Market update
29 January 2010
Dear Investors,
All funds post positive returns
All our funds delivered positive investment returns in the six months ended 31 December 2009. I am happy to communicate this good news as it is a complete turnaround in the fortunes of the market compared to the last half of 2008 and the very dismal news I had to deliver in my report at that time.
Australia avoiding recession has helped the local share market to rebound quickly. Progressive interest rate hikes, the return of inflation to the RBA target band and the unemployment rate not hitting the dire prediction of 8.5% are all markers of an economic recovery.
Over the six months, our relative investment performance suffered mostly in the September quarter due to our underweight positions in both materials (mining stocks) and the big four banks versus the market and our peers. In many ways the easy gains from the rising tide of share market have been made. Individual stock selection is now the most important factor differentiating fund performance and our investors have benefited from a number of individual stock calls made by our portfolio managers over the period. Our investments in information technology and biotechnology stocks have far exceeded the market return over this period and have helped us achieve strong investment performance in the December quarter.
Copenhagen and renewable energy investment
Failure at Copenhagen to secure a global agreement on emissions was disappointing but did not severely impact our renewable energy investments around the world. In Australia at least, legislation confirming the Renewable Energy Target was passed and funding from the Department of Resources, Energy and Tourism as part of the $235 million Renewable Energy Demonstration Program, directly benefited our investments.
Global Smart Energy
From January 2010 the International Equities Trust will be repositioned to focus on Global Smart Energy. The fund will target investment in companies involved in global sustainable energy supply and demand. This dual focus will allow the fund to benefit from the opportunities presented in combating and managing the impact of climate change. The fund will provide specialist exposure to renewable energy supply through sources such as wind, solar and geothermal, as well as exposure to efficient and adaptive technologies in areas such as electric vehicles, recycling and smart grid systems. This repositioning will enhance the sustainability profile of the fund and allow for greater potential for outperformance.
Looking up, but cautious on overseas economic recovery
Our market outlook is positive, but a little guarded. The Australian market looks good with consumer spending, private sector investment and export driven demand keeping company earnings buoyant. However, we can see capacity constraints in the Australian economy starting to rise again with large energy infrastructure projects driven by Chinese demand. We are still concerned about the US economy as it faces a tough year negotiating on health care reform and emissions trading legislation. The US is not the same economy that it was two years ago and may not be for some time. It has a lasting legacy of 10% unemployment, still high property foreclosure rates and the winding back of stimulus in the first half of 2010. We are also concerned about the effect of stimulus spending in China and the obvious over capacity in this country now being reigned in by its government. It all points to a year where we will be paying close attention to the overseas economic recovery and looking for signs of any sustained economic weakness flowing through to company earnings.
Martin Halloran
Chief investment officer