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Australia's biggest industry superannuation fund remains optimistic about the outlook for global equity markets in 2017-18 but warns that returns this year may not be as strong following last year's hefty gains.
AustralianSuper, which oversees $120 billion of assets on behalf of 2.2 million members, said the prospects for the global economy were strong and played down political and interest rate concerns as it unveiled a 12.4 per cent return for the 12 months to June.
Mark Delaney, the fund's chief investment officer, said that unusually growth in all the major economies was solid, while political concerns had been largely swept aside with most of the major national elections now out of the way. Furthermore, assuming the US Federal Reserve tightens interest rates in a "measured way", yields on 10-year US Treasuries should remain within the band of between 2 per cent and 3 per cent.
Mr Delaney was also unfazed by the impact of interest rate rises on equity prices, noting that investors took the last Fed hike in their stride.
"The outlook [for equity markets] hasn't changed that much. But you won't get the same returns from that outlook," Mr Delaney said, referring to the fact that equity prices started the 2016-17 financial year at a much lower level.
Mr Delaney attributed the strong gains last year to hefty rises in global equities and infrastructure in particular. Global shares, which comprise 30 per cent of the balanced portfolio, rose 20 per cent. Infrastructure, which accounts for 12 per cent of the portfolio, returned 15.7 per cent. Australian shares also put in a strong performance, while property returned 11 per cent.
"If you owned anything besides cash and bonds last year you did well," Mr Delaney said.
AustralianSuper manages $26 billion of assets internally, of which $12 billion is in local shares. Mr Delaney refused to disclose the relative performance of the internal and external teams, but said that the internal teams had performed "slightly better than external managers" since inception three years ago. Last year the performance of internal property "was a little bit behind" because the team was more exposed to global property, which lagged the performance of Australian property.
The fund said that on a combined basis the internal teams, where the costs are about one quarter of external managers, had delivered a $100 million benefit to members, taking in fees and performance.
Mr Delaney was cautious about placing targets on internal management, but pointed to the fact that global pension funds of a similar size to AustralianSuper tended to manage about half of their total assets in-house.
"Assuming we can generate successful performance from internal teams, we will continue to increase the amount of money we manage internally," said Mr Delaney.
"Internal management will help us to reduce costs, give the fund the ability to be more agile in the way we invest and enable us to continue to invest in high-quality assets," he added.
AustralianSuper noted that 2016-17 was the eighth consecutive year of positive returns since the global financial crisis and the fourth year out of five that the fund had delivered double-digit returns. Research firm Chant West has estimated that the average balanced fund returned 10.5 per cent last year.
In contrast to his optimism about global shares, Mr Delaney said the fund was cautious about infrastructure and property and was not looking to add investments in those areas. As a result, the relative exposure to those two asset classes is expected to fall. The outlook for property was clouded by the rise in both prices and interest rates. Infrastructure prices had also risen.
"You have to be very careful about what you buy," Mr Delaney said.
According to Chant West, the average annual return for balanced funds over five years was 10.4 per cent, falling to 8.9 per cent over seven years and 5 per cent over 10 years. The 10-year figure takes in the market rout caused by the global financial crisis.