Wednesday, 3 August 2016

One of the main drivers of long term returns in the QSuper portfolio1 is our holding of shares in major companies. Shares, or equities, currently comprise approximately one third of our Balanced option. We hold these equities in the portfolio in the expectation that the businesses that issue these equities will, over the long run, make products or produce services that they can sell at a profit which will then be passed through to us, the shareholders.

While we often hear about how the prices of equity markets have moved over the short term, we rarely hear about how the underlying profits of the businesses behind those equities vary. Let’s face it; listening to a discussion of slow-moving changes in sales numbers, shifts in cost allocations or expense impacts on the bottom line is just not as sexy as hearing about what the Dow Jones Index did last night. But when you are investing for the long term the source and composition of the profits you earn possibly matters more than short term price fluctuations.

At QSuper we believe that diversification represents the most efficient way to generate positive long term returns with acceptable risks. By not concentrating our risks into any one part of our portfolio, we likely reduce the potential for an isolated bad outcome to impact our members’ retirement outcomes. We apply this principle of diversification across asset classes (equities, bonds, property, infrastructure etc), as well as within each asset class (such as our equities portfolio). When building our equities portfolio we look to diversify our sources of return as much as possible.

To do this, we diversify our holdings of shares across both their country of domicile as well as the source of their earnings. While the country of company’s listing is usually pretty clear (Vodafone is traded on the London Stock Exchange and Apple is traded in the US, for example) the source of a corporation’s earnings is often less clear. Modern, multinational conglomerates often earn the revenue and pay their expenses in many different locations and currencies, and can be present in several industries. At QSuper we use sophisticated quantitative methods to analyse the source of our corporate earnings and construct a global equities portfolio so that our profits are not overly concentrated into one particular sector or geography. While we think this perspective is an obvious one to take when building a portfolio of assets, it is not standard across the industry.

Pie chart showing geography and region of earnings for QSuper's global equities portfolio

The charts above show the source of our company earnings across regions, as well as a split across developed and emerging markets. As can be seen, our equities portfolio earns its cash all over the world, with a relatively equal contribution to earnings from Australia, North America, Europe, the Asia Pacific region and other geographies. Note also that a relatively large portion of our earnings comes from emerging markets. In the face of uncertain market outlooks, this dispersion of earnings sources is extremely important. Going forward we’ll continue to seek diverse streams of earnings to produce long term returns while balancing investment risk.

1 The term ‘QSuper portfolio’ is used to refer collectively to the underlying portfolios of assets which in combination make up the individual asset allocations of the QSuper Lifetime and the Balanced, Moderate and Aggressive investment options.

The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only and you should get professional advice before relying on this information.

Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.

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