The Aon Investment Update

Transcription

1 The Aon Hewitt Investment Update OCTOBER Aon Hewitt Investment Consulting The Aon Investment Update OCTOBER 2010

2 2 The Aon Hewitt Investment Update OCTOBER 2010 In this issue... Commentary 3-5 Discretionary Assets Risk and Return 6 Discretionary Assets Asset Allocation 7 Conservative, Balanced, Growth Risk Profiles 8 Overseas Equities (unhedged) 9 New Zealand Equities 10 Australasian Equities 11 New Zealand Bonds 12 Overseas Bonds 13 Property 14 Cash 15 Global Property 16 Other Funds 16 Explanatory Notes 17 Investment Forecasts 18 Economists Survey 19 Contact Details 20 The Managers The Indices Hedge ABNZL AMPCI AXA GI ASB BROOK EC DEVON MAM MINT NZAM RUSSELL SMS TAM TYN Alliance Bernstein Ltd NZ AMP Capital Investors (NZ) AXA Global Investors (previously known as Arcus Investment Mgt) ASB Bank Investments Brook Asset Mgt Elevation Capital Mgt Ltd Devon Funds Mgt Ltd (previously known as GSJBW Asset Mgt) Milford Asset Management Mint Asset Management NZ Assets Mgt Russell Investment Group Smartshares Tower Asset Mgt Tyndall Investment Mgt NZ Equities NZX 50 (Gross)* NZX 50 Portfolio* Aust Equities NZX 50 (Gross)* NZX 50 Portfolio* Overseas Equities MSCI Gross in $NZ 0% & 100% NZ Bonds ANZ Government Stock Overseas Bonds Citigroup Govt. World 100% Barclays Capital Aggregate 100% Cash ANZ 90 Day Bank Bill *Includes imputation credits Rk means Ranking, where 1 indicates that manager had the highest return over the period.

3 Investment Commentary September 2010 The Aon Hewitt Investment Update OCTOBER Bonds Save the Day Solid investment returns The September quarter was kind to almost all investors, with both equities and bonds enjoying healthy returns. This is despite some fairly mixed economic news over the period, though this appears to have already been at least partly anticipated by investment markets. As a result the returns for multi-sector investment mandates have been solid over the last 12 months, though not so over the last three years. This is illustrated in the performance of discretionary funds (ie balanced mandates) shown below: Manager Average (before tax and fees) Quarter ending Year ending September % 8.0% June % 10.0% March % 21.4% December % 13.1% September % 2.6% September % -8.5% The three-year average return for the period ending September 2010 for these discretionary funds is only 0.5% pa, and rolling 3-year returns have been around nil since the beginning of Of course, these periods cover both the severe sell-off in equity markets over 2008 and into early 2009 followed by the welcome and quite pronounced bounce over the remainder of As to be expected, returns over the longer term have improved. Discretionary funds achieved an average investment return of 7.8% pa over the last 15 years, though with some unexpectedly poor annual returns as shown in the graph below: Discretionary Fund 20% 15% 10% 5% 0% -5% -10% Gross returns for 12 months ending September What is very apparent are the two periods of very substantial losses in equity markets - the tech wreck over 2001 and 2002 and the global financial crisis over 2008 and As discussed below, this has tended to overshadow the strong and consistent performance from bonds over this period.

4 4 The Aon Hewitt Investment Update OCTOBER 2010 Equities have been dismal Equity markets are volatile and investors should accept some periods of capital losses. However, over the longer term, equity markets are expected to deliver strong returns - both in absolute terms and relative to other lower-risk asset classes. This has not been the case over the last ten years (which must be close to being defined as long-term), though 15 year returns are much better. The table below shows medium and longer-term gross average investment manager returns for both global equities (currency unhedged) and NZ equities. Equities Average Manager investment returns* Global (unhedged) New Zealand 5 years ending Sept % pa 1.2% pa Sept % pa 15.4% pa Sept % pa 10.9% pa 10 years ending Sept % pa 8.1% pa Sept % pa 13.1% pa 15 years ending Sept % pa 9.0% pa *before tax and fees Compared to global equities, New Zealand equities have been quite respectable Interestingly, despite this relative out performance of the NZ share market, there has been a noticeable trend away from NZ equities over the last 15 years (and longer periods). But Bonds have been brilliant As mentioned above, both NZ and fully hedged global bonds have, in general, performed strongly over the last 15 years. Manager average returns over this period are shown in the table below: Bonds Average Manager investment returns* Global (fully hedged) New Zealand 5 years ending Sept % pa 7.7% pa Sept % pa 7.4% pa Sept % pa 8.6% pa 10 years ending Sept % pa 7.5% pa Sept % pa 8.0% pa 15 years ending Sept % pa 7.9% pa *before tax and fees

5 The Aon Hewitt Investment Update OCTOBER Of course, the return from bonds is a combination of interest payments and capital movements. The last 15 years have seen a marked trend of falling interest rates for both NZ and global bonds, which is reflected in immediate capital gains but lower future returns. The graphs below show the yields on US 10 year treasuries and NZ 10 year government stocks over the last 15 years. 10 year bond yield - US Treasuries and NZ Government Sep 95 Sep 96 Sep 97 Sep 98 Sep 99 Sep 00 Sep 01 Sep 02 Sep 03 Sep 04 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 NZ Government US Treasuries The above only covers sovereign debt that is, country government issued bonds. Corporate debt has suffered much greater volatility over the 15 year periods, with credit spreads narrowing to unjustifiable levels by 2008, and then widening rapidly during the global financial crisis. In addition, there have been massive developments in non-standard debt instruments, including structured debt and mortgage backed assets. What about future returns? We don t of course know what returns investment classes or investment strategies will deliver in future. However, what we do know is that: bond yields are currently at historically low levels, and so it is likely that the return on bonds will be modest over the next few years compared to their previous returns; equity markets continue to be volatile with general acceptance that there are some major economic and trade imbalances, especially in the US, Europe and China that have yet to be resolved, and so it is possible that future global economic growth will be tepid and equities will deliver modest returns over the medium term (albeit with some good years offset by some poor ones). It may be that a conventional balanced investment strategy, with a split largely between fixed interest and equities, may not be able to deliver strong returns over the next 5 or so years. For many trustees and investment consultants, this realisation will result investigating a greater allocation to alternative asset classes.

6 6 The Aon Hewitt Investment Update OCTOBER 2010 Discretionary Assets Risk and Return 3 Year Risk/Return TAM TYN AMPCI ASB AXA GI

7 The Aon Hewitt Investment Update OCTOBER Discretionary Assets Asset Allocation Allocation at end of quarter Changes since last quarter (%) NZ Bonds Overseas Bonds Cash Overseas Equities Absolute Return Property Aust Equities

8 8 The Aon Hewitt Investment Update OCTOBER 2010 Conservative, Balanced & Growth Risk Profiles 3 Year Risk/Return Balanced TAM TYN AMPCI ASB

9 The Aon Hewitt Investment Update OCTOBER Overseas Equities (unhedged) 3 Year Risk/Return TAM RUSSELL TYN AXA GI AMPCI ABNZL Value

10 10 The Aon Hewitt Investment Update OCTOBER 2010 New Zealand Equities 3 Year Risk/Return MAM DEVON High Conviction TYN Core TAM SMS MIDZ

11 The Aon Hewitt Investment Update OCTOBER Australasian Equities 3 Year Risk/Return MAM Aggressive MINT DEVON ABNZL HG Trans-Tasman AXA GI AMPCI BROOK TYN Core ASB SMS OZZY* *Returns before July 2006 include management fees

12 12 The Aon Hewitt Investment Update OCTOBER 2010 New Zealand Bonds 3 Year Risk/Return AMPCI ASB TAM TYN ABNZL AXA GI

13 The Aon Hewitt Investment Update OCTOBER Overseas Bonds 3 Year Risk/Return RUSSELL AXA GI TYN ASB AMPCI TAM

14 14 The Aon Hewitt Investment Update OCTOBER 2010 Property 3 Year Risk/Return TAM ABNZL AMPCI

15 The Aon Hewitt Investment Update OCTOBER Cash 3 Year Risk/Return TYN AMPCI TAM AXA GI ABNZL ASB

16 16 The Aon Hewitt Investment Update OCTOBER 2010 Global Property Other Funds

17 The Aon Hewitt Investment Update OCTOBER Aon Hewitt Investment Consulting Service This quarterly survey is produced by Aon New Zealand. Other investment consulting services include: Establishing investment objectives for both our clients and investment managers; Determining long-term investment strategies, in the form of benchmark portfolios and sector ranges, consistent with the investment objectives; Determining the efficient frontier and risk/return profiles; Assisting in the appointment of investment managers, by: - Establishing the selection criteria; - Identifying suitable investment managers; - Analysing investment managers capabilities against the criteria; and - Carrying out qualitative reviews. Reviewing contractual agreements and legal documentation; Performance monitoring, against both investment objectives and competitors; Communication of investment objectives and strategies to investors; and Asset/liability modelling. Explanatory Notes 1. Returns are before management fees and tax and are generally per annum, except for quarterly returns which are per quarter. 2. Discretionary Assets are those for which the manager considers they have full discretion over stock selection and asset allocation. 3. Australasian Equities - AMPCI s returns are those of their actively managed portfolios only. 4. Overseas Sectors - The returns are in $NZ and exclude the effects of currency hedging on Equities and include the effects of currency hedging on Bonds, Global Property and Absolute Return Funds. 5. Overseas Equities - AMPCI s returns are those of their actively managed portfolios only. 6. Property - The returns in this table are influenced by the allocation to direct investment and holdings in listed vehicles. In the case of direct investment, the valuation approach and timing adopted by the manager will influence the returns. 7. In the compilation of the risk/return plots, risk is measured by the standard deviations of monthly returns over the period. The 3 Year Risk/Return snail trail charts show the change in 3 Year Risk/Return from the previous quarter to the current one. 8. Average return is the asset-weighted average return. 9. Rankings on returns are calculated using more than 1 decimal place. Where managers have the same return rounded to 1 decimal place but different rankings, the rankings reflect the returns to more than 1 decimal place. 10. Index data was provided by AXA Global Investors.

18 18 The Aon Hewitt Investment Update OCTOBER 2010 The Aon Investment Forecasts Conducted during October 2010 Investment Sector NZ Cash NZ Fixed Interest NZ Property NZ Equities International Fixed Interest International Equities Inflation Rate Over the current year 1 Oct Sep 2011 Over the next five years 1 Oct Sep 2015 Average Dispersion Average Dispersion 3.6% (0.1%) 5.1% (0.1%) 3.6% (0.1%) 5.2% (0.4%) 3.7% (1.0%) 5.6% (0.4%) 4.2% (1.4%) 5.5% (0.2%) 3.4% (1.0%) 8.7% (0.8%) 6.9% (3.0%) 8.8% (0.8%) 10.2% (5.9%) 9.7% (2.2%) 10.9% (6.8%) 9.8% (2.5%) 2.7% (1.0%) 4.8% (0.4%) 4.2% (1.2%) 4.8% (0.1%) 11.9% (5.9%) 9.5% (1.9%) 12.5% (8.8%) 9.5% (1.9%) 4.0% (0.6%) 2.4% (0.6%) 4.2% (2.3%) 2.4% (0.7%) Contributors to the survey were: AMP Capital Investors BT Funds Management First NZ Capital Goldman Sachs & Partners NZ (NZ) Limited Notes: 1. Participants were asked for their estimate of the annual rate of investment return before tax and expenses for a New Zealand dollar investor. The figures shown are the average of all responses received. Figures in brackets give a measure of the dispersion of responses, and are equal to the second highest response less the second lowest. 2. The figures in italics are the results of our July 2010 survey. 3. These results may be reprinted in whole or in part, but attribution to Aon Hewitt would be appreciated. 4. The information contained in this report is provided for general information purposes only. It is given without knowledge of your individual circumstances and should not be used as a substitute for you seeking your own independent professional advice. No liability will be accepted for loss resulting from reliance on information contained in this report which proves to be inaccurate and/or incomplete.

19 The Aon Hewitt Investment Update OCTOBER The Aon Economists Survey Conducted during October 2010 In 1 year s time In 4 years time In 7 years time Average Dispersion Average Dispersion Average Dispersion Inflation rate as measured by CPI Rate of increase of Average Weekly Wage Real interest rate (i.e., yield on 10 year ovt stock, in excess of inflation) Rate of growth of real GDP Trade Weighted Exchange Rate (TWI) 4.3% (0.8%) 2.5% (0.4%) 2.5% (0.8%) 5.0% (0.7%) 2.6% (0.4%) 2.4% (0.5%) 2.4% (0.5%) 3.3% (0.8%) 3.2% (1.1%) 2.3% (0.9%) 3.7% (0.7%) 3.5% (0.7%) 2.1% (1.3%) 3.9% (1.1%) 3.8% (1.0%) 1.3% (0.4%) 3.9% (0.7%) 3.9% (0.5%) 2.6% (1.8%) 2.5% (0.5%) 2.6% (0.6%) 3.1% (1.1%) 2.4% (0.5%) 2.6% (0.5%) 67.1 (5.9) 63.4 (6.0) 62.5 (7.2) 66.5 (11.0) 64.2 (6.0) 62.1 (5.0) Contributors to the survey were: ANZ Bank (NZ) Limited Bank of New Zealand Deutsche Bank (NZ) Limited First NZ Capital NZIER UBS NZ Limited Westpac Notes: 1. The figures shown are the average of all responses received. Figures in brackets give a measure of the dispersion of responses, and are equal to the second highest response less the second lowest. 2. The figures in italics are the results of our July 2010 survey. 3. These results may be reprinted in whole or in part, but attribution to Aon Hewitt would be appreciated. 4. The information contained in this report is provided for general information purposes only. It is given without knowledge of your individual circumstances and should not be used as a substitute for you seeking your own independent professional advice. No liability will be accepted for loss resulting from reliance on information contained in this report which proves to be inaccurate and/or incomplete.

20 20 The Aon Hewitt Investment Update OCTOBER 2010 Aon New Zealand Consultants and Actuaries Auckland Level 2, AMP Centre. 29 Customs Street West PO Box 3167, Shortland Street Auckland 1140 Tel: Fax: acg-info@aon.co.nz Wellington Level 8, BP House 20 Customhouse Quay, Wellington PO Box 2764, Wellington 6140 Tel: Fax: acg-info@aon.co.nz Christchurch Level 9, BNZ House, Hereford Street PO Box 2058, Christchurch 8140 Tel: Fax: acg-info@aon.co.nz Visit our website at The information used to compile this survey has been provided by the investment managers or is from publicly available sources. The information contained in this report is provided for general information purposes only. It is given without knowledge of your individual circumstances and should not be used as a substitute for you seeking your own independent professional advice. No liability will be accepted for loss resulting from reliance on information contained in this report which proves to be inaccurate and/or incomplete.