Given the extraordinary movements we are all seeing in the market, we have decided to hold more frequent Investment Committee meetings and provide you with regular updates on our thoughts and discussions from a portfolio perspective.
Lonsec’s Investment Committees will now meet monthly, with additional meetings held as required, and we will send you a summary of our discussions to keep you up to date with the latest market and portfolio developments.
Our Investment Committees are comprised of our portfolio managers, heads of research, and external macro-economic experts. Our team utilises a combination of top-down and bottom-up analysis to establish our dynamic asset allocation positions. These will now be reviewed and updated at least monthly for our range of direct equity and manager portfolios (including our model portfolios and managed accounts).
Positioning leading into our March Investment Committee meetings
Leading into our most recent Investment Committee meetings in March, our overall active asset allocation positioning had a defensive bias. This included: a below target allocation to developed market equities; a positive tilt to emerging markets equities, real assets and alternatives; and a largely neutral allocation to fixed income assets.
The rationale for this positioning was based on our view that most asset classes were expensive – or at best fair value – while cyclical indicators were negative but improving, and the low interest rate environment was expected to continue. At the same time, the threat of ‘x factor’ events was ever-present, with geopolitical risks such as trade tensions between the US and China creating spikes in market volatility.
March Investment Committee discussion
One ‘x-factor’ few predicted three months ago was the COVID-19 virus (coronavirus), which has spread rapidly on a global scale. At the time of our March meeting, markets were heading into bear market territory (a drop of 20% or more) and market sentiment rapidly turned in anticipation of weak economic data in the coming quarters. Our in-house models showed valuations move towards fair value, but at the time of our meeting they had not yet reached ‘cheap’ territory.
Our base case was that we are likely to head into a mid-sized recession characterized by a market drop of around 30%. Committee members noted that, unlike the events of 2008, the banking system remained intact, but there was significant uncertainty about the duration of the virus, the possible flow-on effects throughout the economy, and the extent and efficacy of monetary and fiscal stimulus.
Asset allocation decision
The Committee decided to maintain the existing positioning with a view that markets had already pulled back and that there was still a high level of uncertainty in markets, which would result in high level of volatility.
We reviewed our positive tilt to emerging markets and decided to maintain the exposure. This was based on our view that it was one of the few asset classes that offered value leading into this environment, and that many emerging market economies had greater ability to stimulate via monetary or fiscal measures if required. While no changes were made, we recognized that at some point there will be an opportunity to take a more positive position into risk assets as valuations become more attractive.
Furthermore, we are monitoring liquidity in markets. We have observed liquidity dry up in some markets, particularly fixed income markets. The adoption of further quantitative easing by governments such as the US is aimed at providing such liquidity.
What next
We believe that it is important to remain invested during periods such as this, but portfolio diversification is important. We will be looking to further diversify our portfolios from a bottom-up investment perspective.
We will continue to monitor the situation as the market environment is evolving quickly. From a portfolio governance perspective, we will be holding more frequent investment committee meetings, and there is provision to hold unscheduled meetings as required. We will be providing further updates over the coming weeks.
Find out more
For more information on the Investment Committee work that we do for the Lonsec Model and Managed Portfolios, as well as other external consulting clients, please contact us on 1300 826 395 or info@lonsec.com.au. You can also find the latest insights via our website www.lonsec.com.au.
