John Pearce has taken the brave step of revealing the investments he got wrong over the last year in his role as chief investment of UniSuper.

The fund has an overweight bet on many high yielding Australian shares and while this paid off for Telstra and ASX it has produced an 18 per cent loss for retail chain Woolworths – the tenth biggest domestic holding in its portfolio.

“Our position in Woolworths has, to date, been an unequivocal disappointment,” said Pearce in his monthly update posted to the UniSuper website.

The fund built up the bulk of its position in the retailer at around $33 a share, after the stock sold off from a high of $38. Since then it has fallen to $27 after two earnings’ downgrades.

UniSuper has justified its bet on the stock based on the continual dividend growth profile of Woolworths from 1993 to 2014, even during the global financial crisis.

It was also based on a view that Woolworths’ problems were related to poor management, rather than structural challenges posed by the Aldi discount model of retailing. Pearce reasons that Coles has managed to grow despite pressure from Aldi.

Since the earnings downgrades, Grant O’Brien, chief executive of Woolworths has resigned. “This now paves the way for a broader refresh of the management and board,” said Pearce.

The overweight position was taken by the in-house management team at UniSuper, which looks after 50 per cent of the fund.

“Our in-house management capability enables us to take large ‘single stock’ positions in which we have a particularly high conviction, involving companies that fit with our quality bias and risk/return objectives,” said Pearce.

A further regret was the opportunity not taken to sell bonds at an all-time low yield of 2.28 per cent a few months back. With 10 year Australian bonds now trading at just over 3 per cent, the value of a “typical bond portfolio” fell by 3 per cent in recent months.

Among the positions that have paid off are the property trusts APA (30 per cent), Scentre (21 per cent) and GPT (17 per cent) and the listed infrastructure stocks for Transurban (32 per cent) and Sydney Airport (24 per cent).

Elsewhere bets on the US healthcare and technology sectors have delivered 52 per cent and 36 per cent respectively. A selective emerging markets exposure has led to a 27 per cent return for Asian stocks, while the decision to cut exposure to Brazil, Greece and Russia has paid off after all gave double digit negative returns.
Pearce also paid tribute to his top performing external fund managers over one and three years. These were T. Rowe Price (US technology) 37.8 per cent over one year and 10.4 per cent over three years. Arrowstreet (global small companies) 33 per cent and 5.6 per cent. Novaport (Australian smaller companies) 21.4 per cent and 18.9 per cent. Lazard (Australian large companies) 20 per cent and 5.3 per cent.

UniSuper’s MySuper option made 10.9 per cent over the financial year to the end of June – a figure dented by a 2.8 per cent downturn in June.

Conexus Financial’s inaugural Equities Summit is taking place at Crown Tower, Melbourne on September 8. It will bring together chief investment officers, heads of equities and portfolio managers from Australia’s largest asset owners to discuss the latest global outlook for equities, the latest thinking in portfolio management, and best practice solutions for equities portfolios.

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