AustralianSuper’s Balanced option is ranked No. 1 over both 10 and 15 years to 30 April 2019 by SuperRatings*. It’s also placed in the top three funds over the 1, 3 and 5 years to 30 April 2019.

These results demonstrate our ongoing commitment to delivering strong long-term returns for members, while keeping costs low. Our strategy to increase in-house investment management has been a large contributor to our strong net performance in recent years. We now manage 50% of our equities portfolio internally, spanning across Australian, international and private equities.

With more than $150 billion in assets, we’ve been able to leverage our size and scale to invest in large infrastructure and property assets, like WestConnex in Sydney, and One Crown Place in London – a commercial real estate debt investment.

Balanced option returns to 30 April 2019

AustralianSuper Balanced Option

* SuperRatings Fund Crediting Rate Survey, SR50 Balanced (60-76) Index 30 April 2019. Returns from equivalent investment options of ARF and STA are used in calculating returns for periods that begin before 1 July 2006. Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.

You can view the performance of all AustralianSuper investment options at australiansuper.com/performance

The investment story so far in 2019

It’s been a bumpy but positive financial year so far for investment markets. After reaching record highs in the September quarter of last year, world share markets fell sharply in the December quarter before staging a comeback in the opening months of 2019. So far this year, markets have moved higher despite renewed investor concerns over a deterioration in US and China trade negotiations.

A rebound in share markets and renewed investor appetite for risk assets in the opening four months of 2019 has translated into stronger returns for the Balanced option. Contributors to our strong relative performance were high weightings to infrastructure and private equity assets, and good stock selection within our international share portfolio. Our overweight to foreign currency has also benefited returns over the year to 30 April 2019, with the Australian dollar falling 6.8% against the US dollar over this period.

Looking behind the volatility

Last year, many investors started thinking that share markets had been pushed to high levels in an economic expansion that was showing signs of running out of gas. This raised concerns that the pace of global activity and company earnings growth would slow. Coupled with the prospect of further interest rate increases in the US and geopolitical events, such as the trade tensions between the US and China and the UK’s exit from the European Union (Brexit), this compounded concerns over future economic growth and business confidence.

US growth softened in the December quarter, although not entirely unexpected given the impact of the US government shutdown. In China, there were further signs that deleveraging and trade related weakness were slowing growth. Although still higher than developed economies, Chinese economic growth has fallen to its lowest level in three decades. In Europe, policymakers revised down the growth outlook for 2019 to 1.1% and acknowledged that long-term bond yields will remain negative into 2020.

Investment outlook

Despite the pickup in share markets there are headwinds to the investment outlook. We continue to see signs that the end of the current economic growth cycle is nearing. One of our biggest concerns has been the risk of a policy mistake, particularly in the US or China, leading to a deeper slow-down in the global economy over the next few years. While our concerns on both these fronts have eased somewhat, we expect global economic growth will be softer in the coming year.

After previously signalling further rate rises in 2019 and 2020, the US Federal Reserve (Fed) has paused its rate tightening schedule. This has allayed investor concerns that monetary policy would become too restrictive and push the US economy into recession. The Fed’s shift in sentiment comes as the boost to growth from last year’s tax cuts starts to fade and the inflation outlook remains low. The Fed fund rate is now at 2.5%, after the quarterly increases throughout 2018. This gives it room to cut if US growth continues to weaken.

In China, the economy has been slowing in response to tighter monetary conditions as authorities look to address the issues of high debt levels in state owned enterprises. Business confidence has also been impacted by the trade dispute with the US and softer export markets. Chinese authorities are committed to achieving growth of 6-6.5% over the next two years to meet their 2020 standard of living goal. Our view is China will see additional stimulus in the period ahead via monetary easing, increased infrastructure investment and tax cuts. We expect the Chinese economy to bottom out in 2019 before picking up in 2020, which will help to cushion the impact of slower US growth on the global economy.

In Australia, the RBA has started to express a more balanced assessment on the outlook for interest rates. While acknowledging a softer global environment, the weakening in the domestic economy is driving the RBA’s more cautious tone. Weaker consumer spending, is now a reality, driven by weak household income growth, falling residential property prices and tighter lending conditions in the Banking sector. We think the RBA’s view, like the Fed’s, on the economy has shifted and it will cut interest rates if growth continues to slow. In the short term, prospective tax cuts promised by both major parties in the upcoming May Federal election, may be enough to support growth without the need for additional help from the RBA.

Significant geo-political risk remain, dominated by the US / Chinese trade stand-off and the inability of UK policymakers to put in place an orderly departure of the UK from the European Union. Both of these issues we believe will ultimately be resolved. A “hard” Brexit outcome seems unlikely and the US / Chinese trade talks should lead to an outcome agreeable to both sides.

Our strategy

We look at a combination of factors which we believe drive the long-term behaviour of financial markets such as economic fundamentals, macro-policy and asset valuations. We believe markets have already priced in an easing monetary policy outlook and will be hard pressed to rally much from here without an improvement in the outlook for growth and earnings.

We remain cautious as the economic cycle changes and have adopted a more defensive position in our PreMixed options in preparation for the lower growth environment. Our positioning reflects the less supportive conditions for shares and some other growth assets, which is typical of this stage of the economic growth cycle. In a nutshell, the risk of a severe recession has eased, but valuations for many assets classes are challenging given the low level of interest rates and bond yields.

With policymakers becoming more open to responding to weaker growth we don’t think the economic slowdown will be as long or deep as originally anticipated. Our active investment approach and strong cashflows give us the flexibility to adjust the risk in portfolios as our outlook changes. This means we can dynamically adjust the asset allocation to reduce the impact of volatility on members’ returns or to take advantage of growth opportunities.

Find out more about AustralianSuper’s investment strategy and options