Over the last 40 years interest rates have largely been on a downward trajectory as governments separated central banks from political influence, and refocused them on broader objectives linked to employment, inflation, and currency stability.
Central banks have navigated numerous crises with varying success, and worked within their mandate using monetary policy to help all of us have some greater certainty on the cost of living, jobs, and other aspirations. The charts below show a helicopter view of how some of this policy has seen interest rates fall over this period, and in turn support confidence, economic activity, and (very simplistically) lift asset prices.
We point you to these charts, as over the decades there has been a lot of noise. This has included (but not limited to) oil shocks, Japanese asset bubbles, savings and loan crises, an Asian Financial Crisis, the blow up of hedge fund LTCM, Tech bubbles/busts, the Global Financial Crisis, the European Sovereign Debt Crisis, and the Covid-19 recession to name just a few. Each time an issue arises, we are told this time it is different.
But is it?
Central banks respond, governments respond… and sometimes this is very well co-ordinated, meanwhile we get some blips on the right hand side chart, but largely the green line holds. Irrespective of the blips, what we learn is the importance of having an investment strategy and following a disciplined process.
While the ASX has printed 11 months of straight gains to September, we tune out the noise of US debt ceilings, Evergrande’s impending collapse, inflationary concerns, energy shocks, the spread of Delta, and other events of this quarter. Instead, we continue to follow our strategy which saw us reduce risk over this period by banking profits, and reinvesting in cheaper assets. This has helped to deliver consistent and strong performance for your investment above benchmarks.
We summarise below the other important factors this quarter and how they influenced your investments below.
Quarterly market overview
The quarter had most markets exhibit positive returns, albeit a number of events toward the end of September saw equity markets decline in a “risk off” sentiment, and bond yields rise on inflation and tapering concerns. The net effect delievered both bond and equity market losses for the month of September.
The Australian economy was largely locked down over the period with some of the largest states and regions losing control over the Delta variant. South East Queensland LGAs managed to go in and out of lockdowns, but NSW and Victoria were not so fortunate. Victoria’s capital Melbourne surpassed Buenos Aires’s unenviable 234 day record for the longest cumulative lockdown for any city in the world.
The Australian economy also weathered a collapse in the price of Iron Ore (its largest export) from around $230/t US in July to a low of $103/t US in September. This was on concerns around China’s second largest real estate developer collapsing, as well as Chinese regulators applying a decarbonisation policy reducing steel manufacturing. Thermal coal prices went the other way, spiking higher despite a ban on Australian coal. The combination of strong demand, regulatory issues with Chinese officials checking on the safety of mines, and decarbonisation supported the move. Broader demand for energy around the world saw the oil price rise $6bbl.
Australian unemployment surprised most with a lower than expected print of 4.5%, which on the face of it suggests a booming economy. However with significant lockdowns, the detail revealed a spike in underemployment (which includes underutilisation), and job losses in NSW of 210,000 (chart above).
To date, policy measures (both monetary and fiscal) have supported households and businesses, however it is those in highly impacted industries and based in areas under stringent lockdowns which are most at risk. Housing continues to be resilient with prices in August rising 1.8% for the month or 18.3% yoy. This is the fastest pace since 1989 (see chart to the right).
The global economy pushed forward over the period with the US (the world’s largest economy) growing 6.5% in 12 months. The strong growth was matched by even stronger Non-Farm Payrolls (NFP) data released in August which showed 943,000 new jobs added in a single month. All eyes now turned to the US central bank, and whether there’d be an easing of the incredible stimulus. A further NFP data release before the meeting provided some bad news with the jobs market weakening with only 235,000 new jobs added. Ironically the bad news pushed stock markets to new all-time highs, as it was likely the easy monetary conditions would continue. The US central bank Chairman Powell spoke at Jackson Hole saying the circa 5% inflation rate was still transitory, and that it might be appropriate to taper some of the $120b/month in bond buying before the year’s end as forward looking manufacturing data was extremely strong. This spooked bond markets and pushed yields higher.
The European Central Bank (ECB) announced a reduction in the pace of its asset purchases, but in contrast to the US central bank, it was keen to stress that this was not the beginning of a process of tapering purchases down to zero. As the US & UK central banks set out on a path towards higher interest rates, the ECB looks likely to be left behind.
Markets also had to weather the potential of defaults in debt markets with China’s second largest property developer struggling with $300b US of debt, and the US Government shutting down as its levels approached their ceiling/limit. In a Senate hearing, both the current US central bank Chair Jay Powell and former Chair (and now Treasury Secretary) Janet Yellen both warned a default (because of a failure to raise the debt ceiling) would have catastrophic consequences. This helped spur the US Senate to pass a “stop gap” bill to avoid the government shutting down.
Outlook
In the short term, the recovery in the services sector has been restrained by the spread of the delta variant and the manufacturing sector continues to be affected by supply chain disruptions caused by the pandemic.
In the medium term, the re-opening trade will likely fade and fiscal policy will become progressively less stimulative. Inflation is expected to moderate as high inflation prints in the US over recent months have been largely attributed to supply chain disruptions and believed to be ‘transitory’.
Economies will now be defined by their levels of vaccinations and/or natural immunity. The UK and Europe (and to a lesser extent the US) have managed to break the link between infections and hospitalisations through high rates of vaccination. With the benefits of reopening still to be fully realised, Europe and the UK are the regions with the most promising growth outlook.
The outlook for Australia is delicately poised given the combination of a highly contagious variant and low (but rapidly increasing) levels of vaccination. The National Accounts show the economy was slowing before the full impact of the lockdowns, and a substantial fall in activity in the September quarter is inevitable.
More recently, the “Covid zero strategy” has been abandoned by NSW and Victoria. As a result, this re-opening is going to be very different to what happened in the second half of last year. Added to that commodity prices, including iron ore, are now falling (from extraordinarily high levels) due to the slowdown in demand from China.
As a result, ongoing fiscal support in Australia will be crucial to the path of recovery. In the lead up to next year’s Federal election it’s likely further stimulus will come and underpin a robust recovery. There remains however, an unusual amount of uncertainty about the outlook.
Regards,
AAN Investment Committee
Portfolios:
AAN Core (AC0001)
The Model
No major changes were made to the Model this quarter other than some of the manager changes which were completed over the Financial Year cross over. Therefore, the only moves to note relate to our rebalancing process which saw some profits taken in the Bennelong, Hyperion, and Franklin Global investments and redistributed across the other holdings.
Notable investments
The direct equity models largely trimmed/added around existing positions, and Fortescue was sold down in late August around its dividend date.
- CAR – Bennelong added Carsales.com to the portfolio in late August. They believe it to be a high quality business which is the “only game in town” for consumers and dealers to advertise used cars in Australia and Korea. This allows them to earn high returns, solid earnings growth with low risk. CAR has recently acquired an interest in a business called Trader Interactive in the US which provides classifieds predominantly for RVs and motorcycles. The market didn’t like the transaction due to the price paid and CAR only buying a minority stake. However the Trader business has interesting medium term growth potential and is likely to outperform expectations in the next 12 months. CAR announced at their August result further innovations which was the key driver of the strong share price post the result.
- IEL – IDP Education was added as a “reopening” trade. IEL is involved in international student education and places students into institutions in Asia, Australia, and internationally. The manager is getting increased certainty around international students will return for at the latest the July semester in 2022 but potentially even for March 2022 which would be ahead of the markets expectations and positive for earnings.
- APT – US payment giant Square announced a takeover of Afterpay
- Novo Nordisk – a Danish company, has a vast portfolio of insulin drugs and diabetes-related products which have been helping the company maintain momentum. Label expansion of existing drugs will further boost sales. In June 2021, the FDA approved semaglutide as a weekly 2.4 mg injection for weight management in people with obesity under the brand name of Wegovy. It is also evaluating semaglutide in phase III studies for Alzheimer’s disease and NASH.
Performance
The AAN Core model added another 3.25% this quarter, bringing the rolling 12 month total to 21.3%.
With Fixed Income assets both domestic and global underperformed this quarter leading to a negligible negative effect on the model. Otherwise, the Bennelong and Hyperion models performed well.
VanEck MSCI International Quality ETF (QUAL)’s overweight positions to Communication Services and Information Technology contributed strongly to the performance over the quarter adding ~+0.36% to the fund’s relative performance. At a stock level, QUAL’s overweight exposures to Alphabet Inc, Novo Nordisk and ASML Holding were up 12.2%, 20.8% and 13.2% respectively for the quarter.
Best performing holdings included;
- IDP Education (IEL) +39% – on the reopening trade.
- Dominos Pizza (DMP) +34% – continues to deliver with Japan and Europe starting to fire.
Underperformers included;
- BHP -15% – large ex dividend and weaker iron ore prices.
- Netwealth (NWL) -14% -on margin deterioration and higher reinvestment in IT and product development.
AAN Growth (AC0002)
The Model
No major changes were made to the Model this quarter other than some of the manager changes which were completed over the Financial Year cross over. Therefore, the only moves to note relate to our rebalancing process which saw some profits taken in the Bennelong, Hyperion, Franklin Global, QUAL, and VTS investments and redistributed across the other holdings.
Notable investments
The direct equity models largely trimmed/added around existing positions and Fortescue was sold down in late August around its dividend date.
- CAR – Bennelong added Carsales.com to the portfolio in late August. They believe it to be a high quality business which is the “only game in town” for consumers and dealers to advertise used cars in Australia and Korea. This allows them to earn high returns, solid earnings growth with low risk. CAR has recently acquired an interest in a business called Trader Interactive in the US which provides classifieds predominantly for RVs and motorcycles. The market didn’t like the transaction due to the price paid and CAR only buying a minority stake. However the Trader business has interesting medium term growth potential and is likely to outperform expectations in the next 12 months. CAR announced at their August result further innovations which was the key driver of the strong share price post the result.
- IEL – IDP Education was added as a “reopening” trade. IEL is involved in international student education and places students into institutions in Asia, Australia, and internationally. The manager is getting increased certainty around international students will return for at the latest the July semester in 2022 but potentially even for March 2022 which would be ahead of the markets expectations and positive for earnings.
- APT – US payment giant Square announced a takeover of Afterpay
- Novo Nordisk – a Danish company, has a vast portfolio of insulin drugs and diabetes-related products which have been helping the company maintain momentum. Label expansion of existing drugs will further boost sales. In June 2021, the FDA approved semaglutide as a weekly 2.4 mg injection for weight management in people with obesity under the brand name of Wegovy. It is also evaluating semaglutide in phase III studies for Alzheimer’s disease and NASH.
Performance
The AAN Growth model a strong quarter, returning 4.46% and bringing the rolling 12month period return to 29.28%.
Best performing international share funds were VANGUARD US Total Market Shares Index (VTS) (+5.7%) and VANECK MSCI International Quality ETF (QUAL) (+5.4%).
Best performing holdings included;
- IDP Education (IEL) +39% – on the reopening trade.
- Dominos Pizza (DMP) +34% – continues to deliver with Japan and Europe starting to fire.
Underperformers included;
- BHP -15% – large ex dividend and weaker iron ore prices.
- Netwealth (NWL) -14% -on margin deterioration and higher reinvestment in IT and product development.
AAN Australian (AC0003)
The Model
No major changes were made to the Model this quarter. The portfolio performed well across all managers, so only modest rebalancing was done as all generated profits. Bennelong, Hyperion profits were reinvested in Betashares A200 and VanEck Vectors Australian Equal Weight (MVW).
Notable investments
The model invests in low cost Australian Index ETFs as well as high conviction fund managers. Accordingly the Betashares Australia 200 ETF (A200) and Vaneck Vectors Australian Equal weight ETF (MVW) are the two largest direct holdings at around 25% each.
The Bennelong model exited Fortescue in late August around its dividend date.
- CAR – Bennelong added Carsales.com to the portfolio in late August. They believe it to be a high quality business which is the “only game in town” for consumers and dealers to advertise used cars in Australia and Korea. This allows them to earn high returns, solid earnings growth with low risk. CAR has recently acquired an interest in a business called Trader Interactive in the US which provides classifieds predominantly for RVs and motorcycles. The market didn’t like the transaction due to the price paid and CAR only buying a minority stake. However the Trader business has interesting medium term growth potential and is likely to outperform expectations in the next 12 months. CAR announced at their August result further innovations which was the key driver of the strong share price post the result.
- IEL – IDP Education was added as a “reopening” trade. IEL is involved in international student education and places students into institutions in Asia, Australia, and internationally. The manager is getting increased certainty around international students will return for at the latest the July semester in 2022 but potentially even for March 2022 which would be ahead of the markets expectations and positive for earnings.
- APT – US payment giant Square announced a takeover of Afterpay
- MVW – underweight positions to Materials and overweight allocations to Consumer Discretionary contributed strongly to the performance over the quarter. Wisetech Global was the best investment with the company reported an 18% increase in revenue to $507.5 million and a 63% jump in EBITDA to $206.7 million which was well ahead of guidance.
Performance
The model returned a strong 4.97% for the quarter, adding to the 33.75% rolling 12 month return.
Best performing holdings included;
- MVW’s overweight exposures to WiseTech Global, AusNet Services and IDP Education which were up 68.2%, 44.1% and 39.2% respectively added to performance for the quarter.
- IDP Education (IEL) +39% – on the reopening trade.
- Dominos Pizza (DMP) +34% – continues to deliver with Japan and Europe starting to fire.
Underperformers included;
- BHP -15% – large ex dividend and weaker iron ore prices.
- Netwealth (NWL) -14% -on margin deterioration and higher reinvestment in IT and product development.
AAN Index Core (AC0004)
The Model
This quarter, the Investment Committee elected to swap the Vanguard Australian Fixed Interest (VAF) exposure for the iShares Australian Bond Index fund. This was to achieve a lower cost for you in asset management fees, as well as the removal of brokerage costs in rebalancing.
The portfolio performed well across all but one manager, so only modest rebalancing was done.
Notable investments
The model invests in a series of low cost ETFs with Betashares Australia 200 ETF representing the largest holding of 26%. iShares Australian Bond Index fund is now the next largest exposure at 9.5%, followed by Vanguard International Fixed Interest (Hedged) ETF (16%).
Profits were trimmed in VISM and VTS as well as Cash being reallocated across the other funds.
Performance
The model added 1.63% over the quarter which brought the rolling 12 month period return to 18.76%.
- VANGUARD US Total Market Shares Index ETF (VTS) performed the best, rising 6.01% over the quarter.
- VANGUARD MSCI International Small Companies Index ETF (VISM) was the next best, gaining 3.93%.
- VANGUARD FTSE Emerging Market Shares ETF (VGE) underperformed the most, losing 2.88%.
AAN Index Growth AC0005
The Model
This quarter, the Investment Committee elected to swap the Vanguard Australian Fixed Interest (VAF) exposure for the iShares Australian Bond Index fund. This was to achieve a lower cost for you in asset management fees, as well as the removal of brokerage costs in rebalancing.
We also reweighted the model to benchmark based on our disciplined focus which included the reweighting of cash held.
Notable investments
The model invests in a series of low cost investments with Betashares Australia 200 ETF representing the largest holding of 36%. Vanguard US Total Shares ETF is the next largest exposure at 17.14%, followed by Vanguard MSCI Index Int (hdg) (16.25%).
The model has less than 10% invested in Fixed Interest investments in the iShares Australian Bond Index fund, and Vanguard International Fixed Interest Index (Hedged) ETF (holdings of 3% and 6% respectively).
Performance
With a high weighting to growth assets, the AAN Index Growth model added 2.09% this quarter, bringing rolling 12 month performance to 27.25%
Out of the investments held, the Vanguard US Total Market Shares Index (VTS) was the best performing investment returning 6.01% over the period. The VANGUARD MSCI International Small Companies Index ETF (VISM) was the next best performing at 3.93%, and the VANGUARD FTSE Emerging Markets Shares ETF (VGE) was the only holding with a negative return of -2.89%.
AAN Sustainable Growth AC0006
The Model
The Investment Committee has employed our usual process and reweighted the model to benchmark at quarter’s end. We have not made any other significant changes to the model this quarter.
Notable investments
Rebalancing saw profits taken from the Stewart Investors Worldwide Sustainability fund, Vanguard Ethically Conscious International Shares Index ETF, and Alphinity Sustainable Share Fund. Profits were redistributed across the other investments.
In terms of direct investments, this quarter Graincorp (GNC) and Blackmores (BKL) were added, and Australian Finance Group (AFG) and Vocus (VOC) were exited.
- Blackmores (BKL) – is a leading Australian developer and marketer of vitamins and mineral nutritional supplements for humans and animals. The manager likes BKL for its strong market position, good cash generation and healthy balance sheet.
- Nitro Software (NTO) – benefited from the market growing increasingly confident around monetisation of its eSignature product and the potential cross-sell opportunity into its existing client base. This position was trimmed after a period of good performance.
- Qube (QUB) – was also a good contributor to performance as positive sentiment continued post the full year result, while the acquisition of Newcastle Agri Terminal highlighted the ability to put QUB’s strong balance sheet to use for attractive assets.
- Australian Finance Group – (AFG) subsequently failed to meet the manager’s internal liquidity and holding requirements needed in order to remain in the portfolio and has therefore been removed. Since inclusion into the portfolio, AFG returned +86%.
Stewart Investors Global added;
- Adyen (Netherlands: Information Technology), a company which is helping to streamline and reduce costs in the payments processing ecosystem. The company is growing rapidly in emerging markets, where payments have historically been complex, expensive and insecure.
- Masimo (United States: Health Care), a specialist health-technology company that uses light and electroencephalogram (EEG) signals to monitor patients’ vital signs in a non-invasive manner.
- Synopsis (United States: Information Technology), a market leader in design software for digital integrated circuits, with around 30% market share.
They sold Unilever (United Kingdom: Consumer Staples) on a deteriorating balance sheet as the company struggles to evolve a modern product portfolio. They also sold Neogen (United States: Health Care), primarily on valuation concerns, and Knorr-Bremse (Germany: Industrials) on concerns over the quality of stewardship in the wake of a failed merger and the direction of the company’s commercial strategy.
Performance
The model continued to invest compliantly as per our Sustainable Investment Policy. The model performed well, adding 3.62% this quarter, bringing the return since inception to 15.61%.
The best performing manager was Stewart Investors Worldwide Sustainability fund +6.61%, with Australian Ethical Australian Shares model adding 2.3%.
Best performing holdings included;
- Being underweight Resource sector which continued to come under pressure as iron ore prices fell on concerns around Chinese demand
- Graincorp (GNC) +17.11%
- NIB Holdings +10.3%
Cochlear (COH) was the worst performer, losing 11.9%.
- Australia’s Unemployment drops further to 4.5% in August
- S&P500 returns +0.6% for the quarter
- ASX200 returns +1.7% for the quarter
- US economy grew at 6.7% p.a in June quarter
- China’s second largest property developer close to default
- Iron ore $106 USD/T -50.5%
- Gold $2,412 AUD/oz +2%
- Oil $79 USD/bbl +10%
- AUD/USD declines from 74.98c to 72.26c (-3.6%)
- Australian 10 year bond yield 1.49%
