Investing in shares

June 2016

Investing in Shares 

StatePlus invests in shares as part of our diversified investment options – the Capital Stable, Moderate, Balanced, Growth and Growth Plus funds. We provide you with the opportunity to invest solely in shares in the Australian Equity and International Equity investment options.

What shares do we invest in?

Our Australian equity portfolio invests in shares of companies based in Australia that are listed on the Australian Securities Exchange (ASX). Our international equity portfolio invests in shares of companies based around the world in developed countries including the US, Europe and Asia. Our international equity portfolio also invests in shares of companies based in emerging markets such as China, India and Brazil.

What’s the objective for our share portfolios?

Our investment beliefs recognise that what’s most important to you is capital preservation of your assets over time. While share returns are known to be more variable than other asset classes such as bonds, we have constructed our equity portfolios to be focused on reducing the risk of large losses.  

This means that in an equity market downturn, when share prices are falling (eg the global financial crisis of 2008), we would expect our portfolio returns to fall less than the market.

This also means that when the market is rising strongly, our returns are expected to go up, but may not keep pace with the market.  

Over the medium term this is expected to provide a smoother, less volatile return stream for you, typically with overall returns that are expected to be in line with market returns over that period.

How is our approach different?

We’ve created our share portfolios to achieve risk and return characteristics that we believe are best suited to people who are approaching retirement, or are retired.

We aim to ensure a moderation of the loss of capital for you when share markets fall. We try to achieve this by investing in shares of companies with lower price volatility, and of good quality, that can grow their profits in a variety of market environments.

StatePlus’ share portfolios seek to provide a smoother, less volatile return stream compared to share markets over the medium term

Most of Australia’s superannuation funds have portfolios that are designed for younger investors who are still contributing to their super. In many cases they use the same investment approach for their retirement products. While this may suit certain members, at StatePlus we don’t believe it achieves the outcomes that will best suit your income needs in retirement.

If you’re retired, your fund will be in a zero-tax environment. We structure our share investments to take advantage of the tax benefits flowing from share dividends and we ensure our portfolio does not miss out on these income opportunities. This means we often participate in share buy-backs and ensure our investment managers are monitored against an after-tax return benchmark in Australia.

How do we construct our share portfolios?

We use a selection of specialist investment managers. The Australian and international equity portfolios are constructed separately, with different managers, but with the same broad objectives as described above.

We appoint investment managers with different investment styles or strategies for portfolio construction. We’ve analysed the combination of these managers and strategies to ensure each portfolio is expected to generate the overall objective we’re seeking, with appropriate diversification.  

What’s an example of the investment strategies we use?

To achieve our objective of a portfolio with lower risk, one of the strategies used by our investment managers is a ‘quantitative low volatility’ approach. This is a mathematical modelling approach used by investment managers to weight the companies in the share market by giving greater allocations to those companies whose share prices are less volatile over time. This process also takes into consideration allocations to stocks that have similar risk characteristics, and other measures of risk of the overall portfolio, to ensure an appropriately diversified portfolio by industry and stock. 

Our portfolios therefore typically have larger allocations to companies whose share prices are less variable over time. Examples are healthcare companies such as private hospital operators, or consumer staple companies such as supermarkets and utility companies.

The ‘Quality’ approach

Another approach used by our investment managers is to select good quality companies that are expected to grow their profits over time even in difficult market environments. These companies include those that have a competitive advantage in their industry, which provides pricing power. This enables the company to maintain their product or service prices even in a slowing economic environment.

To select these companies, our investment managers conduct in-depth research to identify good quality businesses. We believe the share prices of these companies are likely to fall less than other companies in a market downturn, as investors remain confident of their future profitability despite a current challenging economic environment. 

How do our investment managers find quality companies?

Choosing a good quality company is a bit like finding a good quality car to buy. When you set out to buy a new car, you usually want something reliable that’s going to drive smoothly, perform well and stand the test of time. Selecting a company to invest in is no different. Our investment managers want to be confident that the company will still be operating in many years to come, that profits (or performance) during that time will be good, and that few things will go wrong along the way.

To help identify the right car, you may look at a brochure from the car dealer. This will include important information on the car such as specifications, model, size and safety test results. An investment manager will review a company's financial reports in the same way. These can provide valuable information to an investor on how the company has performed financially over the past year (and further back), including its sales revenue, current profits and earnings, debt levels and an indication of how the company expects to perform in the coming year.

However, just as the car brochure isn't all you may want to rely on before making your big purchase, it’s the same for our investment managers. 

To get down to the important details, the investment manager will want to meet with the company management and question them on their strategic plans for the company in the coming years – what’s going to drive revenue growth? How can they control costs?

Before you buy a car, you’ll probably ask lots of questions of the car dealer, ask friends and relatives for recommendations, and compare with competitor brands to see which you think is the best value and quality for what you want. Similarly investment managers do this research by walking round factories, meeting with competitors and suppliers of the company, reading broker research and speaking to customers of the company's products to understand demand.

It’s a thorough process. And an investment manager has to have confidence in a company before they invest in its shares.

What’s an example of a good-quality company that we invest in?

Domino’s Pizza

One of our investment managers, Fidelity Investment, has held a position in the popular pizza company Domino's for over three years. They identified the growth opportunities in this company and had confidence that the superior management of the franchise model would enable the overall business to grow its market share and sales over time.

In the last five years, Domino’s has introduced technological initiatives and developed an impressive online ordering process and mobile app, recognising that customers will increasingly use mobile technology to order pizzas. The company has expanded into international markets such as Europe and Japan, diversifying its revenue stream and providing new areas for growth.

Ramsay Health Care

Along with Fidelity, another of our investment managers, Investors Mutual Limited, invests in Ramsay Health Care, a well-known private hospital operator in Australia. Ramsay is the largest private hospital operator in Australia, with strong expansion plans both domestically and overseas. Our investment managers like this company because of the sustained demand for hospital and health care services expected in the future.

You can refer to our top 50 holdings for more details on the companies we invest in. 

Do we consider Environmental, Social and Governance (ESG) factors in share portfolios?

At StatePlus we believe that ESG factors are important and we encourage our investment managers to take these into consideration in their research and portfolio construction.

Our low risk and quality approach to investing in shares tends to lead us to invest in more sustainable companies that support our ESG goals.  

We’re continuing to develop our ESG approach and how we can integrate this into our product range. For more information please see our ESG policy.