Diversified Portfolios - InvestSMART Balanced - 30 September 2016
International equity markets were down for the month while Australian equities were up slightly. Over the quarter both international and Australian equities posted positive returns. There seems to be no shortage of issues that have the potential to impact markets in the short-term (US election, monetary policy from the US Fed, ECB and Japan, what's next for Brexit, European bank solvency). The real difficulty is ascertaining if or when any of these are a catalyst for anything more severe. We continue to remain focused on valuations of asset classes and their prospective returns with the view that should any of those short-term issues transpire into something more serious it is likely that the most over-valued asset classes are likely to be hit the hardest.
The InvestSMART Balanced Portfolio returned -0.6% over the month of September and 2.4% over the quarter. The overweight to Australian equities and underweight to property contributed positively to portfolio performance. The portfolio's exposure to international equities was the main detractor from portfolio performance. Within international equities, non-US equities generally fared better than US equities which is a positive for the portfolio as we are underweight US equities.
A-REITs posted their second month of negative returns with the portfolio's exposure down -4.3% in September. Global REITs fared slightly better but still posted a negative return of -3.0% for the month. During September we reduced the portfolio's exposure to REITs by around 2% on the basis that we view valuations in the REIT sector at the more expensive end. While REITs continue to offer reasonably attractive yields with modest growth prospects we believe that asset classes such as REITs and infrastructure are being treated like bond-proxies and are likely to be more sensitive to interest rates. In addition, once franking credits are taken into account, the broader Australian equity market offers a more attractive yield with relatively better valuations.
Within fixed interest the portfolio's exposure to Australian government bonds returned -0.2% for the month and 1% over the quarter, while the exposure to Macquarie Income Opportunities Fund contributed positively by outperforming the broader bond market, returning 0.2% for the month and 2.1% over the quarter.
During September we removed iShares Europe ETF (IEU) and iShares MSCI Emerging Market ETF (IEM) and replaced them with the Vanguard FTSE Europe Shares ETF (VEQ) and the Vanguard FTSE Emerging Markets ETF (VGE) respectively. The switch was predominately due to the lower fee structure of the Vanguard ETFs.
The investment objective is to achieve a return of 2% above the RBA Cash rate perannum over five year rolling periods by investing in a diverse mix of asset classescovering Australian equities, international equities, property, infrastructure,alternatives, fixed interest and cash.
Growth of $10,000
Asset Allocation as at 30 SEPTEMBER 2016
Source: Praemium, RBA
Returns are before expenses and fees. Returns are shown as annualised if the period is over 1 year. * Since Inception (SI) date is 29 December 2014.
The portfolio remains overweight Australian equities on the basis that valuationsappear reasonably compelling when compared to other asset classes and given theattractive yield characteristics of the asset class. Within fixed interest the portfolioholds Australian government bonds and has an exposure to Australian credit andoverseas securities. The portfolio is also underweight REITs. The portfolio is expectedto do well in an environment where Australian equities outperform other asset classesand where credit outperforms government bonds. Within international equities theportfolios have a bias towards emerging markets and an underweight to US equities,therefore the portfolio will benefit when US equities underperform broader equitymarkets and emerging markets do well.
Current market pricing implies that the portfolio's RBA Cash Rate 2% objective isachievable over the long-term but only through a reasonable allocation to relativelyvolatile equity investments. This means that investors should be comfortable withabove average volatility, which could result in a short-term fall in the portfolio's valueof around 20%.
|PERFORMANCE TO 30 SEPTEMBER 2016||1 MONTH||3 MONTH||6 MONTH||1 YEAR||SI* (P.A.)|
|InvestSMART Balanced Portfolio||-0.62%||2.40%||5.24%||6.31%||5.12%|
|Morningstar Multisector Balanced Index||-0.39%||1.98%||5.45%||7.10%||5.58%|
|Excess to Benchmark||-0.23%||0.42%||-0.21%||-0.79%||-0.45%|
|RBA Cash Rate 2%||0.29%||0.90%||1.87%||3.92%||4.04%|
|Excess to Objective||-0.90%||1.49%||3.37%||2.39%||1.08%|
Peformance Summary to 30 September 2016
Contribution to Return 1 Month to 30 September 2016
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