11 Dec 2018
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Global share markets have been extremely volatile in recent months. They’ve been weighed down by expectations of slowing global growth (especially outside of the US), uncertainty over the impact of rising US interest rates, the end of money printing, and escalating US-China trade tensions.
Against this backdrop, our three investment options that are primarily invested in global shares will be recording far more subdued returns this calendar year compared to last. While lower returns shouldn’t come as a surprise, there’s been a large range in these options’ short-term performance. This month, we explore the drivers underlying this divergence.
Performance of key markets
||3 Years p.a.
||5 years p.a.
|Australian shares (S&P/ASX 300)
(MSCI All Country World Local Currency)
|Australian dollar (AUD/USD)
|Australian fixed interest (Bloomberg Composite)
|Cash (Bloomberg Bank Bill)
Returns are for periods to 30 November 2018. Past performance is not an indication of future performance.
*Returns relate to our Accumulation (not Pension) investment options and are published after fund taxes and investment expenses, other than account-based fees.
See performance information for all options
UniSuper’s global share options
UniSuper members can invest in global share markets through our range of diversified investment options, or more directly by choosing single sector options that are almost solely invested in offshore markets. The three options are International Shares (IS), Global Companies in Asia (GCA) and Global Environmental Opportunities (GEO).
While the three options have the same long-term performance objective (CPI + 4.5%), their performance over short periods can differ markedly as the following table shows.
Table 1: Option returns to 31 October 2018
||1 Year (%)
||3 Years (% p.a.)
||5 Years (% p.a.)
|Global Companies in Asia
|Global Environmental Opportunities
* Past performance is not an indication of future performance.
Different strategies drive different short-term performances
Table 2: Key features of the three ‘global shares’ options
||International Shares (IS)
||Global Companies in Asia (GCA)
||Global Environmental Opportunities (GEO)
||Return objective – CPI + 4.5% p.a. over a minimum of seven years
||To invest in a diversified portfolio of international shares.
||Investing in global companies that are well positioned to take advantage of the expected growth in consumption of emerging Asian economies.
||To invest in companies whose business activities seek to profit from addressing current and emerging environmental issues and opportunities.
||The portfolio is highly diversified, with over 3,000 companies.
||The portfolio is relatively concentrated, with around 70 companies.
||The portfolio is relatively concentrated, with around 100 companies.
As well as a common return objective, the three global options have in common a recommended minimum holding period of seven years, and the likelihood of negative returns is expected to be around five years in every 20. Furthermore, all three options are close to 100% invested in shares listed on international stock exchanges. However, as Table 2 shows, the options employ different strategies giving rise to different portfolio compositions, and hence different returns.
The IS option is the most generic of the three options, in that it isn’t driven by a specific theme—although there’s a bias towards the fast-growing Health Care and Information Technology (IT) sectors. As the most diversified of the options, it could be expected (but not guaranteed) to more closely track the general global share indices.
GCA invests in companies that are benefiting from favourable demographic trends—like population growth, urbanisation, growth in the middle classes and increased spending—that are likely to drive higher company earnings. As such, the option is heavily skewed towards well-established global brands that are exposed to the faster-growing consumption trends in emerging Asian economies. Health Care and IT are also heavily represented in this option.
Given its particular focus, GEO is quite different to the other two options. GEO favours companies offering products or services that are expected to contribute to a more environmentally sustainable economy. In practice, this option is comprised of companies that generate more than 50% of their revenues from involvement in five environmental themes—alternative energy, clean technology, sustainable water, green building and pollution prevention. As such, with a focus on companies trying to find solutions for tomorrow’s problems, this option has a focus on technology and industrial companies. The expectation is that these types of companies should be well positioned to take advantage of regulatory and societal changes in the shift to a low carbon emission future.
Key drivers of performance—geographic and sector exposures
The different strategies employed by the options manifest in different weightings across regions and sectors. A closer look at the differing exposures (see Charts 1 and 2) gives us a clearer understanding of why performance has differed.
Turning first to geographic biases—over the past year, absolute returns across regions (measured in Australian dollars) have varied considerably. The US market has returned 15.4%, significantly outperforming Asia (excluding Japan)—which produced a loss of 6.6%—and Europe, which lost 0.5%. Relative to both the IS and GEO options, GCA has benefited from both a higher exposure to the solidly performing US market and a lower exposure to the very poorly performing Asia (ex-Japan) market—boosting its relative (and absolute) performance accordingly.
Chart 1: Average geographic exposures of the ‘global shares’ options over the last year
We can conduct a similar analysis of returns by looking at the differing underlying sector composition of each option. Over the past year, the only sectors recording double digit gains were Health Care (16.2%), Energy (12.7%), IT (12.4%), and Consumer Discretionary (11.0%). GCA has a much greater exposure to these than the other options.
Conversely, the weakest performing sectors over the same period were Real Estate, Industrials, and Financials, all of which are held in relatively higher allocations within GEO.
Over the last year, GEO has in fact been the worst performing investment option at UniSuper—having been our best performer the previous year. This can happen in investment markets, particularly when certain companies or sectors experience price appreciation faster than underlying profitability. We previously foreshadowed this possibility for GEO in our October 2017 update, The GEO Option: Buyer Beware.
Chart 2: Average sector exposures of the international shares options over the last year
Looking to the future
What the market does in future is, of course, unpredictable—so we’re not going to attempt to forecast absolute returns. However, given that we aren’t currently contemplating any significant changes to the sector or regional mix of our global options, relative performance in the near term is likely to be driven by the same underlying factors as described above. For example, severe weakness in the IT sector could be expected to most negatively impact GEO relative to the other options, while an improved performance by the Real Estate sector would be expected to boost it relative to the other options.
Improved performance of the Asian region would likely boost IS the most, and GCA the least, and the converse would apply if the US outperformed—and so on.
Movement in the value of the Australian dollar (particularly against the US dollar) also has an impact. While the hedge ratio (see our August 2016 Investment market update for more information) is variable, a falling Australian dollar will benefit all options and vice versa—but once again, we won’t offer a prediction. If forecasting share prices belongs in the ‘too hard basket’, forecasting currencies belongs in the impossible.
This is not intended to be an endorsement of any of the listed securities named above for inclusion in personal portfolios. The above material reflects UniSuper’s view at a particular point in time having regard to factors specific to UniSuper and its overall investment objectives and strategies.
Past performance is not an indicator of future performance. This information is of a general nature only and may include general advice. It has been prepared without taking into account your individual objectives, financial situation or needs. UniSuper’s investment strategies will not necessarily be appropriate for other investors. Before making any decision in relation to your UniSuper membership, you should consider your personal circumstances, the relevant product disclosure statement for your membership category and whether to consult a licensed financial adviser. This information is current as at 11 December 2018.
Return objectives are not promises or predictions of any particular rate of return. Returns specified relate to our Accumulation (not Pension) investment options and are published after fund taxes and investment expenses, other than account-based fees.