The last financial year has been a strong period for super fund portfolios. Equity markets posted solid gains both in Australia and offshore, up 13.7% and 15.4% respectively. Returns were also positive across other asset classes such as direct property and infrastructure, and bond returns, although modest, were much stronger than the previous year. Overall, global growth conditions helped to drive earnings and although the US Fed continued to raise rates over the past 12 months, monetary policy conditions both in the US and globally remained accommodative. In this article, we look at what’s been driving these returns and consider the outlook for returns over the medium-term.
The year of two halves
2017/18 was characterised as a year of two halves where volatility featured heavily over the second half. Equity markets were particularly weak at the start of 2018 due to concern that inflation was emerging in the US and that growth had reached a cyclical peak. These fears quickly settled, and the markets were able to recover but volatility resumed on the back of rising geopolitical tension, specifically the threat of a global trade war between the US and China.
click to enlarge
Past performance is not a reliable indicator of future performance.
Looking forward, we are mindful that the market may be underestimating inflation and the threat of additional interest rate increases in the US. We are coming to the end of a long expansion period and there is uncertainty as to how far interest rates can rise before they become negative for equities and how central banks will respond once inflation shows signs of life. These factors alongside ongoing geopolitical uncertainty suggest that trading conditions will be tenuous over the year ahead and returns in this environment are likely to moderate.
Diversification, the key to managing volatility
Volatility will continue to feature over the medium-term and while often viewed in a negative context, it can create trading opportunities for our super portfolios that have a longer-term investment horizon. That said, we are mindful of building portfolios that can better withstand downside volatility. Not only does investing across a broad combination of assets achieve this but actively managing within and across asset classes can also deliver a better risk and return outcome.
Source: AMP Capital 13 July 2018
Author: Debbie Alliston, Head of Multi-Asset Portfolio Management, AMP Capital. Debbie Alliston is the Head of Portfolio Management within the Multi-Asset Group, responsible for overseeing the Group’s multi-asset investment capability which specialises in the management of diversified portfolios. She is also the Portfolio Manager for AMP’s flagship Corporate Super portfolios.
1Source: Bloomberg, AMP Capital, as at 30 June 2018; Australian shares: S&P ASX 200 Accumulation (AUD); International shares (unhedged): MSCI World ex AU Accumulation (AUD); International shares (hedged): MSCI World ex AU Accumulation Hedged AUD; Australian listed property: S&P ASX 200 A-REIT Accumulation; Global listed property (hedged): FTSE EPRA/NAREIT Developed Rental Hedged AUD; Global listed infrastructure (hedged): Dow Jones Brookfield Global Infrastructure Net Accumulation Index Hedged (AUD); Australian bonds: Bloomberg AusBond Composite 0+ Yr Index; International bonds (hedged): Barclays Global Aggregate Index Hedged AUD; Cash: Bloomberg AusBond Bank Bill Index.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.