Chant West finally released its returns for superannuation funds for last month. Our growth fund smashed the median fund by 9.4% in March, courtesy of our aggressive move out of shares at the end of January. Our other funds also considerably outperformed their benchmarks.
And those results don’t include the “massaging” of unlisted asset valuations by many industry funds.
From Chant West:
Because unlisted assets are valued less frequently than their listed counterparts, some commentators are describing their current values as artificially high. We would argue that, on the contrary, unlisted valuations are generally a better representation of fair value than listed market valuations which are often influenced by investor sentiment. We know that listed markets tend to overshoot in good times and undershoot in bad times, so in a crisis this can drag prices down a lot further than where they should be…
…These revaluations have typically resulted in write-downs of between 6% and 10% for property and infrastructure [Nucleus: listed market losses were closer to 30%] and up to 15% for private equity. The reason those revaluations are not as dramatic as we’ve seen in listed markets is that the process is unemotional.
Let’s unpack that. I think the argument is that hypothetical prices based on numbers in a spreadsheet of an industry fund are more accurate than the billions of dollars traded on global markets. This means, if you are in an industry fund, your March superannuation contribution got to buy unlisted assets at a 20% premium to the same assets on the stock market. But your overpayment was unemotional.
Chant West goes on:
Once again, any performance comparison at the end of March must be treated with caution since some funds have devalued their unlisted assets, but others have not. We expect further revaluations over the next few months.
This means that any further contributions will also get to buy unlisted assets at inflated prices. And existing members can look forward to sub-standard returns for years as the unlisted assets are deflated over time.
Just to be clear, all of our funds are invested in liquid, traded blue-chip stocks, federal government bonds or cash. There is no shorting, no derivatives, no leverage. Just high-quality assets, completely visible down to the last cent. These assets are held by our investors in their own accounts, with only their own tax issues. There is no co-mingling of assets and tax liabilities as you see in a traditional superannuation fund.
Looking closer at our March Quarter Performance
As the Coronavirus crisis escalated in China, elsewhere January saw an acceleration of the Everything Rally, where all asset classes were appreciating: Equities, Commodities, Gold, and even Bonds. Given we already viewed valuations as stretched at the end of 2019, by January end we believed downside risks were significantly increasing and started to reposition into more defensive assets. The reports of a cluster of Coronavirus cases in Northern Italy in early February was our catalyst to move more take to a more significant defensive stance. The figure below shows our Tactical repositioning of the Growth Portfolio as a response and the March Quarter performance of that asset class for our investors. This flight to safety, especially US$ assets, meant our portfolios essentially weathered the precipitous drop over March.
While our asset allocation sheltered our tactical portfolios, our stock selection targeting defensive sectors meant our Core International and Core Australian Portfolios outperformed their respective indexes. In the Core International portfolio, we shed our banks, airlines and logistic companies and up-weighted our Health Technology (Drugmakers), Non-Durables (tissue/hygiene product suppliers) and Gold producers. Our aversion to the Energy Sector also meant we were essentially unaffected by the Oil Price rout that also occurred over the period. The chart below shows the relative overweights and underweights of our Core International Portfolio vs the MSCI World ex-Australia. Overall our Core International Portfolio lost 1.4% over the March quarter vs -9.4% of the MSCI World ex-Australia.
We remain conservatively positioned with high cash balances to take advantage of the COVID-19 crisis when the time is right.
Our shopping list is ready and includes those firms we believe will benefit from the structural changes wrought by the virus.
Damien Klassen is Head of Investments at Nucleus Wealth.
The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.