Investment performance and economic update: January 2024

The QSuper Balanced Accumulation option returned 3.6% for the December quarter and 6.48% over the year to December 2023.

Longer-term returns remain solid, with the QSuper Balanced Accumulation option posting a return of 6.7% p.a. over the 10 years to the end of December 2023.

As part of a risk-balanced approach, QSuper Balanced invests more in unlisted assets, such as infrastructure and has lower exposure to equities than traditional funds.

Returns for other QSuper investment options can be found here. The table below shows returns from the major publicly traded asset classes for periods to the end of December 2023.

Sources: Bloomberg, Australian Retirement Trust. Past performance is not a reliable indication of future performance.

Share markets end the year strongly …

Financial markets were buoyed by better news on inflation across a range of economies as well as signs that official interest rates were at, or close to, a peak and likely to fall over the coming year.

Share prices in the major developed markets rose sharply in the final quarter of 2023 and over the calendar year. US shares, led by the technology sector, outperformed shares in Europe, the UK and Japan over the quarter, while Japanese shares were the best performers over the calendar year.

Emerging markets share returns were mostly positive over the quarter, including some very large gains in smaller markets such as Argentina, Egypt, Pakistan and Peru.

However, Chinese shares continued to struggle as concerns over the health of China’s property market persist. Those concerns also detracted from emerging market returns for the calendar year, despite some very strong returns among the smaller markets.

A rise in the Australian dollar against a range of developed and emerging market currencies detracted from the returns of unhedged international shares over the quarter. Over the calendar year, however, a generally weaker Australian dollar contributed positively to unhedged share returns.

Australian shares also enjoyed a strong quarter, with healthcare, materials and financials shares producing double-digit returns over the quarter, more than offsetting losses in energy shares.

… while bond markets enjoyed a solid recovery

Australian and global fixed income returns were positive over the quarter as yields declined in most major world bond markets (bond prices rise as yields fall).

The rise in bond prices over the quarter also led to a sharp improvement in bond returns over the year, both in Australia and globally.

Lower bond rates boosted returns from listed real estate securities over the quarter, as lower bond yields tend to increase the relative attractiveness of the income provided by listed real estate investments.

Recent data has pointed to a further easing in inflation pressures, prompting most central banks, including the Federal Reserve and the European Central Bank, to keep official interest rates unchanged over the December quarter, while signaling the possibility of rate cuts over the coming year.

In contrast, the Reserve Bank of Australia opted to raise rates further, taking the cash rate to 4.35% – its highest level in 12 years.

The outlook and what is Australian Retirement Trust doing?

The challenge facing the world’s central banks remains an extraordinarily difficult one: bring inflation back under control over a reasonable timeframe without causing a major economic downturn in the process.

While a further cash rate increase in Australia is possible over the coming months, inflation is falling, the pace of interest rate increases across the world has clearly slowed, and the monetary policy tightening cycle may be close to an end.

However, labour markets generally remain very tight, and there remains a risk that faster growth in wages and labour costs will result in inflation remaining at unacceptable levels.

On balance, we remain of the view that medium to longer-term inflation is likely to be somewhat higher than we saw in the pre-COVID years.

We do not design portfolios based on our own or anyone else’s short-term economic, market or geopolitical forecasts. And we have no way of knowing with any certainty how far or how quickly inflation will fall from here or when interest rates will peak.

However, our investment team and our external investment managers do seek to capitalise on opportunities that inevitably emerge during times of heightened market volatility, such as we are currently experiencing.

The QSuper Balanced option is designed to be less dependent on any particular market environment, such as rising share markets, to achieve the CPI+ return objective. The option has outperformed its return objective over the past 10 years and delivered annual returns above the objective more consistently than a traditional Balanced option.

How we adjusted our strategy

We have continued to adjust our Dynamic Asset Allocation (DAA) strategy in response to changes in relative value between asset classes, as well as individual countries’ bonds, share markets and currencies. During the quarter we reduced our exposure to bonds as bond prices rose, reversing some of our earlier purchases of US and UK government bonds.

At the end of 2023, our DAA strategy slightly favoured shares over bonds. Within DAA’s shares allocation, we preferred Japanese, UK and European shares over shares in the US and Australia.

In fixed income, we remain underweight in European and Japanese bonds; we are broadly neutral on US bonds after reducing our exposure during the quarter; and remain modestly overweight in UK and Australian bonds.

And the DAA strategy’s currency exposure favours the Scandinavian currencies, the Malaysian ringgit and the Japanese yen over the Canadian and New Zealand dollars, the Czech koruna and the euro.

We continue to hold a substantial allocation to alternative assets, particularly the key unlisted asset classes – real estate, infrastructure, private equity and private debt.

Well diversified portfolios

As a large superannuation fund, we have well-diversified portfolios of these assets that we expect will deliver strong, long-term returns, while reducing our members’ exposure to share market volatility.

In real estate, we added to our investment in UK aged care through our partnership with Elevation Healthcare Properties. Our private equity team made an investment in LMS Energy, an Australian provider of bioenergy and methane abatement solutions. And we sold our investment in Civica, a UK-based global provider of cloud software solutions for the public sector, generating substantial profits for members.

Our private debt team provided funding to a range of companies, including a US based provider of document management solutions to healthcare providers. The team also provided funding to facilitate several acquisitions, including that of a European marine spare parts logistics company and an Australasian IT services company. And we partnered with a new investment manager to allow us to expand our corporate direct lending in Europe.

Help to choose your investments

How your super is invested can have a big impact on what you'll have in retirement. Our online advice tool or speaking with a financial adviser can help you select the right blend of QSuper investment options for you. Advice about your QSuper account is included with your membership.

Book an appointment today online or call 1800 643 893.

 

Past performance is not a reliable indication of future performance. QInvest Limited (ABN 35 063 511 580, AFSL 238274) is a separate legal entity responsible for the financial services it provides. Eligibility conditions apply. Refer to the Financial Services Guide for more information.