Performance
To 30 June 2009
The 2008-09 financial year will be remembered as a year of tremendous upheaval in both the global financial system and the global economy. The credit crisis that started in the US with the collapse of the subprime market in mid-2007 morphed into the worst global financial crisis since the Great Depression.
However, signs of stabilisation in both the global financial system and the real economy began to emerge during the June quarter following extraordinary fiscal and monetary policy responses from central banks and governments. From early March, almost overnight, sentiment became materially different to the first eight months of the financial year as fears of a deflationary spiral and systemic risk shifted to a more ‘normal’ recessionary cycle view. As a consequence, liquid asset markets were repriced with equity and credit markets rallying significantly. This was despite bond yields rising and backward looking data such as unemployment and growth continuing to deteriorate, albeit at a slower pace.
Volatility over the year was apparent across all asset classes, including Australian bonds. Yields that started the financial year at 6.71% for the 3-year Australian Government bond and 6.45% for the 10-year fell to March quarter lows of 2.90% and 3.85%, before ending June back at 4.56% and 5.52% respectively.
The Australian equity market suffered its fourth worst financial year return since WWII, as company earnings deteriorated rapidly. Balance sheet and credit pressures saw dividends slashed and major equity capital raisings undertaken at significant discounts as the equity market was the only real means of accessing capital. However, the S&P/ASX 300 Accumulation Index ended 26% above its March low after rallying 11.5% in the June quarter on top of March’s 8.1% gain.
Table 1 - Performance to 30 June 2009
VFMC builds investment portfolios to achieve each of our clients’ long term investment objectives within acceptable risk tolerances. Delivering a real rate of return over the long term is a key aim for our investments.
Table 1, above shows the performance of our clients’ portfolios on an aggregate basis relative to a composite benchmark. It provides the performance for each asset class relative to their respective benchmarks. Table 1 also shows the asset allocation of our clients’ portfolios on an aggregate basis.
VFMC investment portfolios remained broadly defensively positioned with an underweight exposure to equities, a strategy which although detracting from performance over the June quarter added significant value over the financial year as a whole.
Equities, which account for half the assets managed by VFMC, performed in line with benchmark over both the June quarter and 2008-09 financial year. Both periods were characterised by significant swings on a month to month basis and high divergence of results from individual investment managers.
Our Diversified Fixed Interest and Absolute Return Fund strategies underperformed the market over the financial year as credit, to which the strategies are overweight, was severely impacted by the Global Financial Crisis. Improvements in the credit markets over the June quarter saw our Diversified Fixed Interest portfolio outperform significantly.
Direct Property markets saw material reductions in valuations across all sectors as refinancing risk, limited availability of new debt and widespread uncertainty dominated, particularly in the industrial and office sectors. The -8.6% benchmark return for the full financial year is only an estimate with the final benchmark for the year expected to be closer to -12.0% when the data is released in late August.
The fundamental defensive qualities of VFMC’s core infrastructure holdings continues to underpin our portfolios and prices of these assets have held quite well, reflected in outperformance against benchmark for both the quarter and year.
Table 2 VFMC Performance Relative to Intech Investments Survey of Growth Managers
*Intech Investments Investor Choice Performance Survey Growth Funds, gross of fees and tax
For information purposes we have compared our performance relative to the Intech Investments survey of Growth Managers. The returns are expressed before fees and taxes and include those portfolios with an allocation to growth assets of between 60% and 75%, with VFMC clients at the lower end of that growth allocation range.
The table highlights the recent volatility of markets with the strong increase of Median Managers (up 7.70%) for the June quarter in stark contrast to their annual performance (down 13.54%). March quarter performance for this group was down 4.63%.
Our June quarter performance lagged that of the median manager, largely due to the relatively defensive portfolio positioning which while adding value over the full financial year detracted value as the markets rebounded strongly. Annual and longer term performance results exceeded or were broadly in line with that of the Median Manager.