In this episode of Market Narratives, Lonsec’s Chief Investment Officer, Lukasz de Pourbaix, tackles a range of controversial topics and their implications for portfolio construction.

Is this the new normal or merely the continuation of what have now become conventional policy responses? Is there wisdom in crowds, or is there persistent overvaluation in popular stocks like the FAANGs? Which parts of the market are beginning to appear attractive and how can you position your portfolio to take advantage of them? Tune in to find out.

Market Narratives is a podcast series produced by Investment Magazine that features unorthodox conversations with thought leaders influencing the world of fiduciary investors.

During our previous Asset Allocation Committee meeting we expressed a desire to further diversify our exposure to credit securities within our portfolios. This view was driven by the significant pull back in credit markets in March, which Lonsec believes provided an opportunity to enter certain parts of the credit market, such as syndicated loans, which were previously considered fully valued.

This view has since been implemented within Lonsec’s Multi-Asset and Retirement Managed Portfolios. The allocation further diversifies the portfolios away from duration risk (interest rate risk associated with government bonds), and diversifies the sources of income, most notably within the Retirement Managed Portfolios, which have been impacted by the deferral and reduction in company dividends within the equities component of the portfolios.

In our most recent Asset Allocation Committee we have not made any changes to the existing asset allocation settings. The previous move to neutralize our slightly underweight exposure to equities has benefited the portfolios as equity markets have continued to rise on the view that COVID-19 cases have peaked across many key economic regions, and that economies will begin reopening for business. At the same time, the market has reacted favourably to further fiscal stimulus packages announced in Europe and China.

The output from our asset allocation model has not changed materially since our previous meeting. Some notable changes, however, include the reduction in valuation opportunities within equities, given that share markets, most notably in the US, have recovered since their trough in March. Our valuation model indicates that most asset classes are trading at fair value, with the exception of government bonds, which continue to look expensive, and A-REITs, which look attractive on a relative basis.

Liquidity and policy remain favourable as central banks and governments continue to prop up economies via monetary and fiscal easing measures. Cyclical indicators reman weak, with most economic indicators such as unemployment figures and PMIs continuing to show weakness. Finally, risk indicators such as the VIX and MOVE indices continue to trend down. Indeed, the MOVE index, which measures implied volatility within bond markets, has returned to pre COVID-19 levels.

While markets have shown strength, risks remain. The impact of COVID-19 on company earnings remains unclear at this stage, while the market has been pricing in negative news, meaning any news regarding company earnings that is worse than expected will likely adversely impact markets. Geopolitical risks, while ever present, are in the spotlight again. Tensions between the US and China are elevated, and the path forward is unclear. This is against the backdrop of the upcoming US election in November and recent civil unrest within the US following the death of George Floyd at the hands of US police.

Finally, if we try to look ahead, one of the risks the market is not factoring in is inflation. While our view is that inflation is not a risk in the near term, possible structural shifts to the make up of economies on the back of COVID -19, specifically the potential decline in globalization, changes in supply chains, and the re-emergence of manufacturing industries in service-based dominated economies, may see prices of goods and service increase in the future.

In the shorter term, should we see the ‘V’-shaped economic recovery, the risk of inflation is a plausible scenario given the magnitude of stimulus we have seen in recent months. Within our portfolios, we do have exposure to assets that can offer some inflation protection, notably via infrastructure and gold exposures.

Whether in business, investing or life generally, when circumstances change, we need to be able to adapt quickly. The COVID-19 pandemic has forced us to transform our family, social and professional lives in a matter of weeks while contending with the uncertainty of lockdown and social distancing measures. For trust-based businesses that rely on face-to-face interactions with clients, the transition to online meetings and remote work has been disruptive but manageable.

While COVID-19 is not the teacher we were looking for, we’ve learnt to adapt in the face of a global challenge that affects everyone, albeit in different ways. It’s not the strongest that survive, but those best able to adapt to environmental shifts and identify opportunities, even in a world of chaos. When markets enter a period of extreme volatility, investment managers need both discipline and the flexibility to respond quickly. Likewise, when a client’s wealth is on the line, advisers need to be there to provide reassurance, and be in a position to implement changes to the portfolio as soon as the need arises.

Many advisers Lonsec has spoken to have been surprised by their ability to transform their business practices seemingly overnight. Being able to adapt and pivot as a business is essential, and it’s no different in the investment world. For many advisers, however, making timely changes to their clients’ portfolios remains a challenge. This is where managed accounts can play a critical role in responding to market dynamics while giving clients confidence that their portfolio can actively manage risks and won’t be left behind when the market comes back.

Over the past two months, Lonsec has made a number of changes to its suite of managed portfolios and SMAs, ranging from asset allocation adjustments through to individual fund manager and stock changes. These changes have been made to further diversify the portfolios, manage risk, and take advantage of investment opportunities where there has been significant dislocation in markets and value has been identified. In such an environment, the ability to implement in a timely manner has been important as market dynamics have shifted quickly.

The managed account structure has facilitated the efficient implementation of these changes. In practice, the process of making an investment decision – from the time the investment committee meets, to the implementation of the changes, through to the communication of these changes to advisers – takes around two days. Compare this to the conventional process of making an investment decision, sending a Record of Advice (ROA) to clients, awaiting a response, and then implementing the proposed changes across your client base.

All this can take up valuable time. While managing these changes, advisers also need to focus on running their business and helping clients through a period where many may be feeling distressed as their finances come under pressure, their job security is at risk, or their retirement savings have taken a hit.

An example of the value of being able to implement in a timely manner can be demonstrated by a change to asset allocation Lonsec made on 14 April 2020. Lonsec increased the portfolio allocation to equities within our multi-asset and listed portfolios from a slightly underweight exposure to a neutral exposure, thus increasing the weight to risk assets. The allocation was funded from our alternative and cash exposures, depending on the portfolio. The investment thesis was driven by an improvement in asset price valuation metrics, improved liquidity in markets, and a reduction in some of the risk indicators Lonsec monitors. At the same time, we recognized that economic data is likely to be poor and there is still significant uncertainty around how company earnings will be affected by the pandemic.

However, looking forward over a three-year period, we believed a neutral exposure was warranted. Since the change was implemented, both domestic and global equities have risen, recouping some of the losses experienced in March. While we believe it’s almost impossible to time markets – and Lonsec doesn’t make short-term tactical moves – being able to implement investment views at the time a decision is made can be beneficial to clients, particularly in periods where market dynamics are changing quickly.

Like many things, we often recognize the value of something once things take a turn for the worse. When markets are going up and volatility is low, as was the case leading up to pandemic, portfolio implementation doesn’t rank highly in terms of importance. However, when markets begin shifting rapidly, the value of efficient implementation becomes all too clear, especially for advisers looking to maintain contact with their clients and communicate the benefits of their advice in a highly challenging market.

View webinar recording

The live webinar was held on Wednesday, May 27th, 2020

Overview

Illiquid real assets: How the coronavirus is challenging super funds, fund managers and investors

Are listed markets more prone to emotion, or are funds underestimating the fall in value in their unlisted holdings? What does this mean for liquidity, super fund redemptions, and the rush to access cash? We tackle this thorny issue from a super fund, fund manager and A-REIT perspective.

  • Kirby Rappell, Executive Director, SuperRatings, Lonsec Group
  • Ash Reid, Portfolio Manager, Martin Currie (a Legg Mason affiliate)
  • Kevin Prosser, Research Manager – Direct Assets, Lonsec

CPD Points

If you attended our live webinar, please note that further instruction on how to receive the CPD Points will be delivered to your inbox. Whilst we aim to ensure every attendee receives CPD Points, it is within the guidelines provided that you are required to attend the full duration of the live webinar to receive your CE accreditation. Our technology platform collects data that reflects the duration and your full engagement during the live session.

On-Demand

To earn CE/CPD accreditation, please visit here.

CE/CPD accreditation is provided by our CE Accreditation Partner, Portfolio Construction Forum.

 


The content, presentations and discussion topics covered during this event are intended for licensed financial advisers and institutional clients only and are not intended for use by retail clients. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented.
Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, these presentations or any loss or damage suffered by the attendee or any other person as a consequence of relying upon the information presented.
Lonsec advises that all content presented at this event by any Symposium partner (not part of the Lonsec group of companies) is 3rd party content and forms representations and opinions of those 3rd parties alone. The contents of the presentations at this event are not in any way endorsed by Lonsec.

April saw a rebound in risk assets as markets were buoyed by the prospect of economies slowly reopening for business as the number of new COVID-19 cases appear to have passed their peak in many key economies around the world. Markets were also supported by ongoing policy actions from central banks and governments, which has seen liquidity in markets significantly shift from being problematic a couple of months ago to being flush with liquidity as central banks ramped up their asset purchasing programs.

Economic news however continues to be poor. The Australian unemployment rate rose from 5.2% to 6.2% in April. What this figure does not factor in is the number of people who have effectively exited the labour force as well as people who are underemployed as a result of their work hours being reduced. In the US, unsurprisingly retail sales took a significant hit dropping 16.4% in April, with clothing sales down by about 80% since the end of February. Only food consumption was up by 10%, which was no doubt fuelled by ‘panic buying’. Amidst the negative news, Chinese industrial production continued to show signs of rebounding.

A key question we are asking ourselves is to what degree the negative economic news has been priced into the market and to what extent will markets continue buying into the central bank liquidity story. We believe that markets have factored in some of the bad economic news however much will depend on how quickly economies can reopen and that the rate of COVID-19 cases remains stable. Central banks have responded rapidly, and the scale of response has been unprecedented. However, a spike in cases and economies re-entering a ‘lockdown’ scenario would be negative for markets.

Our most recent asset allocation change was to move towards our neutral weight to equities reducing our alternatives and cash allocation. Our asset allocation views take a 18 month to 3 year view and while we see risks ahead and economic news is expected to be poor, we are also seeing valuation opportunities in some asset classes. Policy and liquidity are conducive to risk assets and risk indicators such as the VIX Index have been moderating.

However, we remain cautious and from a bottom-up investment perspective we have been focused on further diversifying our portfolios. Within equities we are seeking to increase our exposure to managers, sectors and stocks which have a bias towards companies with more sustainable earnings and sound balance sheets. In terms of income, we are factoring in a 30% reduction in income from dividends and we are seeking to diversifying our sources of yield to certain segments of the credit market particularly within our retirement focused portfolios. Finally, we have been adding a small exposure to gold within our multi-asset and listed portfolios. Gold provides defensive characteristics during deflationary periods and times of economic uncertainly. Additionally, it can act as a good hedge against inflation, which while not a concern today, may be an issue in the future given the scale of monetary and fiscal stimulus supporting economies currently.

Stay safe and healthy.

View webinar recording

The live webinar was held on Wednesday, May 20th, 2020

Overview

Income in a very low rate environment

Rates are at historic lows and heading lower, while around the world banks are slashing dividends or scrapping them altogether. Our panellists share their best ideas for generating income during the crisis, and how you can help retirees meet their income and cash flow objectives.

Host: Veronica Klaus (Head of Lonsec Investment Consulting)

Brook Sweeney, Senior Investment Consultant, Lonsec
Vimal Gor, Head of Bond, Income and Defensive Strategies, Pendal
Amy Xie Patrick, Portfolio Manager, Pendal
Anton Tagliaferro, Investment Director, Investors Mutual Limited
Michael O’Neill, Portfolio Manager, Investors Mutual Limited

 

 

CPD Points

If you attended our live webinar, please note that further instruction on how to receive the CPD Points will be delivered to your inbox. Whilst we aim to ensure every attendee receives CPD Points, it is within the guidelines provided that you are required to attend the full duration of the live webinar to receive your CE accreditation. Our technology platform collects data that reflects the duration and your full engagement during the live session.

On-Demand

To earn CE/CPD accreditation, please visit here.

CE/CPD accreditation is provided by our CE Accreditation Partner, Portfolio Construction Forum.

 


The content, presentations and discussion topics covered during this event are intended for licensed financial advisers and institutional clients only and are not intended for use by retail clients. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented.
Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, these presentations or any loss or damage suffered by the attendee or any other person as a consequence of relying upon the information presented.
Lonsec advises that all content presented at this event by any Symposium partner (not part of the Lonsec group of companies) is 3rd party content and forms representations and opinions of those 3rd parties alone. The contents of the presentations at this event are not in any way endorsed by Lonsec.

View webinar recording

The live webinar was held on Wednesday, May 13th, 2020

Overview

The speed and scale of March’s sell-off has left the market reeling, reinforcing the need for a strong risk management component in your portfolios. Our panellists discuss approaches to risk management that can improve performance through volatility spikes in both a domestic and global setting.

Host: Veronica Klaus (Head of Lonsec Investment Consulting)

Presenters:

• Dave Wilson, our Senior Investment Consultant
• Ben Treacy, Institutional Portfolio Manager, Fidelity (Boston, US)
• Roy Maslen, CIO of Australian Equities, AllianceBernstein

 

CPD Points (Accredited 1.25 points)

If you attended our live webinar, please note that further instruction on how to receive the CPD Points had been delivered to your inbox. Whilst we aim to ensure every attendee receives CPD Points, it is within the guidelines provided that you are required to attend the full duration of the live webinar to receive your CE accreditation. Our technology platform collects data that reflects the duration and your full engagement during the live session.

On-Demand

To earn CE/CPD accreditation, please visit here.

CE/CPD accreditation is provided by our CE Accreditation Partner, Portfolio Construction Forum.

 


The content, presentations and discussion topics covered during this event are intended for licensed financial advisers and institutional clients only and are not intended for use by retail clients. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented.
Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, these presentations or any loss or damage suffered by the attendee or any other person as a consequence of relying upon the information presented.
Lonsec advises that all content presented at this event by any Symposium partner (not part of the Lonsec group of companies) is 3rd party content and forms representations and opinions of those 3rd parties alone. The contents of the presentations at this event are not in any way endorsed by Lonsec.

A period of rapid change, coupled with the recent bout of heightened volatility, hasn’t aided the growing list of challenges facing the funds management industry.

The biggest challenge currently confronting fund managers within the Australian Equities sector (and potentially across most sectors) is one of survival. Fund management businesses that were already under pressure from insourcing investment management activities by super funds and low-cost index investing have now been hit with a significant loss of funds under management given downward market movements.

Lonsec Australian Equities sub-sector performance

Sub-Sector Average 1 mth Average 3 mth Average 1 yr
Absolute Return -12.70% -14.79% -7.93%
Core / Style Neutral -21.49% -24.52% -15.28%
Geared -44.06% -48.70% -37.06%
Growth -18.70% -21.05% -11.16%
Income Dividend Focused -21.13% -25.12% -18.27%
Income Specialised -18.80% -22.16% -16.17%
LIC -18.44% -24.62% -12.01%
Responsible Investment -21.31% -24.12% -14.51%
Value -22.62% -27.19% -20.57%
Active Extension -23.60% -26.10% -16.90%
Variable Beta -17.25% -19.89% -13.30%
Microcap -26.05% -31.95% -16.79%
Mid Cap -21.16% -25.41% -18.19%
Small Cap -23.72% -27.96% -18.43%


Source: Lonsec. As at 31 March 2020

Boutique outfits without sustainable business models are increasingly susceptible to significant operational shocks in the current environment of uncertainty. Fund managers with lower funds under management are under increasing pressure to shore up their balance sheets and capital base via cost cutting or by entering into strategic partnerships. This is one key area of focus for Lonsec analysts currently reviewing the Australian Equities sector. That said, the underlying value proposition of boutiques remains compelling, with strong track records, high alignment with investors and autonomy to make decisions and set their own destiny.

The next challenge is the sheer uncertainty of what will happen next. The bottom up consensus earnings forecasts for flat growth in FY20 are not reflective of the current environment. The magnitude and duration of the virus induced disruption remains uncertain, attributing to market participants heavily discounting near term expectations. Over half of ASX 200 companies have downgraded or withdrawn earnings guidance due to the lack of visibility in assessing the extent and severity of the COVID-19 outbreak. Investors are now ready to disregard earnings this year and possibly well into 2021.

In an environment where ‘kicking the tyres’ is difficult, fund managers within the Lonsec universe are maintaining close contact with company management, looking at alternative sources of insights and closely monitoring news flow. While staying true to their traditional bottom-up approach, fund managers are also increasingly taking into consideration ‘top down’ risks, given the prevailing macroeconomic environment.

Importantly, fund managers within the Lonsec universe have stress tested their portfolios and conducted a review of their holdings, focusing on balance sheet resilience to help get through the current downturn. Any question marks around the strength of company balance sheets (i.e. high debt levels and low interest coverage ratios) has, in many instances, resulted in exiting its position.

The most recent drawdown has two stark contrasts compared to previous sizable downturns; the speed of the fall and the concentrated number of outperforming stocks. The dispersion of stock returns has spiked despite elevated sector correlations.

The consensus within the fund management community is that of cautious optimism, given Australia is already seeing the green shoots of a slowing of the spread and flattening the curve. This suggests that stocks exposed to the domestic economy will be direct beneficiaries.

A number of fund managers are taking advantage of opportunities in companies that benefit from the COVID-19 outbreak and stocks with leverage to a recovery. In particular, the surge in data usage emanating from government-imposed restrictions are positively impacting the likes of NextDC and Megaport. Supermarket operators Coles, Woolworths and Metcash are seeing a sharp bounce in their top-line sales as households hoarded a range of grocery staples including toilet paper and pasta.

As part of the ongoing review, Lonsec is monitoring for any ‘style drift’ in strategies chasing ‘high quality’ stocks.

History doesn’t repeat itself, but it often rhymes

If the GFC was any guide, one of the most profitable ways to generate short term gains was via capital raisings. This time is no different. A recent report by analysts at Macquarie who looked at the performance of 35 deals that had raised a combined $15.4 billion since 18 March 2020, found 74% of the deals were trading above their offer price, while raisings had on average returned 17% to date.

Within the small cap sector since late March to 22 April 2020, 29 companies raised capital totalling $5.4bn at an average discount of 22.2%. Only 6 of the 29 companies were trading below their placement price.

Many of these companies have benefitted from steps announced by regulators to facilitate capital raisings. In late March, and in response to the COVID-19 pandemic, the ASX temporarily increased the threshold to 25% (from 15%) for placements without needing to obtain shareholder approval. Last week, the waiver was amended to require additional disclosure by companies taking advantage of new share placements rules. Companies need to explain in detail how the shares are allocated, and which investors received stock, amid concerns existing investors are being diluted. For example, NextDC handed 20% of the stock issued in the placement ($672 million) to new investors at the expense of existing shareholders.

A large number of fund managers currently reviewed by Lonsec are taking advantage of this phenomenon, but the approach varies from taking  their pro-rata allocation, investing in a stock with the intention of topping up at the capital raising stage, or using their networks to get an allocation despite not having previously held a position in the company.

Fund managers are finding new sources of dividend income

Fund managers across the board are expecting company dividends to come under pressure due to liquidity concerns and balance sheet stress. The ability to cancel or delay dividends may prove an important source of funding to preserve balance sheets and may also help avoid dilutive equity raisings. Fund managers expect any unpaid dividends to be kept on balance sheets as retained earnings for future dividends.

% of dividends exposed to COVID-19 disruption


Source: AMP Capital

As at 30 March 2020, ASX 300 dividends announced but not paid totalled around $14 billion. Of these around $450 million have been cancelled and $540 million deferred.

Lonsec expects all Income strategies to be impacted as dividends for banks, property and infrastructure companies are expected to decline as companies try to counter demand shocks through rapid cash conservation measures. For example, National Australia Bank recently cut its dividend by 64% to protect their capital positions in anticipation of rising bad debts. Historically (over the last five years), the Financial Services sector and Materials sector have paid 33% and 27% (respectively) of total dividends (net) paid by companies.

The market expectation is for average DPS to fall in the region of 25–30%, but fund managers expect this to recover by 2022. Prior to the current crisis, yield (cash dividend plus franking) was near 7% (add a further 2% for option-based strategies). These numbers will obviously fall, but the belief is they are unlikely to approach the level of bond yields.

Importantly, fund managers have found new homes in their quest for yield. Resources stocks are the new ‘kids on the block’ when it comes to dividend payers. Resources companies are benefiting from strength in commodity prices, weakness in Australian dollar and strong balance sheets. Stocks such as Rio, BHP and Fortescue now within the ‘low probability of dividend cuts’, whereas the previous ‘annuities’ being the bank dividends are under continued pressure. Lonsec notes that given resource companies are generally capital intensive, cyclical (commodity cycle), and have higher operational risks, they are not the best ‘through the cycle’ dividend plays. For example, BHP had to cut its dividend following the Samarco dam disaster.

Dividends will be cut, making the avoidance of dividend traps more important than ever. It is important for fund managers to be cognisant of the potential for stocks to cut their dividends and adjust their portfolios accordingly, rather than just remaining systematically overweight those stocks with the highest historical yields.

Managers are getting ahead of the regulatory curve

The ban on short selling during the GFC opened up a lively debate on how markets should function. While the merits of a short selling ban may be dubious, fund managers are nonetheless prepared for this. While this would not be a big deal in isolation, fund managers need to make sure they are not exposed to many illiquid or highly shorted names. In the event of a short selling ban, history suggests that many would more actively use shorting of the index for hedging purposes.

Similar to past crises, the COVID-19 outbreak will mark a key point in history. Key structural trends are likely to emerge, and fund managers have begun pondering the implications for their strategies. Themes include the transition to a more digital world and focus on automation, having been further highlighted by the enforced digitisation of workplaces. Changing consumer behaviour such as an increase take up of e-commerce and the fragility of global supply chains have also been brought into stark attention. How these broader trends will impact the economy is a different question, but they will undoubtedly work to reshape the future investment landscape.

The biggest challenge for investors in an environment such as the one we are experiencing now is that there is a lot of information, the environment is changing rapidly and there are many unknowns. In the past several weeks we have witnessed one of the fastest drops in markets in history, bond market liquidity has dried up, unemployment is rising, robust business models have unraveled with businesses such as Virgin Australia forced into administration and we have seen unprecedented levels of government stimulus. This follows an extended period where equity market returns were strong and volatility was at historically low levels.

Whether you are running an investment committee or speaking to clients in such an environment, going back to basics is warranted. Referring to your investment philosophy and the investment framework that underpins it is fundamental in periods such as this. Importantly, it will assist in avoiding making reactive investment decisions that can have an adverse impact on the long-term outcomes of your portfolios. This is particularly important in the current environment where there is a proliferation of news flow. On a client level, dusting off the investment philosophy and refocusing your client’s attention on your fundamental investment beliefs will help you deal with nervous clients and aid in preventing them from making kneejerk decisions relating to their investments.  If we cast our minds back to the GFC, we know that clients that were reactive and cashed out from a typical balanced portfolio locked in a loss of about 8.5% on average, whereas those that remained invested, benefitted from the subsequent rebound in markets.

At the core of Lonsec’s investment philosophy is our belief in a diversified portfolio approach across asset classes and investment strategies with a strong focus on risk management. We aim to do this through a combination of active asset allocation decisions focused on managing risk and active bottom-up investment selection focused on ensuring portfolio are diversified not only by asset class but also investment strategies. As a practical example, in the current environment our focus within asset allocation remains on valuation, cyclical and liquidity factors and market sentiment. This provides us a starting point for assessing the current environment.

From a bottom-up fund selection perspective, we remain focused on understanding the role that every fund plays in the portfolio recognising that during periods of severe market dislocation, our ‘risk control’ funds should provide some dampening against this volatility, whereas our ‘growth’ funds will more than likely suffer the full extent of any market moves.

The strength of having an investment framework will assist navigating through uncertain times as it helps understand performance drivers and ‘where to from here” scenarios. Additionally, it ensures that conversations we have with clients on expectations of portfolio performance are clear and easily understood.

For more information about how Lonsec can help you with your investment philosophy and process, please contact us on 1300 826 395 or info@lonsec.com.au.

There has been much debate as to whether the market has reached its bottom. Trying to pick market inflection points be it the top or bottom range of the market can be difficult in the best of times. The last two months have felt like an eternity not only in terms of markets but from a life in general perspective. Many of us are working from home, homeschooling our children, we are rolling back the years with petrol prices and many people close to us have seen their businesses and job security plunge into uncertainty.

We’ve seen markets fall faster than during the financial crisis over a decade ago and at the same time we’ve seen central banks and governments respond quickly and in an unprecedented fashion in terms of scale. On average, governments have committed approximately 10% to 15% of their annual GDP to implement backstop measures to prevent their economies plunging into a deep recession or a depression. The US Federal Reserve has injected markets with a massive liquidity boost not only buying US treasuries but buying investment grade credit and high yield bonds.

So, have we seen the bottom or is there more downside to come? The fundamental question is how much of any future bad news has the market already priced in. This is one of the key things we asked ourselves in our most recent investment committee meeting. If we break down the key factors of our dynamic asset allocation process, we believe that over the long-term valuation is a key indicator of future returns, but that over the medium term where we are in the cycle, liquidity and policy have an important influence on markets.

Based on these factors our view is that risk assets are more attractively priced than they were prior COVID-19.  Policy and liquidity is accommodative to risk assets, economic data is negative and shorter-term sentiment indicators remain negative albeit risk gauges such as the VIX index moving down from their highs.

In a nutshell, we believe that market volatility will persist, there will be further bad news to come, but if we look ahead three years, we believe asset prices are likely to be higher than they are today. Based on this view we have neutralised our slightly underweight exposure to risk assets and reduced our exposure to alternative assets and cash.

So, don’t try to pick bottoms. We know that it doesn’t end well. In such environments where news is changing on a daily basis it is important to focus on your investment philosophy, process and investment time horizon.

Stay safe and healthy.

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.