2019 investment commentary
Good returns despite volatile markets
Investment review provided by Mercer
It was another year of good returns for the scheme and especially pleasing to finish on a positive note after a volatile year. Markets across developed countries fell 13% in the December quarter then bounced back strongly. Nevertheless, unlike in previous years, our three main investment options didn’t perform as well as some KiwiSaver funds. There are two main reasons for this.
We hedge a higher percentage of our offshore assets than most other funds in the market. We do this to protect the scheme from the volatility of the New Zealand dollar against the foreign currencies in which some of our investments are held. This means the fund does not benefit as much if the New Zealand dollar weakens as it did in the past year. While hedging didn’t help our returns this year, we do benefit when our dollar strengthens. Furthermore, in light of the current economic climate, the trustee recently made the strategic decision to reduce our currency hedging position from 100% to 50% hedged.
New Zealand shares
We have a lower proportion of assets invested in New Zealand shares than other funds. Instead, our assets are well diversified all over the world. This means the fund isn’t overly reliant on any one asset class, fund manager or company. This year, the New Zealand share market performed very well compared to the broader global share market. A large part of this was due to very strong performance of interest rate-sensitive companies that yield high dividends such as Meridian Energy, Genesis Energy and Auckland International Airport after the Reserve Bank of New Zealand signalled it may start to lower interest rates (which it has subsequently done). Global interest rates were also at near all-time lows, and the New Zealand share market benefited as it contains many attractive attributes for investors offshore (and domestically). However, we are one of the most expensive share markets in the world. While this growth is good news for the New Zealand market, it does highlight why there is a need for diversification outside of what is a small market. There is, as the saying goes, considerable risk in having all your eggs in one basket. Investment markets do not go up forever, and when there is volatility, diversified funds generally fare better.
Other main asset classes
While our assets are diversified across a range of asset classes, investments in international shares and bonds are the mainstay of our portfolio. Here’s a brief overview of how these asset classes performed.
Despite increasing global political and market volatility during the year, share markets recovered and delivered good returns. Share markets sailed relatively smoothly before tightening financial conditions, ongoing trade tensions, slowing global growth and cautious corporate earnings forecasts combined to frighten investors and spark a strong sell-off of equities in the December quarter, with markets in the developed world declining 13%. Investors then regained some confidence, with global equities posting 3 months of consecutive growth from January to March 2019. In most cases, share market gains over the first 2 months of 2019 have been sufficient to eclipse the falls experienced in the last quarter of 2018. As noted above, New Zealand shares performed strongly, delivering 18.9% over the past year.
Bond markets delivered solid returns for the year as expectations of higher interest rates quickly vanished after the US Federal Reserve changed its stance at the beginning of 2019. The outlook is now for lower interest rates for longer. The Official Cash Rate (OCR) in New Zealand was cut to 1.5% in May, a record low level. This was also a key driver of the returns from Cash Plus, which is focused on shorter-term cash investments. A further cut since balance date has seen the OCR fall to 1%.
In light of a recently volatile market, we believe our portfolio remains well diversified and sufficiently robust to handle further risks in the pipeline.