Download The land of the rising sun

WINTER 2013
What’s inside
Market
insights
Strategic asset
allocation
Meet our
team
Investing
in success
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Advancement
The land of
the rising sun
Is Japan the new
global growth engine?
The land of the rising sun
Following nearly two decades of virtual economic
stagnation and deflation, Japanese Prime Minister
Shinzo Abe has vowed to reverse Japan’s fortunes
with policy stimulus and structural reform.
We assess what this mean for investors in Australia.
The new engine for growth?
Abe’s three-pronged solution of
massive monetary easing, huge
fiscal stimulus, and structural
micro-economic reform is not
new. The Bank of Japan was
the first global central bank to
undertake quantitative easing,
whilst numerous fiscal stimulus
packages were implemented and
failed. Investors have avoided
Japan but will these changes
make it the new engine for
growth? Initial market reaction
suggests so.
Despite some weakness in
recent weeks, Japan’s equity
market has rallied with the
Nikkei up around 40% and the
yen depreciating around 20%
against the US dollar since
Abe was elected and in light of
anticipated liquidity flooding.
Massive monetary easing
In April, Bank of Japan Governor,
Haruhiko Kuroda announced
measures to achieve 2% inflation
by 2015 by doubling its monetary
base through the purchase
of long-term government
debt including the doubling
of its holdings of Japanese
government bonds, Real Estate
Investment Trusts and Equity
Futures. Kuroda believes a
combination of monetary easing,
fiscal stimulus and microeconomic reform creates a
positive cycle of production,
income and expenditure in the
economy, leading to gradual
price rises.
A by-product of these measures
has been a sustained weakening
of the Japanese yen. This is
assisting Japanese exports,
boosting corporate earnings
and should reflect increased
business investment and
employment. However, economic
activity in Japan’s biggest export
markets (China, Europe and
the US) remains moderate so
its unlikely exports alone will
drive stronger activity and
stoke inflation.
A domestic focus
Stronger domestic demand is
key but there is a limit to how
much new government spending
Japan can afford. The yen’s
weakness and equity increases
are attractive for business
investment, supporting wages,
consumer confidence and
spending, but household wage
growth may not be enough to
offset inflation.
No matter how much money
is created, banks must lend,
investors must invest and
consumers must spend in order
for easing monetary policy to
become effective and generate
a positive impact on the
real economy.
Fiscal and monetary policy is a
short-term focus but structural
reform will take longer. Rising
inflation will push bond prices
lower resulting in capital losses
to a large number of conservative
investors who predominantly
invest in safe and less volatile
assets while higher inflation
reduces the nominal value of
bonds to the issuer. This has
the potential to increase bond
market volatility that will spill
over to other asset classes.
are being rewarded. But will it
continue? With one quarter of
faster growth, erratic quarterly
statistics and structural reforms
to come, Japan must achieve
faster economic growth.
We believe Japan has been
given the blessings by key
global political leaders to “do
whatever it takes” to get the
economy back on track. There is
a chance that corporate Japan
may respond if the Government
Stronger domestic demand is key but
there is a limit to how much new government
spending Japan can afford
Rolling the investment dice
For a mature, highly
industrialised nation with an
ageing population, growth
challenges and extreme longterm debt, these measures are
bold. Investors who got into
the Japanese market last year
also introduces key structural
changes, increases productivity
and revives consumption and
investment at a scale not seen
in a long time. The positive
effect this will have on the global
economy will be significant.
Marcelle Murphy
Economist, Advance
Asset Management
THREE
Outlining the macro-economic issues
that affect your investments
Advance has new Strategic Asset Allocation and
ranges for the Advance Diversified Multi-Blend Funds
An increasingly unsettled
financial climate has seen tighter
regulation and heightened levels
of uncertainty across economies
globally. For investors, the
need to monitor and the ability
to act both proactively and
reactively is paramount.
In simple terms, a Strategic
Asset Allocation (SAA) is the
mixture of different asset
classes within a portfolio.
This Asset Allocation strategy
is designed to meet long-term
strategic objectives based on
current and expected future
market conditions.
Innovative central bank policies that have
supported the global economy and prevented
it from spiralling into a depression are under
increasing pressure from powerful headwinds such
as corporate and household deleveraging.
Authorities are concerned that their aggressive
policy initiatives have not generated the ‘virtuous
cycle’ anticipated by them and has instead created
asset bubbles that may destabilise a fragile world.
What are the headwinds and tailwinds?
A powerful headwind is excessive financial market
volatility generated by either the miscommunication
or mishandling of policy by central banks in not
generating the ‘virtuous cycle’ anticipated by
them, instead creating asset bubbles that causes
a destabilising force.
In order to counter this, policy initiatives proposed
by the Japanese leadership, a decrease in
geopolitical tensions in both the Middle East
and the South and North China seas may provide
a reasonable level of tailwind support.
What does this mean for investors?
To successfully navigate periods of high volatility,
investors need to be mindful of both stabilising
and destabilising forces that are always present
in modern societies and in particular financial
asset markets.
Advance’s Market Outlook: Based on our most recent market
forecasts and assumptions, here are our return projections
for the major asset classes over the next 12 months:
Equities: We anticipate equity
markets to deliver moderate returns
over the next 12 months accompanied
by a high degree of volatility.
Fixed interest: Fixed interest
returns are expected to be below
those experienced in recent years
but will exhibit an increased degree
of volatility.
Listed property: We anticipate the
listed property market to deliver
moderate returns but slightly higher
than equities.
Alternative strategies: We expect
alternative strategies to deliver
returns in line with other growth
assets but with less volatility over
this period due to the lowly correlation
to major asset classes and diversity
in strategies.
Currencies: We expect the Australian
dollar to remain stable against the
US dollar having reached our initial
targets but vulnerable to bouts of
weakness during US dollar strength
and increased volatility.
Whilst we have used every effort to ensure the assumptions on which the above projections are based
are reasonable, the market returns are highly sensitive to these assumptions and can change as more
information becomes available. The actual results may differ materially from these projections.
How we determine our
Strategic Asset Allocations
The assessment of risk
and return drives our asset
allocation decisions. SAA
positioning relies on being able
to meet longer term investment
objectives based, not only on
market characteristics and
fundamentals, but also the ever
changing landscape in relation
to key global themes, such as
geo-political issues, investor
sentiment, and the regulatory
environment that influence the
way investment markets behave.
Asset class
Felix Stephen
Head of Investment,
Strategy and Research
Advance Asset Management
What has influenced our
current Strategic Asset
Allocation decisions?
Equity markets have recovered
losses post the Global Financial
Crisis. However, many risks in
terms of the ongoing economic,
political and financial concerns
are far from being resolved,
leaving markets highly
susceptible to any bad news and
continued uncertainty, leading to
market volatility.
source of returns, referred to
as Alternative Strategies in
the table below.
More information
The Strategic Asset Allocations
below are to be read in
conjunction with the relevant
Product Disclosure Statement.
The Product Disclosure
Statements for the Advance
Funds can be located at
advance.com.au. You should
consider the relevant Product
Disclosure Statement in
deciding whether to acquire,
or continue to hold, units in an
Advance Fund.
With the aim of protecting
investor returns from this
potential volatility, we’re reducing
the exposure to Australian and
international equity markets
as well as our exposure to
Australian and international
fixed interest securities. These
sector reductions are being
replaced by strategies that are
designed to dampen volatility
and provide a non-correlated
Defensive
Multi-Blend
Fund (%)
Moderate
Multi-Blend
Fund (%)
If you have any questions about
these changes, please speak
with your financial adviser or
call Advance to speak with one
of our Investment Specialists
on 1800 819 935.
Balanced
Multi-Blend
Fund (%)
Growth
Multi-Blend
Fund (%)
High Growth
Multi-Blend
Fund (%)
Australian Shares
8.5
17.5
25.0
30.5
36.5
International Shares
3.5
10.0
18.5
23.0
31.5
Property Securities
8.0
9.0
10.0
11.0
10.0
Growth Alternative Strategies
10.0
13.5
16.5
20.5
22.0
International Fixed Interest
14.0
14.0
7.0
2.5
0.0
9.0
9.0
5.0
1.5
0.0
Defensive Alternative Strategies
20.0
15.0
13.0
8.0
0.0
Cash
27.0
12.0
5.0
3.0
0.0
Total
100.0
100.0
100.0
100.0
100.0
Australian Fixed Interest
FIVE
Get to know your
investment team
Discover how James Kerr, Portfolio Manager, Tactical Asset
Allocation, manages investment opportunities for Advance.
Investing in success
The Advance Fixed Interest Multi-Blend Fund was a finalist
for its category in the Money Management Fund Manager of
the Year awards 2013.
Advance also won Money Magazine’s Best Fund Manager for
2013 and continues to reap the rewards of 30 years of investing
with wisdom. To find out more, visit advance.com.au/30years.
What attracted you to a career
in investments?
The challenge of looking across global markets
for opportunities to invest and a general interest
in financial markets. I studied a Bachelor of
Agricultural Economics at Sydney University,
which gave me great insights into the core
supply and demand dynamics of food production
and economic supply chains balanced with
economics and financial market theory.
What does an average day look like?
I arrive at the office by 7.30am and review what
has happened overnight across markets and
general news. The investment team meet at 9am
to discuss overnight developments and provide
a run down on key economic data releases.
Following my mid-morning coffee, the rest of
the day is spent reviewing models and portfolio
positions, trading on our investment decisions,
researching various strategies that may provide
avenues for future investments across asset
classes and meeting with other investment
managers in the industry. I generally focus
on investigating and identifying differences
in sentiment and those drivers of investor
sentiment to decide where the most attractive
opportunities may lie.
James wrapped up
Family: A wife, a baby daughter
and a large extended ‘mob’
Favourite film: Top Gun
How you relax: Playing golf, bike riding,
skiing, beach, time with the family
Favourite food: Roast pork
Best memory: The birth of my daughter
Best advice you’ve ever been given:
To leave things how you’d like to find them.
This can be applied to work where we
consider the interests of our unit holders
before our personal interests.
This information is of a general nature only and has been prepared without taking into account the objectives, financial situation or needs of any
particular person. Before acting on the information, a person should consider its appropriateness having regard to these factors. Advance Asset
Management Limited ABN 98 002 538 329 AFSL No.240902 (Advance) is the issuer of units in the Advance Funds (Funds) referred to in this
publication. Before making a decision whether to acquire, or to continue to hold, an investment in a Fund, investors should obtain and consider
the Product Disclosure Statement for the Fund, available at advance.com.au or from your adviser. Whilst every effort has been taken to ensure
that the assumptions on which the outlooks given in this document are based are reasonable, the outlooks may be based on incorrect assumptions
or may not take into account known or unknown risks and uncertainties. Past performance is not a reliable indicator of future performance.
Awards and ratings are opinions only, are subject to change and are not a recommendation to invest. Information from third parties is believed
to be reliable however it has not been independently verified. While the information in this document is given in good faith, no warranty is given
that it is accurate, reliable, free from error or omission. Advance and other entities forming part of the BT Financial Group wealth management
division are members of the Westpac Group. An investment in a Fund, does not represent an investment in, deposit with or other liability of
Westpac Banking Corporation, or any other member of the Westpac Group. It is subject to investment risk, including possible delays in the
payment of withdrawals and loss of income or capital invested. No member of the Westpac Group stands behind or otherwise guarantees the
capital value or performance of a Fund. Subject to any terms implied by statute which cannot be excluded, no member of the Westpac Group nor
its directors, employees and associates accept any responsibility for errors in, or omissions from the information.
SEVEN
Contact us
Speak to one of our investment specialists on 1800 819 935
email investorservices.com.au
or visit us at advance.com.au
AD10381-0613 BTF128 07/13
Advance is an award-winning specialist asset management business
within the Westpac Group. We provide investors with opportunities
across a range of asset classes, including shares, property,
fixed interest and cash with a focus on asset allocation and risk
management, implemented through a multi-manager process.