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WINTER 2013 What’s inside Market insights Strategic asset allocation Meet our team Investing in success Page 4 Page 5 Page 6 Page 7 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.