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Our Chief Investment Officer, Andrew Howard looks at the key investment themes moving into 2019 and how they will shape our investment strategy this year. More importantly, he reminds us that a sound investment strategy is not based on reacting to short term ‘noise’ but one that is proactive, focused on delivering long term investment objectives.

Playing the long game

As we move into 2019, the key themes in financial markets of the last few months are still in play. We can also be reasonably confident that others will arise that are not yet in the headlines. Then there are the ‘black swan’ events—those negative surprises that no one saw coming. Our job at VicSuper is to assess the opportunities and risks in markets and asset classes so that we can deliver solid, consistent investment returns for our members over the long term.

One of the most important lessons from last year was to look through the ‘market noise’ and focus on the investment themes that truly mattered. By investing ‘through the cycle’ and managing risk through a well-diversified portfolio, our flagship Growth Option was able to deliver a positive return (1.02%) in calendar year 2018 against a backdrop that saw all major developed equity markets fall over the same period. In addition to a diversified, risk-aware investment strategy, our exposure to a falling Australian dollar helped boost the return.

In the context of falling share markets (see chart below), the positive return for our Growth Option was especially encouraging and shows the success of our investment decisions to date. It’s also worth noting the seven year return of the Growth Option (9.45% per annum; not shown in the chart) to demonstrate the solid and sustainable long-term performance we’re delivering for our members.

VicSuper Growth Option returns in 2018 vs major share markets

VicSuper CIO Update Chart 1 Jan19

 

Source: VicSuper; returns are total returns expressed in local currency (except China)

Why did we ‘de-risk’ the portfolio in 2018?

  • We saw threats on the horizon in share markets, especially around geopolitical issues and US monetary policy, not to mention share markets becoming more expensively priced.
  • Our exposure to fixed interest was a good way to reduce share market risk to protect members’ retirement savings.
  • We enhanced the diversification of the portfolio by selectively investing in new property, infrastructure and timber assets.

How is the portfolio positioned moving into 2019?

  • Our portfolio is relatively well positioned with enhanced downside protection from a year ago to weather further share market volatility as well as take advantages of investment opportunities that arise from continued volatility.
  • We will continue to invest proactively and in a responsible manner, investing in sustainable outcomes across all our investment options.

The smoother the better - our aim is to deliver a consistent pattern of returns

In pursuing our mission of optimising members’ retirement savings, we must remain true to our investment principles. By doing this, investment returns for all VicSuper Options (excluding cash) are ahead of their individual objectives. What is also important is how we deliver investment returns.

You can see in the chart below the smoothness and consistency of the VicSuper Growth Option’s returns over time. A critical part of this is our ability to manage risk in the portfolio in times of share market turbulence. This provided significant protection for investment returns in the latter months of 2018.

VicSuper Growth Option vs ASX 200 - Performance over last five years

VicSuper CIO Update Chart

Source: VicSuper

Well placed for 2019

Time will tell as to how the above-mentioned investment themes will play out in 2019. It seems that markets will remain risk-averse until there is more certainty on big issues like the US-China trade dispute, interest rate policy (particularly in the US) and Eurozone geopolitics, at the very least.

We will continue to maintain a diversified approach, managing risk effectively in asset classes (e.g. equities) where that is required while being proactive and flexible in other asset classes (e.g. infrastructure, direct property), taking up new investment opportunities as they arise.

What is most important is our ability to operate an investment strategy that can negotiate challenging markets, source new investment opportunities, and manage risk effectively on behalf of our members.

Any investment decision made is not done in the context of the short term outlook but rather taking a proactive approach to ensuring that the investment strategy has every opportunity to deliver on the long term investment objectives.

In times when the market is more volatile, it can help to talk to someone about your super. Talk to us before you consider switching portfolios. At VicSuper, you get financial advice at no additional cost in most cases. For more about our advice services, go to vicsuper.com.au/help-and-advice

For more about how we harness different sources of investment returns for our members:

— Discover more about how we invest your super
— Read other articles in Investment News
— Discover more about the benefits you get as a VicSuper member 

Important information 
This advice has been prepared without taking into account your objectives, financial situation or needs. You should therefore consider the appropriateness of the advice in light of your individual circumstances before acting on the advice. You should also obtain and consider a copy of the relevant Product Disclosure Statement available at www.vicsuper.com.au before making any decisions. VicSuper Pty Ltd ABN 69 087 619 412, AFSL 237333, Trustee of Victorian Superannuation Fund ABN 85 977 964 496.