitable. Over the long term, both investments have delivered strong returns. APA has returned over 10% since we started building a large stake in 2013, and ASX has returned over 15% since we started building a stake in 2014.
Our large investments in Transurban and Sydney Airport have also performed relatively poorly (+3.3% and +4.7% respectively) in a strong market. With toll roads and airports being directly impacted by the pandemic, the underperformance is understandable. However, we have not lost a single ounce of confidence in the long-term outlook for these businesses. Indeed, just a few days into the new financial year, a ‘take-private’ bid was launched for Sydney Airport at $8.25, representing a massive 42% premium to the price at which it was trading at the time. We’re Sydney Airport’s largest shareholder, and the bid is conditional on us effectively backing the bid by maintaining our investment in the new (unlisted) vehicle. It will be many months—and probably a few rounds to be played between potential buyers and sellers—before this game gets settled. Watch this space.
The worst performing investment option for the financial year was Australian Bond (-1.1%). Given that government bonds are considered a safe investment used for capital preservation, a negative return over a one-year period is unusual (and unwelcome). The negative return is an outcome of the extraordinarily low level of rates we find ourselves in. Australian Government bonds, held to maturity, will be repaid in full. However, the capital value of the bonds will actually rise and fall as interest rates fall and rise respectively. As the worst fears of economic recession and deflation receded, bond yields rose (and prices fell). The income received on the bonds wasn’t sufficient to compensate for the fall in prices, and hence the negative returns.
Negative bond returns and next-to-zero cash rates heavily contributed to subdued returns in the Conservative (+4.7%) and the Conservative Balanced (+7.5%) options. Given the nature of the options, both have high allocations to cash and bonds. They also have relatively high allocations to unlisted property and infrastructure, which have returned far less than the share market. The property portfolio has a large exposure to shopping centres, the largest single investment being Karrinyup Shopping Centre (KSC).
Our Perth members may be aware that we’ve been in the process of a major development of this centre since November 2019. The development is due to be completed by the end of this year, by which time we hope and expect borders to be open. It will be a magnificent centre. For our members who enjoy shopping, a visit to KSC will be worth the price of a ticket to Perth!
Past performance isn’t an indicator of future performance. This information is of a general nature only and may include general advice. We’ve prepared it without taking 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 product disclosure statement and whether to consult a licensed financial adviser. This information is current as at 29 July 2021. This isn’t intended to be an endorsement of any of the listed securities named above for inclusion in personal portfolios. 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.