The Aon Investment Update Aon Hewitt Investment Consulting

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1 July 2013 The Aon Investment Update Aon Hewitt Investment Consulting July

2 The Aon Hewitt The Aon Investment Hewitt Investment Update Update In this issue Commentary 3-7 Discretionary Assets - Risk and Return 8 Discretionary Assets - Asset Allocation 9 Conservative, Balanced, Growth Risk Profiles 10 Overseas Equities (unhedged) 11 New Zealand Equities 12 Australasian Equities 13 New Zealand Bonds 14 Overseas Bonds 15 Cash 16 Alternatives 17 Property 18 Global Property & Income Funds 19 Explanatory Notes 20 About Aon Hewitt 21 Investment Forecasts 22 Economists Survey 23 Contact Details 24 The Managers AMPCI BROOK BT CFSGAM EC HARBOUR ONEPATH DEVON MAM MINT NZAM RUSSELL TAM TYN SALT AMP Capital Investors (NZ) Brook Asset Mgt BT Funds Management (NZ) Ltd Colonial First State Global Asset Management Elevation Capital Mgt Ltd Harbour Asset Management OnePath (NZ) Limited Devon Funds Mgt Ltd Milford Asset Management Mint Asset Management NZ Assets Mgt Russell Investment Group Tower Asset Mgt Tyndall Investment Mgt Salt Funds Management The Indices NZ Equities NZX 50 (Gross)* NZX 50 Portfolio* Australasian NZX 50 (Gross)* Equities NZX 50 Portfolio* Overseas MSCI Gross in $NZ 0% & 100% Equities NZ Bonds ANZ Govt Stock Overseas Citigroup Govt. World 100% Bonds Barclays Capital 100% Aggregate Cash ANZ 90 Day Bank Bill *Includes imputation credits Hedge

3 July 2013 Investment Commentary June 2013 Bond Markets Turn The June quarter delivered flat returns from the main investment sectors, though with renewed investment market volatility. The main feature was the material capital losses from bonds, which is discussed further below. However, the returns for most periods ending June 2013 should have been strong for most investors. The average returns achieved by wholesale managers operating in New Zealand over both the last year and the last 5 years (which includes the height of the global financial crisis) are provided below: Manager Average Investment Returns to June 2013 (before tax and investment fees) 12 months % 5 years % pa Cash New Zealand Bonds Overseas Bonds Australasian Equities New Zealand Equities Overseas Equities New Zealand Property Alternatives Discretionary Assets Note: Overseas Bonds are fully hedged and Overseas Equities are unhedged. Discretionary Assets are balanced fund mandates with the investment manager having discretion over asset allocation. Striking is the big difference between returns from equities relative to bonds over the last year, though not over the longer period. Also noticeable is the stronger return from NZ equity only mandates compared to Australasian equity mandates. 3

4 The Aon Hewitt Investment Update The Bond Bubble Both NZ and global bonds have delivered great returns over the last 10 years and longer. This has been an environment of falling interest rates, resulting in capital gains and, despite the global financial crisis amongst others, very few defaults of securities in the portfolios of wholesale investment managers. Interest rates now have begun to rise, following comments by Bernanke on the likely tapering of quantitative easing in the medium term. This has resulted in some material capital losses for both NZ bond and global bond mandates in recent months. This is illustrated in the table below: Gross returns over June 2013 Quarter NZ Bonds Global Bonds Index -2.2% -1.3% Investment Managers Average -1.3% -1.1% Positive Returns 3 of 9 2 of 6 Indices are the ANZ Government stock index and the Barclays Capital Aggregate (100% hedged) The returns by managers of NZ bonds have been negative over the months of May and June, though April was strong. The returns over the first half of 2013 have been volatile, as illustrated below: 2.0% 1.0% 0.0% - 1.0% - 2.0% NZ NZ bond bond returns returns 4-3.0% Jan- 13 Feb- 13 Mar- 13 Apr- 13 May- 13 Jun- 13 AMPCI BT Bond Fund BT Corporate Bond Harbour NZ Core Harbour Corporate Bond OnePath Fisher Funds Tyndall Tyndall Corporate Bond

5 July 2013 Note that the three corporate bond funds performed relatively well over May and June. The other mandates also include corporate bonds together with government bonds and typically have an equal allocation between the two. The first seven months of 2013 have seen substantial increases in the market yields on NZ government bonds, resulting in large reductions in the capital values of these securities. These changes reflect global bond markets, with some global managers reducing their exposure to NZ government debt. Changes in gross yields on NZ government stock are shown below: 4.5 Gross Yields - NZ Government Stock Gross Yields - NZ Government Stock Jan-12 May-12 Sep-12 Jan-13 Jun-13 2 year 5 year 10 year These changes in interest may appear innocuous. However, the impact on the capital value of bonds can be seen by considering changes in the market value of the NZ government bond maturing in April 2023 with a nominal interest rate of 5.5% pa. This bond was first issued during The market value of this bond, expressed per $100 of nominal bonds at month end over the last 2 years is shown overleaf. 5

6 The Aon Hewitt Investment Update NZ Government NZ Bond --5.5% pa, pa, matures matures April April Strong capital gains from mid-2011 to mid-2012 are clear, following by a period of stability and then the large capital losses over May and June. The bond is now back to its value in late 2011, though still has been a reasonable investment form those who purchased it earlier in Some see the bond market as a bubble. If so, maybe it has burst. In any case, the expectation is for interest rates to be higher several years in the future, assuming that the global economy continues to sustain growth (albeit the rate may be slower than many would like). What we don t know is how these increases will unfold. It would be nice if there was a gradual increase, but we expect there will be periods large increases and possibly others of falling rates. Volatility is likely to continue. NZ Equities have performed As mentioned above, the other feature of the June returns has been the strong relative return of NZ equities against Australian equities. It wasn t that long ago that investors were after greater allocation to Australian equities, driven both by the higher returns from the then resources boom and a desire for greater diversification through a much deeper market. 6

7 July 2013 Gross returns over June 2013 Year NZ Equities Australasian Equities Australian Equities Index 32.3% N/A 22.8% Investment Managers Average 35.1% 28.4% 21.4% Above NZ equity average 3 of 9 3 of 14 0 of 2 Indicies are the NZX 50 gross (with imputation credits) and the ASX200 (AUD) Around 4 years ago, there was a trend away from domestic to global investments. This was seen as providing greater diversification and so reduced risk. Sentiment has changed over recent years, with a strong NZ economy making domestic investment attractive. For tax-paying investors, the ability to access imputation credits makes NZ equities even more attractive. We have no doubt that Australian equity markets will perform again, and that investors should continue to pursue a diversified investment strategy. Changes to the survey We have made some changes in the classification of some investment products within the survey. This includes introducing an alternative section and splitting the Australasian equity table between index-aware and absolute return funds. Given the on-going development of investment products and the relatively small number of wholesale investment managers in NZ, there will always be challenges in providing adequate groupings of investment products. If you need any help with reviewing your fund s strategic long term asset allocations please call your Aon Hewitt consultant. 7

8 The Aon Hewitt Investment Update Discretionary Assets Risk and Return Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk AMPCI MAM NZAM ONEPATH TAM TYN Average Price inflation Wage inflation Return (% pa) AMPCI Balanced NZAM 3 Year Risk/Return MAM TAM TYN ONEPATH AMPCI Risk 8

9 July 2013 Discretionary Assets Asset Allocation Allocation at end of quarter Changes since last quarter (%) 0% 20% 40% 60% 80% 100% NZ OS Cash Aust OS Abs Prop Bonds Bonds Eq Eq Ret AMPCI ONEPATH MAM NZAM TAM TYN NZ Bonds Overseas Bonds Cash Overseas Equities Absolute Return Property Australasian Equities 9

10 The Aon Hewitt Investment Update Conservative, Balanced And Growth Risk Profiles Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk Conservative AMPCI Balanced AMPCI AMPCI RIL MAM NZAM ONEPATH TAM TYN TYN SRI Growth AMPCI Return (% pa) AMPCI Balanced NZAM 3 Year Risk/Return MAM TAM TYN ONEPATH AMPCI Risk 10

11 July 2013 Overseas Equities (unhedged) Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk AMPCI EC Global Value EC Value ONEPATH 1, RUSSELL TAM TYN TYN Multi-Manager TYN SRI Average Index (MSCI Unhedged) Index (MSCI 100% Hedged) Year Risk/Return ONEPATH 10.0 EC Value TYN Multi-Manager AMPCI 8.0 RUSSELL Return (% pa) TAM Risk 11

12 The Aon Hewitt Investment Update New Zealand Equities Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk DEVON NZ Core MAM ONEPATH SALT TYN Core Average Index (NZX 50 Gross) incl I/C Index (NZX 50 Portfolio) incl I/C Year Risk/Return 22.0 MAM ONEPATH Return (% pa) DEVON NZ Core TYN Core SALT Risk 12

13 July 2013 Australasian Equities Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk Index Aware AMPCI AMPCI SEGF BROOK Premium Share BROOK Tasman CFSGAM Core DEVON Australian DEVON Trans-Tasman HARBOUR MAM Trans-Tasman MINT ONEPATH ONEPATH Australian SALT Focus Share SALT NZ Plus Share TAM TYN Small Companies Absolute Return BROOK Alpha DEVON Alpha MAM Active Growth ONEPATH ESF TYN Aggressive Average Index (NZX 50 Gross) incl I/C Index (NZX 50 Portfolio) incl I/C Return (% pa) MAM A-G ONEPATH ESF MINT MAM T-T BROOK P-S HARBOUR ONEPATH SALT P-S DEVON Alpha TYN Agg BROOK Alpha AMPCI DEVON T-T 3 Year Risk/Return TAM TYN Small Companies Index ING aware Absolute ING ESF return Risk 13

14 The Aon Hewitt Investment Update New Zealand Bonds Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk AMPCI 1, BT BT Corporate Bond HARBOUR HARBOUR Corporate Bond ONEPATH 1, TAM TYN TYN Corporate Bond Average Index (Govt Stock) Return (% pa) HARBOUR Corporate Bond 3 Year Risk/Return TAM TYN BT Bond Fund ONEPATH AMPCI Risk

15 July 2013 Overseas Bonds Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk AMPCI CFSGAM 1, ONEPATH RUSSELL 1, TAM 1, TYN Average Index (Citigroup) Index (Barclays) Year Risk/Return Return (% pa) RUSSELL TAM TYN 6.0 AMPCI 5.0 ONEPATH Risk 15

16 The Aon Hewitt Investment Update Cash Returns (%) gross of tax and fees for Funds the last the year ended 31 March Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk AMPCI 3, BT CFSGAM HARBOUR ONEPATH 1, TAM TYN Average Index Year Risk/Return 4.5 Return (% pa) TYN AMPCI ONEPATH BT TAM Risk

17 July 2013 Alternatives Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk MAM NZAM NZAM Alpha TYN TYN Bond Option Average TYN 3 Year Risk/Return 8.0 NZAM Return (% pa) Risk 17

18 The Aon Hewitt Investment Update Property Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk AMPCI AMPCI Listed CFSGAM MINT ONEPATH SALT TAM TYN Average Year Risk/Return 18 Return (% pa) MINT ONEPATH SALT TYN TAM AMPCI Risk

19 July 2013 Global Property Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk AMPCI ONEPATH Average Income Funds Returns (%) gross of tax and fees for Funds the last the year ended 30 June Manager ($m) 1 qtr Rk 1 yr Rk 3 yrs Rk 5 yrs Rk BROOK DEVON HARBOUR MAM TYN Average

20 The Aon Hewitt Investment Update Aon Hewitt Investment Consulting Service This quarterly survey is produced by Aon Hewitt 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; Performance monitoring, against both investment objectives and competitors; Reviewing contractual agreements and legal documentation; 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. 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 year 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 AMP Capital. 20

21 July 2013 About Aon Hewitt New Zealand July 2013 Part of Aon plc, Aon Hewitt is the world s leading HR consulting and outsourcing firm. We empower organisations by advising and delivering integrated HR solutions that help employers achieve business results and create better outcomes for employees. At Aon Hewitt, we know that every organisation is only as great as its people. That s why we work with clients to make sure their people are positive, productive and secure in their future. Only then can they achieve remarkable results for their organisation. We also recognise the importance of safeguarding individuals financial wellbeing as well as their physical wellbeing. Our Wealth Management business helps individuals to meet their wealth creation, protection and retirement planning needs. In New Zealand, Aon Hewitt provides consulting services and solutions to clients in the areas of: Aon KiwiSaver Scheme Aon Master Trust KiwiSaver and superannuation administration actuarial and investment consulting engagement and leadership remuneration surveys and analytics performance and rewards consulting health and benefits global benefits. With more than 30,000 professionals in 120 countries, Aon Hewitt makes the world a better place to work for clients and their employees. About Aon Aon plc is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 65,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world s best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited to learn about Aon s global partnership and shirt sponsorship with Manchester United 21

22 The Aon Hewitt Investment Update The Aon Hewitt Investment Forecasts Conducted during July 2013 Investment Sector NZ Cash NZ Fixed Interest NZ Property NZ Equities International Fixed Interest International Equities Inflation Rate Over the current year 1 Jul Jun 2014 Over the next five years 1 Jul Jun 2018 Average Dispersion Average Dispersion 3.0% (0.1%) 3.9% (0.5%) 2.8% (0.2%) 3.6% (0.4%) 3.0% (2.5%) 4.3% (1.6%) 2.7% (2.7%) 3.8% (1.5%) 6.1% (1.5%) 7.0% (2.0%) 5.3% (1.0%) 6.8% (1.9%) 7.5% (3.9%) 8.3% (2.0%) 6.3% (3.5%) 9.0% (1.5%) 2.7% (2.5%) 3.9% (2.0%) 2.2% (3.7%) 3.4% (1.2%) 4.8% (9.0%) 7.1% (2.9%) 6.0% (0.7%) 7.6% (1.0%) 1.9% (0.5%) 2.4% (0.5%) 1.8% (0.4%) 2.5% (1.0%) Contributors to the survey were: BT Funds Management (NZ) Limited Devon Funds Management First NZ Capital Fisher Funds Harbour Asset Management Limited OnePath (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 (April 2013 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. 22

23 July 2013 The Aon Hewitt Economists Survey Conducted during July 2013 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 Govt stock, in excess of inflation) Rate of growth of real GDP Trade Weighted Exchange Rate (TWI) 2.0% (0.1%) 2.3% (0.2%) 2.3% (0.1%) 1.8% (0.4%) 2.3% (0.3%) 2.4% (0.3%) 2.6% (0.9%) 3.1% (0.5%) 2.9% (0.3%) 2.5% (0.7%) 3.0% (0.3%) 3.0% (0.3%) 2.3% (0.2%) 2.8% (0.2%) 3.1% (0.2%) 2.5% (0.5%) 2.9% (0.0%) 3.2% (0.2%) 3.1% (0.4%) 2.3% (0.4%) 2.4% (0.5%) 2.8% (0.5%) 2.2% (0.4%) 2.5% (0.2%) 74.1 (2.7) 67.8 (2.9) 65.5 (5.1) 75.9 (1.2) 66.4 (6.0) 65.6 (5.1) Contributors to the survey were: ANZ Bank (NZ) Limited BNZ Deutsche Bank (NZ) Limited First NZ Capital NZIER UBS NZ Limited 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 (April 2013 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. 23

24 The Aon Hewitt Investment Update Aon Hewitt New Zealand Consultants and Actuaries Auckland Level 2, AMP Centre, 29 Customs Street West PO Box 3167, Shortland Street Auckland 1140 Tel: Fax: nz.info@aonhewitt.com Wellington Level 2, State Insurance Building, 1 Willis St, Wellington PO Box 2764, Wellington 6140 Tel: Fax: nz.info@aonhewitt.com Christchurch 388 Blenheim Road, Christchurch PO Box 2058, Christchurch 8140 Tel: Fax: nz.info@aonhewitt.com 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. 24