One of the issues Lonsec has discussed within our investment committee process is the potential rise in market volatility and what it means for portfolios. Our view is that volatility is on the rise and that the likelihood of downside risk has increased.

There are various ways of incorporating such views within the context of a portfolio. One of the ways Lonsec seeks to incorporate these views within our diversified portfolios is to manage the ‘systemic market risk’ (beta) within our portfolios via an allocation to investment strategies that have the flexibility within their portfolios to manage their beta exposure. A portfolio with a beta of less than 1 should perform better in a down-market and lag in an up-market.

Consistent with our view, we have been increasing our allocation to investment strategies that have the ability to vary their beta exposure. For example, in the Australian equities component of our portfolios we have added funds that can manage risk within their portfolio by allocating to cash. This is reflected in our overall beta exposure within the Australian equities component of our portfolios, which has been below 1. The chart below shows the rolling 1 year beta of the Australian equities component of our portfolios relative to the S&P/ASX 300 index.

Chart - Implementing a dynamic approach to portfolio construction

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