Disclaimer: This webcast discusses UniSuper’s investment performance and recent investment decisions designed to suit UniSuper, which may not be appropriate for you personally. We’re not suggesting you should make the same decisions.
Consider your situation and read the relevant Product Disclosure statement before making personal decisions about your investments or UniSuper membership. Past performance is not an indicator of future performance.
Victoria Place (VP): Welcome to Five questions for the Chief Investment Officer. I'm Victoria Place and I'm a Senior Analyst working with our CIO, John Pearce, in the investments team.
John, I'd like to jump in and ask some questions on investment performance. While we encourage our members to look at investment returns over the long term, the wide range in performances of our growth options over the past 12 months has caught my eye. Can you elaborate?
John Pearce (JP): Sure. Well, here's a table listing the returns of all of our options over the last 12 months.
If you have a look at the performance of the best-performing growth option and the worst-performing growth option, it's nearly 11%. That's quite a dispersion. Over a year, these things can happen, because over a short time, you've got a difference in performance of countries, sectors, regions—so it throws up these anomalies. Over the last year, we had Australia outperforming global markets because of the bounce back in our banks. We had the sustainable options outperforming their standard equivalents because energy prices were lower, and these options don't have fossil fuels. And we also had a situation where the US generally outperformed emerging markets, large companies outperformed small companies, so an option like Global Companies in Asia outperformed International Shares by about 4%, even though they're all invested in global securities, it's just that one option had an exposure to those better-performing sectors.
More importantly, if we look over a longer term, here are the five-year returns.
We're seeing a lot of these idiosyncrasies wash themselves out. So the difference in performance between the top- and bottom-performing growth option is now 4%. Importantly, what we're seeing is the pattern of growth outperforming defensive option, and it's comforting to see that people who are taking a risk are being rewarded.
JP: To understand the key drivers, we have to look at the underlying segments in property, because it's not the case that all property rises and falls at the same time. And when I say key segments, there are basically three. You have office property, so think of particularly office buildings in Melbourne and Sydney. We have industrial—logistics and warehouses—and then we have retail, which is, effectively, shopping centres.
It's risen strongly, and in fact, this has happened for the last five years. And look what's driving it—it's all about office and industrial. Why is this? There are a couple of big factors. Firstly, we've had a reduction in interest rates and yields. Let me explain this in non-technical terms.
If we see the yields offered on bonds declining, we'll also see the yields on other income-producing assets, such as property, looking relatively attractive, so their prices get bid up. That's what's been happening with industrial and office. The other tailwind is that we've actually had a tight supply situation, particularly in Sydney and Melbourne, and pretty strong demand. So, this has fuelled an increase in prices.
Now have a look at retail. This is the shopping centres story, and it has terribly under-performed the broader market.
Why is this? Well, we've got cyclical pressures. We've had a fairly sluggish economy, and that's feeding into lower retail sales. And then we've had the more secular threats of online retail, and that's scaring some investors away.
We've discussed this before, but I think it's worth mentioning our position again. We believe that there will always be a place for good quality retail. If you look at our main exposures, by far our largest exposure is in Scentre Group. They own Westfield shopping centres and they constitute seven of the 10 largest shopping centres in the country.
There are other big trends happening in retail. The biggest trend is that we're seeing the real successful retailers are multichannel—they've got an online and an offline presence. Did you know that nine of the 10 most popular online sites in Australia are actually owned by your traditional offline brands? Look at that. Right at the top of the list—JB Hi-Fi and Bunnings.
What about the other way around, online to offline? Here we have an aerial photograph of Manhattan. What do you think those red indicators are? That happens to be Amazon's physical presence in Manhattan.
Here we have the most successful online retailer in the world building its physical presence. So, I think it's fair to say the death of shopping centres has been exaggerated.
VP: Given that a large component of the total return is derived from rental income, property is considered to be one of the more conservative growth assets. Does this mean that the sector and the Listed Property investment option is due for a correction after such a big 12 months?
JP: Well, you're right about the theory. If you think about growing rental incomes, that should lead to steady growth in capital value. But markets don't go up in a straight line, and if you look at this bar chart of the annual returns of the Listed Property option over the last 10 years, it's been quite volatile.
You've actually had two negative years out of those 10 years. Now, we're following a very strong 12 months and I'm not going to make a prediction, but I would be amazed if the next 12 months is as strong as the last 12 months. I think it's important to point that out because we are seeing some switching activity following those returns and it really is a case of buyer beware.
VP: John, you've recently presented to some large audiences comprising of our retired members. Is there a key message or two in your presentations?
JP: The context that I'm painting with the audience is a world that's experiencing sluggish growth. So, two years ago, we were talking about synchronised global growth. Nowadays, we're talking about synchronised global slowdown. About 20 central banks around the world are in easing mode—downward pressure on interest rates—and that's including our own central bank, the Reserve Bank. So there's this continuous search for yield, and investors either have to accept a lower return or they have to accept a higher risk for the same level of return. I think this chart sums it up perfectly. If we wind the clock back and look at 2009-10, what were the yields on offer? Just a quick reminder—yield is simply the return that we're getting for the price we're paying. So if you're getting a $5 return from a $100 investment, that's a 5% yield. Back in 2009, one-year term deposits from a bank, which is as close to a risk-free investment as you could possibly get, were yielding around 6%. And around that time you saw returns on corporate bonds, such as a Telstra bond, property, and the share market for a dividend yield, around that 6% and 7%. Today, look where we are. Look at the decline in that risk-free return from term deposits, down to around 1%.
But it's not all bad news. We're seeing still reasonably healthy yields from the share market, but as I said before, to earn that yield, members have to expose themselves to greater volatility, more risk.
VP: And finally, John, I'm sure within these presentations you've been asked about UniSuper's positioning with regards to climate change risk. What's been your response?
JP: We cover a lot in these presentations, so my first response is that I couldn't do justice to such an important subject in such a short period of time, so what I do is I refer our members to our website, where we have a comprehensive document, Climate risk and our investments. A word of caution, the document is not available now because it is being refreshed, but it will be available in November. This document goes through a lot of things. It points out that we actually have a lower carbon intensity in our portfolios than you find in the average fund. We also talk about the extensive engagement we have with climate action groups that we feel are responsible and aligned, and the engagement with our portfolio companies. 12 months ago, 45% of the companies that we invest in had emission targets. Today, that number is now 79%, a really, really big increase. I'm not saying that's purely because of UniSuper's engagement, but I can say that awareness and management of climate risk is one of the first questions that we raise when we talk to company boards and management.
And a final point. I think it's worth reminding members who do not want to invest in fossil fuels that we have seven options ranging from very low risk to high risk that do not invest in companies that are engaged in the exploration or production of fossil fuels, so members can well and truly vote with their feet.
VP: Thanks, John, for answering these five questions. If you have any questions you’d like answered, please email us at firstname.lastname@example.org. Thanks for watching.
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