Investment Update The University of Melbourne 7 November, 2013 Agenda TOPIC Investment Update (45 min) UniSuper Investment Options & Advice (10 min) PRESENTER David Schneider Head of Research & Quant Methods Graham Eggins Regional Manager Questions 2 1
The information contained within this presentation is intended to provide general advice only. It has been prepared without taking into account your objectives, financial situation or personal needs. Prior to making any investment decisions, you should speak with a financial adviser to consider whether this information is appropriate for your needs, objectives and circumstances. You should obtain a copy of the relevant product disclosure statement (PDS) prior to making a decision regarding any investment in any financial product. This information is current as at August 2013 and is based on our understanding of legislation at that date. Information relating to the 2012/13 & 2013/14 Federal Budgets, and announcements made by the Federal Government on 5 April 2013 is based on our understanding of the proposals. The information provided in this presentation in relation to these announcements is subject to change and certain proposals may not become effective until they are enacted by Parliament. You should not rely on this information and it should be verified prior to making any decision. Defined benefits (including defined benefit pensions) are not guaranteed and are subject to the risk that the pool of assets supporting them may not be sufficient to meet all of UniSuper s defined benefit obligations. In the event of prolonged underfunding, clause 34 of UniSuper s trust deed provides a mechanism for defined benefits to be reduced on a fair and equitable basis. A clause 34 monitoring period was recently concluded and it was resolved to reduce the defined benefit formula from 1 January 2015 by changing the definition of Benefit Salary as it applies to service on and after 1 January 2015. This change does not affect defined benefits or pensions that become payable before 1 January 2015. There are two further clause 34 monitoring periods in place concluding on 30 June 2015 and 30 June 2016. The information contained in this presentation is not legal, taxation or accounting advice. Professional advice should be obtained before making any decisions. Whilst care has been taken in the preparation of this information, the accuracy or completeness of the information is not guaranteed. This presentation was prepared and issued by UniSuper Management Pty Ltd ABN 91 006 961 799, AFSL No: 235907, which is also the administrator of, and wholly owned by, the UniSuper Superannuation fund (ABN 91 385 943 850). UniSuper Limited (ABN 54 006 027 121) is the trustee of the fund. If you would like to contact us please do so on 1800 331 685 or alternatively send us an email to enquiry@unisuper.com.au 3 Investment Update David Schneider Head of Research & Quant Methods The University of Melbourne November 2013 2
Agenda Macro-economic update Financial conditions and market outlook Focus on UniSuper s options» Australian Equity Income Option» Global Companies in Asia Option» Defined Benefit Division Performance 5 Macro-economic update 3
The economic cycle; what is the new normal 20 USA QoQ GDP Growth (%) 15 10 5 0-5 -10-15 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 7 The economic cycle; what is the new normal 5 Australia QoQ GDP Growth (%) 4 3 2 1 0-1 -2-3 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 8 4
The Australian economy mining investment slowing and non mining is mixed, but some signs of improvement Source: Thomson Reuters, AMP Capital 9 Australia s public finances are in relatively good shape Source: IMF, AMP Capital 10 5
Financial conditions and market outlook To understand markets pay attention to financial conditions Economic Fundamentals Financial Conditions GDP Growth Valuation Inflation Sentiment Unemployment Liquidity 12 6
Sentiment was very poor not long ago Warning from respected business journalist Alan Kohler on 17 December 2011 IMPORTANT: I believe the conditions are in place for another major panic sell-off on the sharemarket. I don't know when it will happen and it is not a certainty that it will happen (nothing is ever a certainty), but I think the risk is now such that you must take action. On Monday I will be significantly reducing my already reduced exposure to equities, possibly to zero 13 The post-gfc white-knuckle ride Alan Kohler says SELL! 14 7
Equities now appear fairly priced 18 Australian Equities - Forward Price Earnings Ratio 17 16 Equities expensive 15 14 13 12 11 Equities cheap 10 9 8 2005 May 2005 Aug 2005 Nov 2006 Feb 2006 May 2006 Aug 2006 Nov 2007 Feb 2007 May 2007 Aug 2007 Nov 2008 Feb 2008 May 2008 Aug 2008 Nov 2009 Feb 2009 May 2009 Aug 2009 Nov 2010 Feb 2010 May 2010 Aug 2010 Nov 2011 Feb 2011 May 2011 Aug 2011 Nov 2012 Feb 2012 May 2012 Aug 2012 Nov 2013 Feb 2013 May 2013 Aug FWD PE Average +/- 1 standard deviation Source: Bloomberg, UniSuper 15 Bond yields Still expensive from a historic perspective 8 10 Year Commonwealth Government Securities Long Bond Yield (%) 7 6 5 4 3 Long Bond Yields Average 6% Yields Recover GFC: Flight to safety Eurozone/Sovereign Crisis Yields starting to normalise 2 Unprecedented levels 1 0 Jul 13 Jan 13 Jul 12 Jan 12 Jul 11 Jan 11 Jul 10 Jan 10 Jul 09 Jan 09 Jul 08 Jan 08 Jul 07 Jan 07 Jul 06 Jan 06 Jul 05 Jan 05 Jul 04 Jan 04 Jul 03 Jan 03 Jul 02 Jan 02 Jul 01 Jan 01 Jul 00 Jan 00 Jul 99 Jan 99 Source: Bloomberg, UniSuper 16 8
Dividend yields v. bonds Source: Bloomberg, UniSuper Past performance is not an indicator of future performance. Views on sentiments reflect currently available data, are subject to change and are not guaranteed. 17 Outlook for 2013 Valuations appear fair for equities SELL Valuations EXPENSIVE Liquidity / Funding costs unsupportive Sentiment very optimistic HOLD Valuations FAIR Liquidity / Funding costs neutral Sentiment neutral last year WAIT Valuations EXPENSIVE Liquidity / Funding costs unsupportive Sentiment nervous BUY Valuations CHEAP Liquidity / Funding costs supportive Sentiment very pessimistic 18 9
Periods of industrialisation have been good for equity markets 2012 2007 2003 2001 1999 1998 1997 1996 1989 1988 1977 1969 1961 1958 1957 1955 1954 1953 1947 2010 1946 2000 1945 1976 1942 1966 1936 1964 1935 1962 1931 1956 1928 1949 1927 1948 1926 1944 1925 2002 1943 1924 1994 1940 1923 1992 1939 1921 2006 1987 1937 1919 2005 1984 1920 1917 2004 1971 1918 1914 1995 1965 1913 1911 1978 1960 1912 1909 1963 1951 1910 1908 1934 1941 1907 1906 1933 1993 2011 1938 1904 1905 1932 1986 1990 1929 1897 1902 1922 2009 1985 1982 1916 1896 1900 1903 1991 1983 1981 1915 1892 1899 1895 1979 1980 1974 1970 1901 1890 1898 1888 1972 1975 1973 1952 1893 1886 1894 1887 1968 1967 Australian Sharemarket Returns 1883 2012 Source: IRESS, GS&PA Research estimates 2008 1930 1891 1889 1884 1885 1883 1950 1959 <-30-30 to -20-20 to -10-10 to 0 0 to 10 10 to 20 20 to 30 30 to 40 >40 10
2012 2007 2003 2001 1999 1998 1997 1996 1989 1988 1977 1969 1961 1958 1957 1955 1954 1953 1947 2010 1946 2000 1945 1976 1942 1966 1936 1964 1935 1962 1931 1956 1928 1949 1927 1948 1926 1944 1925 2002 1943 1924 1994 1940 1923 1992 1939 1921 2006 1987 1937 1919 2005 1984 1920 1917 2004 1971 1918 1914 1995 1965 1913 1911 1978 1960 1912 1909 1963 1951 1910 1908 1934 1941 1907 1906 1933 1993 2011 1938 1904 1905 1932 1986 1990 1929 1897 1902 1922 2009 1985 1982 1916 1896 1900 1903 1991 1983 1981 1915 1892 1899 1895 1979 1980 1974 1970 1901 1890 1898 1888 1972 1975 1973 1952 1893 1886 1894 1887 1968 1967 Australian Sharemarket Returns 1883 2012 Source: IRESS, GS&PA Research estimates 1894 1928 Industrialisation of the US 2008 1930 1891 1889 1884 1885 1883 1950 1959 <-30-30 to -20-20 to -10-10 to 0 0 to 10 10 to 20 20 to 30 30 to 40 >40 2012 2007 2003 2001 1999 1998 1997 1996 1989 1988 1977 1969 1961 1958 1957 1955 1954 1953 1947 2010 1946 2000 1945 1976 1942 1966 1936 1964 1935 1962 1931 1956 1928 1949 1927 1948 1926 1944 1925 2002 1943 1924 1994 1940 1923 1992 1939 1921 2006 1987 1937 1919 2005 1984 1920 1917 2004 1971 1918 1914 1995 1965 1913 1911 1978 1960 1912 1909 1963 1951 1910 1908 1934 1941 1907 1906 1933 1993 2011 1938 1904 1905 1932 1986 1990 1929 1897 1902 1922 2009 1985 1982 1916 1896 1900 1903 1991 1983 1981 1915 1892 1899 1895 1979 1980 1974 1970 1901 1890 1898 1888 1972 1975 1973 1952 1893 1886 1894 1887 1968 1967 Australian Sharemarket Returns 1883 2012 Source: IRESS, GS&PA Research estimates 1929 & 1930 Start of the Great Depression 2008 1930 1891 1889 1884 1885 1883 1950 1959 <-30-30 to -20-20 to -10-10 to 0 0 to 10 10 to 20 20 to 30 30 to 40 >40 11
2012 2007 2003 2001 1999 1998 1997 1996 1989 1988 1977 1969 1961 1958 1957 1955 1954 1953 1947 2010 1946 2000 1945 1976 1942 1966 1936 1964 1935 1962 1931 1956 1928 1949 1927 1948 1926 1944 1925 2002 1943 1924 1994 1940 1923 1992 1939 1921 2006 1987 1937 1919 2005 1984 1920 1917 2004 1971 1918 1914 1995 1965 1913 1911 1978 1960 1912 1909 1963 1951 1910 1908 1934 1941 1907 1906 1933 1993 2011 1938 1904 1905 1932 1986 1990 1929 1897 1902 1922 2009 1985 1982 1916 1896 1900 1903 1991 1983 1981 1915 1892 1899 1895 1979 1980 1974 1970 1901 1890 1898 1888 1972 1975 1973 1952 1893 1886 1894 1887 1968 1967 Australian Sharemarket Returns 1883 2012 Source: IRESS, GS&PA Research estimates 1945 1969 Post WW2 recovery Commercial industrialisation of Japan 2008 1930 1891 1889 1884 1885 1883 1950 1959 <-30-30 to -20-20 to -10-10 to 0 0 to 10 10 to 20 20 to 30 30 to 40 >40 2012 2007 2003 2001 1999 1998 1997 1996 1989 1988 1977 1969 1961 1958 1957 1955 1954 1953 1947 2010 1946 2000 1945 1976 1942 1966 1936 1964 1935 1962 1931 1956 1928 1949 1927 1948 1926 1944 1925 2002 1943 1924 1994 1940 1923 1992 1939 1921 2006 1987 1937 1919 2005 1984 1920 1917 2004 1971 1918 1914 1995 1965 1913 1911 1978 1960 1912 1909 1963 1951 1910 1908 1934 1941 1907 1906 1933 1993 2011 1938 1904 1905 1932 1986 1990 1929 1897 1902 1922 2009 1985 1982 1916 1896 1900 1903 1991 1983 1981 1915 1892 1899 1895 1979 1980 1974 1970 1901 1890 1898 1888 1972 1975 1973 1952 1893 1886 1894 1887 1968 1967 Australian Sharemarket Returns 1883 2012 Source: IRESS, GS&PA Research estimates 1963-1980 Industrialisation of South Korea 2008 1930 1891 1889 1884 1885 1883 1950 1959 <-30-30 to -20-20 to -10-10 to 0 0 to 10 10 to 20 20 to 30 30 to 40 >40 12
2012 2007 2003 2001 1999 1998 1997 1996 1989 1988 1977 1969 1961 1958 1957 1955 1954 1953 1947 2010 1946 2000 1945 1976 1942 1966 1936 1964 1935 1962 1931 1956 1928 1949 1927 1948 1926 1944 1925 2002 1943 1924 1994 1940 1923 1992 1939 1921 2006 1987 1937 1919 2005 1984 1920 1917 2004 1971 1918 1914 1995 1965 1913 1911 1978 1960 1912 1909 1963 1951 1910 1908 1934 1941 1907 1906 1933 1993 2011 1938 1904 1905 1932 1986 1990 1929 1897 1902 1922 2009 1985 1982 1916 1896 1900 1903 1991 1983 1981 1915 1892 1899 1895 1979 1980 1974 1970 1901 1890 1898 1888 1972 1975 1973 1952 1893 1886 1894 1887 1968 1967 Australian Sharemarket Returns 1883 2012 Source: IRESS, GS&PA Research estimates 2003 onwards Industrialisation of China begins to hit critical mass 2008 1930 1891 1889 1884 1885 1883 1950 1959 <-30-30 to -20-20 to -10-10 to 0 0 to 10 10 to 20 20 to 30 30 to 40 >40 Summary The economic cycle is still alive;» the global economy continues to heal after the great recession The equity market has largely anticipated the improved macro picture and now looks fairly valued Bonds, however, still look expensive Given favourable relative valuations, and favourable global trends, UniSuper still prefers equities over bonds Equity preferences are:» High quality fortress assets» Global companies benefiting from emerging Asia» High yielding Australian equities 26 13
UniSuper Option Focus Australian Equity Income Option Australian Equity Income Investment thesis In a post-gfc world, interest rates are likely to stay low for a long time due to:» Lower inflation expectations; and» Accommodative monetary policies as central banks take on most of the responsibility to stimulate economic growth. Low bond yields, cash and term deposit rates will encourage investors to seek higher yielding assets. While investors will be prepared to accept more risk, many will be very selective with respect to the type of equity risk they are prepared to accept. For many investors, high yielding blue chip companies will be preferred over general equity exposure. 28 14
In search of yield Australian Equity Income Option Option Objectives Provide income yield greater than Australian share market (currently 4%)» Note that franking credits can increase income yield by an additional 1.4% Provide capital growth potential Suitable for Risks Investors who want equity exposure with a preference for blue-chip, high yielding equities, as distinct from general equity market exposure which includes higher risk / higher growth companies Investors able to benefit from franking credits (i.e. superannuation funds) Volatility associated with equity markets, which can result in large fluctuations in capital values Investment time horizon has to be long term (i.e. five years or longer) 29 USA v. Australia Australia s post GFC performance appears to be well behind the USA 130 S&P 500 vs ASX 200 120 110 Standardised to 100 from January 2007 100 90 80 70 60 50 40 2007 2008 2009 2010 2011 2012 2013 US S&P500 AU ASX200 30 15
The Importance of Dividends After including dividends the performance gap narrows considerably 140 130 ASX200 vs S&P500 Total Return 120 Standardised to 100 from January 2007 110 100 90 80 70 60 50 40 2007 2008 2009 2010 2011 2012 2013 US S&P500 AU ASX200 31 In search of yield Australian Equity Income Option Australian Equity Income vs. ASX300 (Cumulative Returns) Top 10 Holdings 150.0 140.0 STOCK NAME PORTFOLIO WEIGHT (%) DIV YIELD (NET %) DIV YIELD (GROSS %) Index Value 130.0 120.0 110.0 100.0 TELSTRA 9.1 5.6 8.0 WESTPAC 8.7 5.9 8.4 CBA 8.7 5.0 7.2 NAB 8.4 5.8 8.3 ANZ 8.3 5.2 7.5 TRANSURBAN 6.0 4.5 4.5 90.0 Apr 2012 May Jun 2012 2012 Jul Aug Sep Oct Nov Dec 2012 2012 2012 2012 2012 2012 Jan Feb 2013 2013 Mar 2013 Apr 2013 WOOLWORTHS 5.9 3.9 5.6 WESFARMERS 5.9 4.3 6.1 WOODSIDE 5.4 6.6 9.4 Aust Equity Income (After Tax and Fees) ASX 300 (After tax and Fees) ASX 3.5 4.7 6.7 Source: Net and Gross dividend yields sourced from Goldman Sachs forecast data - 2013 32 16
Example of a key AEI holding: Woolworths Consistent earnings and dividends what GFC? $35 Woolworths Share Price vs Dividend per Share $2.00 $30 $1.80 $1.60 $25 $1.40 Share Price $20 $15 $1.20 $1.00 $0.80 Dividend Per Share $10 $0.60 $5 $0.40 $0.20 $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 FY End DPS Price $0.00 33 UniSuper Option Focus Global Companies in Asia Option 17
Global Companies in Asia Investment thesis The industrialisation and urbanisation of Asia will be the most important economic development for at least the next few decades, and possibly the 21 st century Investing in Asian based companies may well be rewarding. However, Asian markets are still relatively under developed, illiquid, and often lack robust corporate governance frameworks Therefore, a potentially less risky way of benefiting from the Asian story is to identify companies listed in developed markets. These will include many well known global brands, deriving a significant proportion of their sales from the emerging Asian region 35 Why? 1. Population growth Between now and 2050, the world s population will grow by 2 billion people» 2.2 billion people will be from developing nations! Source: UniSuper, United Nations Department of Economic and Social Affairs Population Division, 2012 36 18
Why? 2. Urbanisation China s urbanisation rate will rise from 50% to 65% over the next 15 years» By 2025 China s urban population will grow by 300 million people Source: UniSuper, United Nations Department of Economic and Social Affairs Population Division, 2012 37 Why? Result = increasing Share of GDP World GDP 1980 2100 Source: UniSuper, United Nations Department of Economic and Social Affairs Population Division, 2012 38 19
Why? 3. Rising middle and upper class By 2030 the global middle class will number 4.9 billion from 2 billion today» China and India will account for 2 billion of the 2.9 billion new middle class 16% 5% Source: UniSuper, McKinsey 39 Why? 4. Spending habits change Projected change in breakdown of consumption spend, urban China Source: UniSuper, National Bureau of Statistics of China +17bn RMB 40 20
Portfolio Construction Criteria Algorithm Total Securities 67,190 35,748 Remove Emerging Markets Remove Incorporation in EM 33,024 4,359 Remove Mkt Cap <$US1bn Remove Tobacco 4,348 1,648 Consider only consumption based Add major brands 1,673 10% or $1B in EM sales 661 256 Growth in sales over 3 year period 41 41 41 Global Companies in Asia Portfolio Snapshot at 30 September 2013 Top 5 Holdings by Region NORTH AMERICA % of Portfolio Citigroup 3.59 General Electric 3.07 Apple 3.04 JPMorgan 2.93 Qualcomm 2.67 EUROPE % of Portfolio Nestle 2.91 Unilever 2.38 Siemens 2.11 BMW 2.10 Volkswagen 2.07 ASIA PACIFIC % of Portfolio Samsung 2.10 AIA 1.97 United Overseas 1.12 ANZ Bank 1.06 Toyota 0.63 Industry Classification Country Classification % % 42 21
UniSuper Option Focus Defined Benefit Division Defined Benefit Division ABI and VBI as at June 2013 Defined Benefit Division VBI and ABI 44 22
DBD positioning Required return of ~7% p.a. High weighting to growth assets to achieve required return High weighting to high yielding Australian assets Positioning generated a return of 18.3% Actual Asset Allocation 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Past performance is not an indicator of future performance. Views on sentiments reflect currently available data, are subject to change and are not guaranteed. 0% 30 June 2012 30 June 2013 Global Shares Australian Shares Alternative Assets Australian Property Cash & Bonds 45 Performance 23
Option performance as at 30 September 2013 OPTION FYTD (%) 1 YEAR (%) 3 YEARS (%) 5 YEARS (%) 7 YEARS (%) High Growth 7.0 21.9 10.0 6.6 4.8 Balanced 5.1 16.3 8.9 6.5 5.0 Cash 0.7 2.9 3.8 3.7 4.2 DBD 4.8 18.3 10.4 7.5 5.8 OPTION FYTD (%) 1 YEAR (%) SINCE INCEPTION (21 APRIL 2012) Australian Equities Income 7.2 28.3 27.1 Global Companies in Asia Global Environmental Opportunities 4.9 25.7 17.5 9.2 44.8 27.3 47 Quartile ranking of UniSuper s diversified accumulation option performance* UNISUPER DIVERSIFIED OPTION 1 YEAR 3 YEARS 5 YEARS 7 YEARS 10 YEARS Cash Q2 Q2 Q2 Q2 Q1 Capital Stable Q2 Q1 Q1 Q1 Q1 Conservative Balanced Q1 Q1 Q1 Q1 Q1 Balanced Q2 Q1 Q1 Q1 Q1 Growth Q2 Q2 Q1 Q1 Q1 High Growth Q3 Q2 Q1 Q1 Q1 Key Q1: Top quartile (i.e. top 25% of all superannuation funds that participate in the SuperRatings Survey) Q2: Second quartile (i.e. between the median and the top 25% of all superannuation funds) Q3: Third quartile * SuperRatings Crediting Rate Survey 30 June 2013 Past performance is not an indicator of future performance. Survey data is for Pension Options not Accumulation Options. 48 24
UniSuper Investment Options & Advice Graham Eggins Regional Manager The University of Melbourne November 2013 Get to know your tolerance to risk High Low Potential return The higher the potential return, the higher the potential risk... Cash Australian Bond Balanced Socially Responsible Balanced Capital Stable Conservative Balanced Listed Property Growth Australian Shares International Shares High Growth Socially Responsible High Growth Global Environmental Opportunities Australian Equity Income Global Companies in Asia Growth assets Defensive assets Single-asset class options Low Expected risk High This is a conceptual chart showing the risk/return trade offs where risk means volatilityas opposed to the risk of a negative return 50 25
Making the most of your Accumulation account Choose your investment option A single Pre-Mixed investment option or elect your own mix from our range of: - 6 Pre-Mixed investment options, and - 9 Single Asset Class investment options UniSuper offers separate investment choice functionality to: - Direct how future contributions are invested - Direct how rollovers are invested - Switch your existing investments independent of which options your future contributions are invested 51 Pre-Mixed investment options Investment option Strategic Growth/Defensive asset mix (%) Performance objective over suggested investment horizon Capital Stable 30/70 2.0% pa + CPI Conservative Balanced 50/50 2.5% pa + CPI Balanced 70/30 3.0% pa + CPI Socially Responsible Balanced 70/30 3.0% pa + CPI Growth 85/15 4.0% pa + CPI High Growth 100/0 5.0% pa + CPI As at 30 June 2013. Each investment option has a strategic asset allocation to various asset classes. Actual allocations to each asset class (and therefore to growth and defensive assets) may deviate within permitted ranges. Strategic asset allocations and permitted ranges may change from time to time. Refer to our website for further details. Source: www.unisuper.com.au/investments/options-and-performance. 52 26
Sector investment options Investment option Strategic Growth/Defensive asset mix (%) Performance objective over suggested investment horizon Cash 0/100 0.5% pa + CPI Australian Bond 0/100 1.0% pa + CPI Listed Property 100/0 3.0% pa + CPI Australian Shares 100/0 5.0% pa + CPI International Shares 100/0 5.0% pa + CPI Socially Responsible High Growth 100/0 5.0% pa + CPI Global Environmental Opportunities 100/0 5.0% pa + CPI Australian Equity Income 100/0 To exceed the Australian equity market dividend yield, and provide potential for capital growth Global Companies in Asia 100/0 5.0% pa + CPI As at 30 June 2013. Each investment option has a strategic asset allocation to various asset classes. Actual allocations to each asset class (and therefore to growth and defensive assets) may deviate within permitted ranges. Strategic asset allocations and permitted ranges may change from time to time. Refer to our website for further details. Source: www.unisuper.com.au/investments/options-and-performance. 53 How UniSuper can help UniSuper offers 3 levels of advice: General Advice (phone-based) - Not specific to your personal situation Limited Advice (phone-based) - Single issue personal advice specific to your situation Comprehensive Personal Advice (face to face) - Full personal advice covering multiple issues specific to your situation Call UniSuper Advice today on 1300 331 685for a complimentary initial assessment on the level of advice that might suit you 54 27
Any questions? 55 28