The REI Super Balanced Option has outperformed its investment objective for 10 years, with a net return of 7.66% for the second quarter ending 31 December 2019.
The portfolio remains well optimised for a turn in the market, given the current ‘over heated’ state of the Australian and US markets. Industry analysts remain on the lookout for a market turn, and the focus for the investment team in the last quarter at REI Super has been to preserve member’s capital, pending an expected turn in the market, which is likely to be sharp and rapid, with no way to predict when it may occur. The uncertainty in the market has been exacerbated by concerns over the economic impact of the Caronarvirus epidemic.
This means the portfolio for the Balanced Investment Option remains underweight, compared to other super funds, in the Australian and US stock markets, as well as unlisted assets such as infrastructure and private equity.
Sluggish economies and trade wars
The past quarter has been dominated by many countries responding to ongoing sluggish economies which have not shown any growth. Many central banks eased their monetary policy which was reflected in drops to the cash rates including both Australia and the US.
September and October 2019 were still dominated by continuing uncertainty on trade, particularly between the US and China and lack of clarity on Brexit, however by December there was more positive sentiment on resolutions to both these situations and there was a rally in December, with some countries recording record-highs, after poor performance from the markets in September and October.
Gains were recorded in other key markets for the quarter including property, infrastructure, oil, gold, and many commodity markets. However, global and Australian bond markets ended the quarter with losses, as government bond yields rose towards the end of the quarter with increased confidence that a trade tariff deal would be struck between the U.S and China.
A year of contrasts and unpredictability
While 2019 delivered unexpected and significant rises in the share and bond markets, we shouldn’t forget that 2019 was one of the more unpredictable periods in history, with low interest rates, heightened geopolitical uncertainty, and stretching asset valuations continuing to worry investors. Indeed, these returns have been achieved with very little regard for risk should an unexpected and swift turn in the market occur. One-year returns have been exceptional, but we believe the market is overvalued, and a correction is inevitable, and we must keep our focus on long term performance.
If we recall the GFC, now heading towards its thirteenth anniversary, we saw similar complacency in the market, resulting in many people close to retirement experiencing a dramatic drop to their super balances when there was a plunge in stock values during that period.
Asset class run down
• Global shares recorded strong gains for the quarter, underpinned by gains in both emerging and developed markets. Emerging market equities outperformed developed markets over the quarter, owing to increased optimism over a trade tariff deal being struck between the U.S and China. Developed market equity gains were led by the U.S.
• The Australian dollar (AUD) strengthened against the U.S. dollar (USD) over the quarter, reflecting broad based USD weakness, due to stronger commodity prices, especially that of iron ore. The AUD also strengthened against other currencies, including the Japanese Yen and Euro, but ended little changed against the British pound. With the strengthening of the AUD, returns for unhedged international investments were dampened.
• The Australian sharemarket (S&P/ASX 200 Accumulation Index) eked out a muted gain of 0.7% in a volatile fourth quarter, recording losses in October and December, and significantly underperforming global peers. Bouts of volatility over the quarter were largely associated with concerns about sluggish domestic economic conditions and fluctuating sentiment about the ongoing U.S.–China tariff negotiations.
• However, overall returns for 2019 were impressive, with the S&P/ASX 200 Accumulation Index strengthening by 23.4%, the strongest annual gain in a decade. This remarkable gain was largely underpinned by three domestic interest rate cuts, stronger commodity prices, and the surprise re-election of the incumbent government in May, all of which contributed to buoyant investor sentiment. Incredibly, the Australian market was a laggard versus the U.S sharemarket for the year, as the S&P 500 soared by a staggering 31.5%.
• Global and Australian bond markets recorded losses as government bond yields rose, however bond yields still remain near record lows.
Global Listed Real Estate (GREITS) and listed infrastructure
• Interest rate sensitive sectors, including global listed property and listed infrastructure, recorded positive returns for the quarter, most notably, infrastructure staged a 3% gain.
• Real estate as an asset class has been under pressure due to retail underperforming as the traditional shopping model is challenged by online shopping, and causes higher vacancy rates.
Managing the REI Super Balanced Portfolio over the December quarter
REI Super remains focused on managing the risk of an overvalued market, which will eventually impact on future returns. The focus remains on building portfolios with an eye toward return and risk, seeking to own only those investments we believe offer investors good reward-for-risk potential. Ultimately, our process looks to identify undervalued assets that we think will help deliver investor outcomes over the longer term.
We continue to have a lighter exposure to Australian and the U.S as there are other sharemarkets that offer better value, such as Japan, which we have added to the portfolio, and other selective sectors in Europe, the U.K, and emerging sharemarkets.
Within the Australian Shares sector, we have focused on finding value companies with good underlying fundamentals, helping us to avoid the most expensive parts of the market.
Note: Future investment performance can vary from past performance, and you should not base your decision to invest in REI Super simply on past performance. Past earning rates are not an indicator of future earning rates. The investment returns of REI Super are not guaranteed, and the value of the investment may rise or fall.