The positive market momentum continued over the June quarter, leading to historical returns over the financial year, with the S&P/ASX benchmark returning 28% over the past 12 months. The Listed portfolios’ bounced back strongly this year, driven by solid performances from Australian & Global Equites and Listed Property.

Dan Moradi, Portfolio Manager for Listed Products, provides an update on the portfolio’s performance and explains why ensuring the portfolios are well diversified across the various asset classes remains of utmost importance in our portfolio construction process.


IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2021 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

It’s been a strong quarter for the Multi-Asset portfolios’ performance, with Dynamic Asset Allocation and manager selection both adding value.

Deanne Baker provides an update on the contribution manager selection made to the portfolios over the quarter and explains that whilst we are comfortable with the portfolios positioning and have retained our overweight position in risk assets, it’s important we remain diversified should we experience a pull-back as we move through to the next stage of the market cycle.


IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2021 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

The recent increased number of Covid-19 cases in Australia and in some parts of the globe highlights how quickly things can change and why it is critical that your portfolios are diversified and have some protection.

Markets have continued to be buoyed by strong performance and despite continuing concerns regarding inflation, the markets had some relief as bond yields pulled back over the quarter. Key Central banks have taken the view that much of the rise in CPIs is attributed to supply/demand imbalances caused by Covid, these imbalances will diminish and alleviate some of the current inflationary pressures. Lonsec’s base case in aligned to this view and while we expect inflation to rise over the next six months, we believe that it will subside.

Policy setting also remains conducive to equity markets, with interest rates remaining low as inflation subsides. In addition to supportive monetary policy, fiscal support also remains a continuing theme. Economic indicators such as employment figures, PMIs and consumer confidence all suggest that the economic recovery in well on track, with some indicators exceeding pre Covid levels.

Despite these positives, risks remain – one of the biggest being complacency. While we believe that risk assets continue to offer a suitable return relative to bonds and cash, the increasing divergence in asset and security returns suggests not all boats will float equally. Some of our indicators suggest that the threat of a ‘tail risk’ event is on the rise. Policy error, geopolitical tensions or the path of the pandemic taking an unexpected turn are all plausible. Therefore, ensuring portfolios are diversified remains important.

We have positioned our Dynamic Asset Allocation model to reflect our belief that portfolio diversification remains important. The July Investment Outlook Report summarises the outlook for each asset class included in our asset allocation framework.

Our Dynamic Asset Allocation model is available to iRate subscribers via the quarterly Investment Outlook Report. To access the latest Investment Outlook Report, sign up for a two-week trial of iRate, our market leading research platform.

MPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2021 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

We are very happy to advise that Netwealth has added Lonsec’s Sustainable Managed Accounts to their menus.  The Lonsec Sustainable Managed Accounts complement our existing range of managed accounts available on Netwealth –  Lonsec Listed Managed Accounts, Lonsec Retirement Managed Accounts and Lonsec Multi Asset Managed Accounts.

We are a proven partner in Portfolio Construction with over 20 years of experience and expertise that has seen Advisers and their clients through multiple market cycles and conditions.

The Lonsec Sustainable Managed Accounts have a unique philosophy that looks through both lenses of ESG, which focus on the underlying managers’ take around Ethical, Sustainable & Governance metrics, along with Sustainability measures, which focus on how to demonstrate the goodness of the included funds. We also take into account the United Nations’ 17 Sustainable Development Goals when choosing funds for inclusion in the managed accounts. Coupled with our proven investment philosophy of both SAA & DAA considerations and proven downside market risk mitigation, this makes a compelling offer in a market where investors are becoming more and more ethically focused.

The Lonsec Sustainable Managed Accounts are the only actively managed, risk diversified and multisector portfolio with a highly qualitative focus on sustainability measures of its class.

A spokesperson for Lonsec said ‘Over the past five years we have seen increased investor appetite for sustainable and ethical investments that also provide a solid return.  Our suite of managed accounts has doubled their FUM over the past 12 months and we are happy to partner with Netwealth to bring this unique product to more Advisers and investors.’

The Lonsec Sustainable Managed Accounts joins our suite of managed accounts available on Netwealth including:

Lonsec Listed Managed Accounts – Portfolios built on the 20-year proven Lonsec investment philosophy, incorporating an active approach while using passive style assets to achieve a lower overall cost for investors
Lonsec Retirement Managed Accounts – Diversified, actively managed portfolios for income seekers with a proven yield objective of +4%
Lonsec Multi Asset Managed Accounts – Portfolios built across multiple asset types allowing best of idea execution while also delivering the most diverse and risk-controlled outcomes for investors

Following Lonsec’s Asset Allocation Investment Committee meeting in June, we asked Chief Investment Officer Lukasz de Pourbaix to give us an update on his views of the current market drivers and challenges, and how these impacted Lonsec’s latest dynamic asset allocation views.

The main topic of discussion at this meeting was inflation – is it transitory or are we seeing a structural shift up in inflation? Lonsec’s current view is that whilst inflation will continue to rise in the short-term, after that, it’s still questionable whether we will see a structural rise in inflation. One of the other matters we’re focused on is wage growth. We have not seen a material rise in wages, which is important in the context of looking at inflation.

As part of our dynamic asset allocation process, we also look at a number of key factors: valuation (are assets cheap or expensive), where we are in the business cycle, and policy (such as monetary policy) and liquidity. In this video, Lukasz looks into each of these factors and explains how these were considered to determine Lonsec’s current asset allocation

Transcript

Inflation and its implication for asset allocation

Hello, my name is Lukasz de Pourbaix, I’m the CIO of Lonsec Investment Solutions. Today, I’ll be providing an update on our latest takeouts from our asset allocation Investment Committee, which is responsible for our dynamic asset allocation views. Now we hold that committee every quarter.

The main topic, really this investment committee was inflation, and whether inflation is transitory in nature, or whether we are seeing a structural shift up in inflation. And certainly, we’ve seen CPI numbers go up, most recently in the US announced the significant jump in CPI to levels we haven’t seen since 2008. And so, as part of that discussion, part of the narrative was, is this driven by supply/demand issues as a result of COVID? Or is there genuinely an inflation increase? And it’s fair to say that the market at the moment does believe that it’s transitory in nature, we are seeing significant disruptions to supply chains, which has impacted a range of assets. If you look at things like some of the commodities, Lumber (LBS), the one that suddenly is sort of focused on, through the microchips to make computers, mobile phones, etc. We’ve seen prices certainly spike up in a lot of these areas. And our view would be that once we get spending come back to pre-COVID levels, inflation will continue to rise in the short term, but after that, it’s still questionable whether we will see structural rise inflation.

Our base case at the moment is that it is likely to be transitory in nature, but that it will rise in the shorter term. One of the other aspects that we’re certainly focused on in that context is wage growth. Today, we haven’t seen a material rise in wage growth. It is a lagging indicator. However, it is important in the context of looking at inflation and while we have seen pockets of rises in wage growth, if anyone’s been out to try to hire staff in places like cafes, restaurants, fruit pickers, we all know that there’s shortages there, but across the board, we haven’t seen wage growth right rise and certainly that would be an area that we would be keen to focus on.

What changes were made in June to Lonsec’s Asset Allocation positions?

As part of our dynamic asset allocation process, we look at a couple of key factors that we think determine the direction of where different asset prices will go into the future. And those are valuation – so are assets cheap or expensive. Where are we in the business cycle, and then policy and liquidity.

If we take those three metrics in isolation, from a valuation perspective, it’s probably fair to say that most assets from an absolute perspective look pretty expensive. However, we are in the game of allocating capital. And so we have to look at things from a relative perspective. If we look at asset classes, from a relative perspective, we’ve continued to think that risk assets such as equities are favorable compared to things like bonds and cash, where know there’s you’re getting little reward for that risk. From an equity perspective, we probably have a bias towards emerging markets and Australian equities over some developed markets, particularly the US, from a pure valuation perspective. So overall picture is that from a relative perspective, risk assets are still looking attractive, you’re still being rewarded for risk from a valuation perspective. If you look at other indicators, and one of those is cyclical indicators – so where are we in the cycle? Cyclical indicators continue to look positive. A lot of economic data that’s been coming out, whether it’s looking at PMIs, whether it’s looking at job growth, all of them pointing in the right direction.

From our economic perspective, we’ve clearly seen a recovery and continue to see a recovery, those indicators are looking positive. Finally, from a policy perspective, if we think about monetary policy, and my earlier reference to inflation, the two are obviously related. Policy, however, does remain supportive of risk assets, interest rates remain low. Central Banks, in our view, aren’t going to pull the trigger anytime soon. They will want to see evidence of growth, and more evidence that if this inflationary environment is transitory, they’ll probably be a bit more standoffish in pulling the trigger on rates. But as it is at the moment, that environment in terms of policy does remain supportive of risk assets. We are also seeing material fiscal support. So net net if you think about those longer-term indicators, such as valuation, which is very much longer term indicator is supportive of risk assets. The policy settings continue to be supportive of risk assets. And then obviously, liquidity is there supporting markets as well, all things pointing to risk assets from an overall directional perspective, we do like risk assets over some of the more defensive assets. Having said that, we do think we’re in an environment where we are seeing a lot more dispersion between returns within asset classes. We do think that being selective within asset classes, be it equities or bonds, is becoming much more important. And we do think that dispersion between winners and losers will be wider going forward than it has been in the past.

Overall, the outcome of our dynamic asset allocation committee has been to make no change at this point. From our last quarter, we do remain positive on risk assets, underweight, Fixed Income, underweight Cash, we continue to have a neutral position to Alternatives. We are looking at if there are others? Potentially at some point, do we review that allocation to alternatives? Do we potentially increase that? From a portfolio perspective, we already have some exposure. Some of you will note will have we’ve had exposure to Gold, which has seen a significant increase in price over recent months. And if we do see that inflationary environment be more than just transitory those type of assets can contribute to helping protect the portfolio in that environment. So overall, there are some risks out there. Some inflation is probably the number one risk at the moment. But net net, we think that the environment is still conducive to risk assets.



IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2021 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

The yield curve shows how yields for bonds of the same credit rating, typically government bonds, differ based on maturity date. It sounds simple and yet from this curve one can glean insights into market expectations of inflation, economic growth, and future central bank policy. As such, those who follow fixed income markets pay close attention to movements in the curve. In February 2021, the curve’s shape changed by an amount so large in magnitude that a similar shift has not been seen since the 1994 bond market meltdown.

The conventional measure of the ‘steepness’ of the yield curve is the difference between the yields of 10-year and 2-year Government Bonds. In Australia, this gap was 1.04% at the beginning of February. During the month, this gap rose to a high of 1.80%. The driver of this was a sharp increase in yields of 10-year, and other longer duration Australian Government Bonds (AGBs), while yields for 2-year and other shorter duration bonds stayed relatively static. Throughout February yields for 10-year AGBs rose from an initial value of 1.15% to a high of 1.92%. Movements of this size might be common in equity markets, but in the world of government bonds such shifts in recent years have been rarely seen. For context, February 2021 was the Bloomberg AusBond composite index’s worst month since 1994, as surging bond yields throughout the month were mirrored with a corresponding decrease in prices. Not all news is bad however, as a steeper curve allows for additional fixed income investment strategies to be utilised, including those which involve purchasing longer duration bonds and picking up price increases as they “roll down” the yield curve.

This historic shift was caused by a combination of increased inflationary expectations, and a more optimistic outlook of economic growth in the medium term. The component of the increase due to inflation expectations can be tested for directly by comparing the change in yields for 10-year AGBs with the change in yields for 10-year Australian Treasury Indexed Bonds (TIBs), which offer returns that are adjusted in-line with inflation. Throughout February yields for TIBs rose by approximately three quarters as much as for AGBs. This suggests that approximately one quarter of the increase in the yield for AGBs was due to inflation expectations, as, if the entire increase were due to inflation there would have been no movement in the yield for TIBs. The remainder of the increase in AGB yields implies a combination of a more positive economic outlook, and expectations of the Reserve Bank of Australia (RBA) adopting tighter monetary policy sooner than expected. While there is no way to test for either of these, due to; vaccine rollouts, a decreasing unemployment rate, and soaring commodity prices, an optimistic economic outlook is expected post last year’s recession. The first since the early 1990s. The conundrum is RBA policy, as the central bank has moved to directly counter the increase in yields by expanding its quantitative easing program, which involves purchasing 10-year AGBs on the open market. The announcement of this policy led to a dip in yields, but the upwards trend has since resumed. Given the better-than-expected economic recovery to date, the market may have doubts as to the RBA’s conviction in keeping yields low moving forward.

Moving forward, February’s increase in yields could mark the beginning of a return to normal after the COVID induced recession of 2020. While the increase in 10-year AGB yields was extremely large, even after the increase, yields remain low compared to historic norms. The gap between 10-year and 2-year yields remains large however, but this can also be closed from an increase in rates at the lower end of the curve, possibly brought about by the RBA ending its yield curve control program, in which it is targeting yields for 3-year AGBs at 0.1%, the same level as the Cash Rate. The main cause of problems would be in the case that the strong economic conditions that are implied by the increase do not manifest, whether due to a resurgence of COVID, falling commodity prices, or an unrelated reason. If signs of such an occurrence appear it is likely that yields would fall again. Unfortunately, there is no way to be certain of which outcome will occur, but regardless of the specifics of future economic outcomes, February’s events will remain a focal point in discussions of fixed income market outlooks for some time.

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2021 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

Pre-pandemic, Australian office market fundamentals were solid and in high demand from both investors and tenants. This was supported to a large extent by high population and employment growth, significant infrastructure spending by governments and a lag in supply, particularly in Sydney and Melbourne. However, over the last 12 months market dynamics have shifted significantly as COVID-19 restrictions left the CBDs of Australian capital cities empty/under-capacity for large parts of 2020, fuelling a major shift in habits of working (‘working-from-home’), shopping, leisure and education.

Announcements of successful vaccine trials in late 2020 have given a much-needed boost of confidence and as the vaccine roll-out progresses and lock-down restrictions ease, a sense of normality will begin to return. However, the debate in Australian and global property markets is now focussed on how the pandemic may have changed demand for office space on a permanent basis.

In Australia, the immediate impact has seen CBD office vacancy levels rise in Sydney and Melbourne from 3-4% to around 8-9% over the year to January 2021. Net absorption for Australia overall has reduced from +50,000sqm in the six months to January 2020 to -90,000sqm in the latest six months to January 2021. Sub-leasing has spiked as tenants with longer leases look to offload spare capacity. While face rents have remained largely unchanged, incentives have risen to over 35% compared to around 25% pre-pandemic, dampening net effective rents. Businesses are taking longer to commit to new leases and when they do, there is a trend towards shorter terms.

Rental collections have held up and investor interest remains high in this relatively higher yielding sector, thus placing a floor under valuation reductions. In response to COVID-19 conditions, valuations were conservatively adjusted down for office (-10%) and retail (-15%) assets, while industrial/ logistics asset values remained steady to slight increases in line with rental escalations and/or lease extensions.

As restrictions ease (barring the occasional lockdown) and workers begin returning to their offices with encouragement from businesses and government, there is a growing realisation that more flexibility to work-from-home is both possible and desired. While dependent on industry and function, the consensus view is that a ‘hybrid’ working model is the most likely outcome – two or three days working from home with the remaining days spent in the office. While some firms experienced increased worker productivity during the lockdowns, intangible aspects such as corporate culture, team morale, creativity and innovation rely on human interaction to a large extent.

As corporates plan ahead and leases come to an end, there is already demand for core space plus an option for a flexible amount. Landlords will also need to ensure that buildings provide good quality space (including high environmental ratings) with facilities being upgraded in line with social distancing requirements. While these guidelines are being progressively relaxed, the floor densification trend of the last few years may have peaked, and businesses may require more floor space per person. However, it is likely that the trend for more flexible space/work-from-home will drag on demand while the world works its way through this pandemic. Given the possibility of further pandemics, the outlook for office space has a high degree of uncertainty. One bright spot is medical and life sciences office space, where demand benefits from pandemic conditions, as such tenants are usually businesses deemed ‘essential’ with minimal operating restrictions.

A noticeable trend is the ‘flight to quality’, where premium/A-grade office assets on long leases to strong corporate and/or government tenants remain very well bid, due to greater perceived stability of cashflows for investors. Assets that are of secondary quality and/or location, tenanted by less robust tenants are coming under valuation pressure. There is also some debate on whether suburban offices, which are usually in less preferential locations compared to the CBD and accordingly charge lower rent per square metre, will benefit from the working-from-home trend.

A further consideration is the expiry of the National Cabinet Mandatory Code of Conduct for commercial tenancies and the expiry of the JobKeeper program, both of which helped businesses survive through the pandemic. With this support now largely withdrawn, the impact on business insolvencies, employment and associated office demand remains to be seen.

Chart 1 — Commercial property yields

Chart 1 shows office yields bottomed-out during 2020 and now appear to be rising, but the extent of this reversal of the trend of falling yields is still uncertain. The office sector continues to offer yields of 5-7% p.a., which is an attractive spread over bond rates as Chart 2 illustrates. Central banks have adopted ultra-low monetary policy settings, which maintains investor demand and underpins tight market capitalisation rates (apart from discretionary retail property assets which faced headwinds well before the pandemic).

These policy settings are artificially low, and as inflation resurfaces bond rates and borrowing costs are likely to increase as exemplified by the US 10-year bond yield rising from 0.70% in early October 2020 to 1.74% at the end of March 2021. While this rate has come off in recent weeks, the only certainty is uncertainty.

Chart 2 — Commercial property yields vs. 10-year bond yield

Source Chart 1: AMP Capital (April 2021); Chart 2: Charter Hall (December 2020).

Author: Balraj Sokhi, Senior Investment Analyst

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2021 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

Lonsec works closely with advisers to build solutions that enhance a practices ability to serve clients, while building greater operational efficiencies. As innovators in managed accounts, we’ve always believed in their power to transform an advice business. Research indicates that practices using managed accounts see a noticeable uplift in revenue, and profitability per adviser, by up to 32% and most importantly facilitates increased engagement with clients.

The potential for improved business outcomes is clear, however change can be hard so we’ve asked Tim Scott, small business owner, co-founder and adviser at Ford + Scott Financial Planning (Tasmania), to share his experience, thoughts and the process he went through, to re-imagine business.

Watch the video below

Get in touch with us to discuss how we can help you redesign your practice with Lonsec Managed Accounts

Steven Jessop 
Good morning, everybody. And welcome to Tim Scott, Principal from Ford Scott financial planning really pleased you could join us today. I’m Steven Jessop. I look after licensees and IFA’s nationally for Lonsec, and Tim has very kindly agreed to join us today to share some of the journey that he’s been on over the last number of years that we’ve known each other, where I’ve seen his business grow from strength to strength, and let’s take our audience through some of the big decisions that he’s had to make in a really tough regulatory environment.

Tim Scott
Yeah, so we’ll try to run a core of managed funds and have a good good quality managed funds. And with direct equities as a satellite around the side. And, it worked. And it was certainly no disrespect to the fund managers, they’re terrific. And we’re still partnering with these guys in other ways. But the issue we had was the time the blending, the construction side, was just taking us away from what our core skill was. And by having a Lonsec in our core, who actually do that for you, you can’t put a dollar figure on the benefit of business has been, there’s no doubt in my mind, and I’m sure, Luke and Mark, and the guys back at the office would understand it’s been a significant part of what we’ve had revenue growth, because we’ve been out of focus on working with existing clients and attracting new clients. As a business, we had a lot of direct equity exposure to the business, we loved bespoke portfolios and working closely with our clients. Ultimately, that was a value add, but it wasn’t the key value to providing advice. Scalability was an issue for us. And Mark Ford, my founding partner and I were wanting to expand the business. But we couldn’t do so with a laborious approach to portfolio construction, then with our clients it’s all about education and for them to understand what we were as a core financial planning business, so we weren’t stockbrokers. And we weren’t there to pick the eyes out of the market. Obviously, where the reforms have gone, that’s becoming harder and harder to do that. But it’s just a time aspect to act on research. We’re in a fast moving society. Technical analysis flies by the screen every 30 seconds or so it seems. And for financial planning business, how do you actually react to that? And how do you communicate that with the clients. And so it’s all about education with our clients to explain that we are working with investment professionals that are going to be able to do that, on our behalf on your behalf. And that’s going to free us up to actually work more with you about what’s important for you. Yeah, I think from a client’s perspective, they have been able to get their advisor back to advise on what their goals and objectives are. Rather than being the stockbroker and the fund manager or the portfolio constructor per se, we still position ourselves and our portfolio construction process, and we explain to clients how our investment committee works, and how our approach to philosophy to Investment Management is. So, it’s really key to have that belief and ability to articulate that to your clients. But I think, the feedback we’ve been getting from our clients is, all of a sudden we in our reviews are more efficient, we’re actually going in and whether the review was a zoom or a call or an email or face to face, it’s more pertinent to what they’re trying to achieve, and we’re able to spend more time on changes that might be coming up for them. And that allows us to, you know, focus on potentially the planning benefits are of things they need to consider or the you know, the trips and traps that might be involved with what they’re next do. It allows us to actually prepare reports as slide decks around our portfolio construction. And quite often that we go through that at their own leisure, without having to sit in a meeting and go through it. So we finding our meet. From a review perspective, we’re more thorough, you know, the Safe Harbor provisions, which are so important in financial advice now, always have been, but even some more so from a regulatory perspective, we are able to actually focus on that, and deliver that for the client and get better achieve those better outcomes. One of the great and I think my staff would reaffirm as well, if we have a query, we have all segments of the business that can support us right away whereas the direct equities analyst, the person who is in charge of managed portfolios or whatever it will be, and they will give us a reason and answer to any query, but also their communications are very timely and onpoint, which is really good. And I think it’s important. The updates when there’s a portfolio change, it’s a using the technology that we have in the business and I think it’s available to all all players, practices, that would use a Lonsec iRate or a good administration platform, we have the ability to distribute the portfolio changes, run by the manager in an educational email and the clients are feel like they’ve got a really, tangible benefit by being back in touch and feel the portfolio

 



IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2021 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

There has been little evolution in this area over the last 5 years; however, with the greater focus on the retirement phase by the government we believe it is time providers turned their minds to optimising outcomes for retirees and tailoring investment objectives appropriately.

Camille Schmidt: Market Insights Manager – SuperRatings

Australia’s inflation rate has been stubbornly below the RBA’s target band of 2–3% for several years now, but the 0.9% rate realised in 2020 was, even in this paradigm, exceptionally poor. However, economists are projecting an increase in inflation this year, driven by increased expenditure from households.

The reasoning behind these expectations is households looking to spend the savings they built up over the last year, as the household savings rate grew from 5.3% in the December 2019 Quarter to 12% in the December 2020 quarter. However, this inflationary spike is expected to be short-lived and over the next 2 to 3 years inflation is expected to remain below the RBA’s target.

Turning to the labour market, Australia’s unemployment rate sits at 5.6% in March 2021, down 0.2 points from February and continuing its downward trajectory since October 2020. The overall unemployment rate for the nation is now only 0.5 points higher than in pre-COVID February 2020.

This suggests that there is significant demand for labour that could continue to drive the downward trend in the unemployment rate. Vacancies are up for all sectors of the economy, except for Retail Trade, and Arts and Recreation Services, both of which were hit hard by COVID lockdowns. However, with the expiry of fiscal stimulus such as JobKeeper and the Coronavirus supplement for JobSeeker, it remains to be seen whether the downward trend in unemployment will continue.

The impact of the economic recovery and the uptick in inflation has been evident in the bond market. The Australian sovereign yield curve has steepened since the end of 2020, reflected in the spread between the 10-year and 2-year government bond yields, which has risen from 90 basis points at the end of December to 158 basis points at the end of April.

The Australian yield curve’s steepening has been driven by a multitude of factors. The rise in the 10-year yield has been recently buoyed by expectations of an increase in the cash rate prior to the RBA’s stated 2024 target, as measured by interest rate futures, which can be used to deduce probabilities of future rate hikes or cuts and the respective implied policy rate.

However, the rise in the 10-year yield is also partially explained by continued growth in inflation expectations, commonly referred to as ‘breakeven inflation’. The Australian 10-year breakeven rate, which is measured as the difference between the nominal yield of the Australian 10-year bond and the real yield of the Australian 10-year inflation linked bond. This measure peaked at 222 bps in early March and ended the quarter at 210.7 bps, an increase of 35 bps.

More importantly, when considering the overall changes in both the steepness and level of the curve, both have risen over the quarter due to significant moves in longer-dated government bonds. Given the RBA’s explicit 3-year government bond yield target of 10 bps, the short end of the curve has effectively been pinned to the floor in a bid at reducing short-term funding costs for institutions.

While the RBA notes the rise of the long end of the yield curve, its announcements have indicated a firm stance in relation to the official cash rate remaining at its current level until a sustained rise in inflation. The RBA has briefly acknowledged a temporary rise in inflation “due to reversals in some COVID-19 related price reductions”, however they note that “underlying inflation is expected to remain below 2 percent over the next few years”. Considering the latter, the market continues to price rosier times ahead (more than what the RBA contends).

A rise in yields is potentially a welcome sign for economic conditions ahead, but the inverse is that they also represent higher borrowing costs for market participants such as corporations and governments. For investors, the rise in yields has represented significant losses considering the magnitude of the shift across the curve, especially when considering the duration (interest rate risk) attached to longer-dated bonds. Typically, duration is one of the more difficult risks to trade for bond managers. Furthermore, as yields rise, so do their attractiveness relative to other asset classes such as equities and hybrids.

Lonsec’s base case is that we may see a modest rise in inflation over the next 12 months, but that over the medium term inflation will remain under control as broader structural deflationary pressures such as the continual impact of technology in society and the aging population continue to weigh down on most developed economies. However, even a modest rise in inflation will have consequences for financial markets, and the bond market is where the action will be.

Author: Ron Mehmet, Head of Fixed Income Research

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2021 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.