Investment Update - Summer 2019

December was a very difficult quarter for share markets. We saw steep falls in all global markets, which fell by about 13.5% on average.

  • Transcript

    Hi, my name is Graeme Miller and I’m the Chief Investment Officer at TelstraSuper. In today’s video I’ll be speaking about investment returns in the last quarter of 2018.

    How did share markets perform in the December 2018 quarter?

    December was a very difficult quarter for share markets. We saw steep falls in all global markets, which fell by about 13.5% on average.
    There were a number of reasons for this.

    I think the main reason is that investors were concerned about trade tariffs between the world’s two biggest economies – the United States and China. Trade tariffs are bad for everyone. They reduce economic activity and destroy prosperity. In recent months, we’ve already begun to see signs of economic slow-down both in China and the United States.

    The other thing that is concerning investors is political instability across the world:

    • For example, in the United States, the President is locked in battle with the Democratic-controlled House of Congress over funding for the Mexican border wall. This has led to the shut-down of many government services, with no end in sight as to how this will be resolved.
    • In the UK, the Prime Minster has problems of her own, with no consensus yet reached on how the UK’s withdrawal from the European Union will work in March 2019.
    • And in France, there have been mass protests against reform measures proposed by the once-popular President Macron.

    This environment of political dysfunction and uncertainty has rattled investors’ confidence.

    And the other big thing that investors are worried about is rising interest rates. Official interest rates in the US were increased in December 2018 – the fourth time this year.

    What about other asset classes such as fixed interest and property?

    As is often the case when share markets perform poorly, we saw better performance from fixed interest assets, which were up by between 1 and 2% over the quarter. Another bright spot was property assets, with TelstraSuper’s property portfolio delivering a solid 2% return for the quarter.

    Also, the value of the Australian dollar declined against most foreign currencies during the quarter and this somewhat cushioned the blow of the sharp falls in share markets.

    So how did TelstraSuper’s investment options perform in this environment?

    As you’d expect, most of TelstraSuper’s investment options delivered negative returns in the quarter. The investment options with the highest exposures to shares had the lowest returns.

    For accumulation members, the Growth option returned minus 5.9% for the quarter, the Balanced Option returned minus 4.3% and the Conservative option earned minus 1.6%.

    If we look at returns for the full calendar year of 2018, we see that they have been reasonably flat for the full year period. Both the Defensive Growth and Diversified Income options – which have been designed for TelstraSuper members who are looking for more stability in their investment outcomes – have performed well with positive returns (1.9%) and (2.2%) respectively.

    Should I be concerned about the recent falls?

    While volatility can seem scary, it’s important to put these moves in context:

    First of all, it’s not unusual for there to be volatility in share prices. In fact we fully expect to see negative periods from time to time. Share investments offer much higher potential returns than assets such as cash and fixed interest, but the price we pay for those high expected returns, is greater volatility.
    Secondly, these falls have followed some extraordinarily strong returns in recent years. So although our members’ balances will have fallen in recent times, they have done so from a high base.

    History shows us that periods of market falls are often followed by strong period of recovery. We’ve already seen a bit of this, with share markets up around four percent for the first three weeks of January 2019.

    How are TelstraSuper’s portfolios positioned today?

    We haven’t made any major changes to our portfolio positioning over the last few months. Our portfolios continue to be somewhat defensively positioned. For example in our Growth and Balanced portfolios, our exposure to Australian shares is about two percentage points lower than our long term positioning. Our share portfolios have been tilted away from the most expensive market sectors such as Information Technology, and towards sectors such as Consumer Goods that represent better value. We’re also holding less fixed interest securities than usual and a greater amount of cash.

    We believe that this is a prudent way to position the portfolio, given that we appear to be in the late-stage of an economic cycle and most asset prices have appeared to be elevated. Under this positioning, our members will continue to enjoy the benefits of continued investment strength, but will also be more protected in the event of a significant market fall.

    It’s a privilege to be entrusted with the management of your superannuation savings. As always we will continue to manage your investments in a prudent and proactive manner – remaining vigilant to identify both risks and opportunities as they emerge.