With the growing dominance and potentially anticompetitive nature and conduct of big tech multinational players of the likes of Amazon, Facebook, Apple and Alphabet, there is bipartisan support behind the need for antitrust reform. US President Joe Biden’s appointment of staunch antitrust reform advocate Lina Khan as Chair of the Federal Trade Commission in June this year, reinforces the Biden administration’s firm intent to seek to address the broad range of antitrust concerns. In her role as Chair, Lina Khan will work with Congress on bills to limit the power of big tech companies, collaborate with European regulators on antitrust issues, and will be involved in deciding whether to launch antitrust investigations and court cases.1 Amazon is currently being investigated by the FTC for past acquisitions, treatment of third party sellers and its cloud services business. As evidenced by recent flurry of capital outflows in response to significant regulatory change targeting the technology and education sectors in China, regulatory and ESG risks can have a material impact on stock markets. This article discusses the rationale behind the need for antitrust reform which has been articulated by Khan and other advocates in the area, using the example of Amazon, to capture the reality of the anticompetitive risks that big tech companies present to society.

Amazon has an undeniably impressive long-term track record as a growth company. It has a substantial and growing addressable market, with promising businesses in AWS and Alexa, as well as value-add opportunities in Amazon Prime, grocery delivery and healthcare. As a result, it is often a ubiquitous and prominent holding in the portfolios of growth investment managers, which has proven to be a multi-bagger stock, and then some. AWS is a “scale as a service” platform, which delivers IT infrastructure services online. It has been transformational in making cloud computing more accessible and affordable to smaller companies, and its scale has enabled Amazon to invest more in the development and management of services than what would have otherwise been possible.2 Following Congressional hearings last year, the US House of Representatives’ Antitrust Subcommittee established that Amazon has “significant and durable market power in the US online retail market”, with monopoly power over third party sellers on its platform and suppliers.3 Amazon have developed a valuable service for vendors and consumers, built a strong market position and are entitled to a return on their substantial investment and innovation over the years. They have acted on a strategy of heavy reinvestment and research and development to produce a more competitive offering for consumers. However, there is growing recognition of the need for sufficient checks and balances to ensure that anticompetitive hazards are mitigated.

Theoretical Underpinnings of Antitrust Law

There has been a shift in approaching antitrust from economic structuralism toward consumer welfare. The current approach was introduced by Judge Robert Bork and supported by the University of Chicago Law school through the Chicago School of Antitrust framework. This approach narrows the scope and application of the law to focus solely on consumer welfare, specifically consumer prices, rather than the entire spectrum of market participants and implications to market power dynamics in the economy. Antitrust laws are centred on the objective of maximising consumer welfare, measured primarily through prices. Furthermore, the view is that consumer welfare is best achieved through market efficiency, in which firm size, structure and concentration are a result of market forces.4 Consistent with this theory, Amazon as a profit maximising actor, has a large market share and integrated supply chains. Its concentrated structure enables it to achieve lower prices and thereby maximise consumer welfare. This approach overlooks risks Amazon poses to competition and other market participants, and the multitude of other ways it can exploit market power. Market efficiency lies on the premise that rational economic actors will maximise profits by combining inputs in the most efficient manner. However, economic actors do not always act rationally and unchecked and without proper oversight have opportunities to act unfairly for the ultimate detriment of consumers. Monopolies and oligopolies increase barriers to entry, risks of collusion and price fixing, and lowers the pricing power of consumers, suppliers and even employees.5 Amazon has barriers to entry that assist the durability of its market power, including high switching costs for consumers to shop outside Amazon’s ecosystem and its fulfilment and delivery advantage through a large logistics network.6 In addition, network effects and data collection that cannot be easily replicated by new entrants, further increase these barriers.7 As Congresswoman Pramila Jayapal stated when questioning Jeff Bezos in the antitrust Congressional hearings in 2020, Amazon can monitor third party vendors on their platform so there is a risk competitors don’t get big enough so that they can never essentially compete.

Antitrust ideology in the 1960s centred on the theory of concentrated economic structuralism, which takes the view that concentrated market structures promote anticompetitive conduct. Markets with several small and medium sized companies are more competitive in structure than where it is concentrated among a few large players. Thus, the application of antitrust law was broader and took into consideration the interests of these stakeholders, including suppliers, employees, and competitors. Even if current interpretation of antitrust is correct in its focus solely on consumer welfare, consumer prices are only one measure of consumer welfare. This approach ignores the totality of consumer welfare including product quality, variety and innovation.8 These are best fostered through open markets and competition, rather than concentrated market structures with a few, large powerful companies.9 The aim of antitrust law should be to promote market competition and ensuring market power is appropriately distributed to achieve this, rather than consumer welfare.10 Practically, however, it is difficult to envisage that the application of this approach should result in the break-up of big tech companies. In the case of Amazon, the economies of scale arguments hold true, the vertical integration of business provide cost advantages to consumers that could not otherwise be achieved. However, closer regulatory oversight of big tech companies to prevent infringement upon interests of other stakeholders may be warranted.

There is broad support for the view that the Supreme Court’s interpretation of legislative intent behind the Sherman Act as a consumer welfare prescription is inaccurate. The genesis of antitrust was based on several aims, including to control and distribute the power of large industrial trusts and ensure that they did not impinge upon the opportunities for newer entrants in the market.11 In fact in the 1960s the Supreme Court specifically highlighted that the legislative intent of antitrust was to prevent concentrations of economic power,12 which reduced economic competition and gave rise to the potential for significant political control.13 Congressional debates by Senator Sherman himself highlighted one of the purposes of Congress during the 1890s was to protect an industry structure of small units which effectively compete with each other.14 Whilst this was the legislative intent of the 19th and 20th centuries, intent of Congress is an important basis for courts in interpreting and applying legislation.

Predatory Pricing

Whilst companies are entitled to competitively price and discount goods and services, predatory pricing to eliminate competition is illegal. However, the distinction between the two can be difficult to determine. In 2009, Quidsi, a growing e-Commerce business declined Amazon’s acquisition offer. Amazon subsequently aggressively reduced prices on product categories sold by Quidsi including diapers and baby products. Amazon used its data advantage, with pricing bots monitoring and following any price cuts made by Quidsi. Amazon’s product manager admitted to a strategy to match prices no matter what the cost.15 Ultimately, this resulted in the sale of the business to Amazon, after which Amazon raised the prices on products that were previously discounted. Arguably Amazon used its market power to undermine competition. Advocates may argue that this is the type of conduct which the Clayton Act was designed to prevent, as articulated in Congressional debates ‘by the use of this organized force of wealth and money the small men engaged in competition with them are crushed out; and that is the great evil at which all this legislation ought to be aimed.’16 On the other hand, it may be argued that this is an example of competitive pricing. Companies often compete on prices to attract and gain customers. Amazon thus could at best be said to have engaged in a pricing war with Quidsi on similar products, which ultimately resulted in Quidsi’s sale. In a general sense mergers and acquisitions can aid platforms in achieving scale, gain functionality to provide to its large user base as well as obtaining talent and resources for innovation.17 However, even if we are to look at antitrust through the lens of the consumer welfare standard, Amazon’s conduct significantly reduced the degree of competition and choices in the market when in Amazon’s own view it believed that Quidsi was its largest short term competitor.18 This seems to meet the FTC’s guidance on predatory pricing in that it harmed consumers by allowing a ‘dominant competitor to knock its rivals out of the market and then raise prices to above-market levels for a substantial time.’19

Amazon’s significant size and influence enables losses from aggressive pricing strategies to be offset and recouped through other avenues, including charging publishers higher fees for services.20 In an incident termed the “Gazelle Project”, small book publishers, dependant on Amazon for sales, were subjected to unfavourable treatment if they did not agree to more favourable terms during contract negotiations.21 Similar instances were highlighted by the US House of Representatives’ Antitrust Subcommittee, such as Amazon threatening retaliation if publishers would not accept contractual terms that limited their ability to work with Amazon’s rival e-book retailers.22 Publishers are at a structural disadvantage in negotiations not only because they rely on Amazon for distribution and marketing, but also because Amazon is vertically integrated into publishing and may promote its own content over external publishers.23

Advocates argue that predatory pricing laws should be more strongly enforced to reflect the uncertainty surrounding predatory pricing. Predatory pricing cases are rarely brought in the US. The Clayton Act of 1914 prohibited large companies from reducing prices below the cost of production to eliminate competitors and make their business unprofitable, and with the aim of becoming a monopoly.24 Similarly, the Robinson-Patman Act of 1936 aimed to prevent conglomerates and large companies from using their buying power to obtain discounts from smaller companies to destroy competition.25 However, the Supreme Court has adopted the view that rather than predation, there is a greater risk of price competition being misclassified as predation (Matsushita Electric Industrial Co v. Zenith Radio Corp). This is because the success of predation schemes of predatorily low prices is uncertain in the long-term. The Chicago School’s critique of predatory pricing was that below cost pricing is irrational, unsustainable and rarely occurs.26 Economics is not an exact science and the Chicago School’s argument is not an unbreakable principle of law.27 The Chicago School undermined the idea that price discrimination could be used to create monopolies, which they argued was the premise of the Robinson-Patman Act. Indeed, Amazon uses below cost pricing as a systematic and highly effective strategy, and whilst prima facie irrational, below cost pricing can nonetheless prove to be sustainable in the long term and enabler of gaining market share. This is not necessarily conclusive that Amazon engages in predatory pricing but evidences the outdated thinking behind predatory pricing and the need for this to be revisited.

Amazon have developed a valuable service to consumers, third-party vendors and publishers on its eCommerce platform. As a result of significant and continuous reinvestment into the company it has earned its strong market position and are entitled to a return on investment. However, the dominant business structure and power imbalances of third-party vendors elevates risks of anticompetitive harm. Closer regulatory oversight may be needed to protect the interests of these broader groups of stakeholders albeit the market will be very wary of the impact such regulations may have on the earnings power of Amazon and other big tech companies.

Author: Asha Rahman, Associate Analyst
Approved by: James Kirk, Manager – Global Equities & Alternatives


1. The Economist, ‘Joe Biden appoints Lina Khan to head the Federal Trade Commission’, 19 June 2021 < https://www.economist.com/united-states/2021/06/19/joe-biden-appoints-lina-khan-to-head-the-federal-trade-commission>.
2. Baillie Gifford, Portfolio Construction Forum 2021.
3. Subcommittee on Antitrust, Commercial and Administrative Law of the Committee of the Judiciary, US House of Representatives, Investigation of Competition in Digital Markets, Majority Staff Report and Recommendations (2020) 254.
4. Lina M Khan, ‘Amazon’s Antitrust Paradox’ (2017) 126 Yale Law Journal 710, 720.
5. Ibid.
6. Subcommittee on Antitrust, Commercial and Administrative Law of the Committee of the Judiciary, US House of Representatives, above n 3, 260.
7. Khan, above n 4, 772.
8. Ibid 737.
9. Ibid 739.
10. Ibid 737.
11. Ibid 740.
12. Greenfield B Leon, Lange A Perry and Nicole Callan, ‘Antitrust Populism and the Consumer Welfare Standard: What are we Actually Debating?’ (2019) 83(2) Antitrust Law Journal, 2.
13. Darren Bush, ‘Consumer Welfare Theory as an Ethical Consideration: An Essay on Hipsters, Invisible Feet, and the “Science” of Economics’ (2018) 63 The Antitrust Bulletin 509, 511-12.
14. Ibid 513.
15. Sarah Oh, ‘Is there evidence of antitrust harm in the house of judiciary committee’s hot docs?’ (2021) 37 Santa Clara High Tech Law Journal 193, 199.
16. Sandeep Vaheesan, ‘The Profound Nonsense of Consumer Welfare Antitrust’ (2019) 64 The Antitrust Bulletin 479, 481.
17. D Daniel Sokol and Marshall Van Alstyne, ‘The Rising Risk of Platform Regulation’ (2020) 62(2) MIT Sloan Management Review, 3.
18. Ibid.
19. The Federal Trade Commission, ‘Predatory or Below-Cost Pricing’ <https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/single-firm-conduct/predatory-or-below-cost>.
20. Khan, above n 4, 765.
21. Business Insider Australia, ‘Sadistic Amazon Treated Book Sellers “The Way a Cheater would Pursue a Sickly Gazelle”’, 23 October 2013, <https://www.businessinsider.com.au/sadistic-amazon-treated-book-sellers-the-way-a-cheetah-would-pursue-a-sickly-gazelle-2013-10?r=US&IR=T>.
22. Subcommittee on Antitrust, Commercial and Administrative Law of the Committee of the Judiciary, US House of Representatives, above n 3, 269.
23. Khan, above n 4, 766.
24. Ibid 723.
25. Ibid 724.
26. Ibid 727.
27. Bush, above n 13, 511.

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.
Disclosure as at the date of publication: Lonsec receives fees from fund managers or product issuers for researching their financial product(s) using comprehensive and objective criteria. Lonsec receives subscriptions for providing research content to subscribers including fund managers and product issuers. Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other advice. Lonsec’s fees are not linked to the product rating outcome or the inclusion of products in model portfolios, or in approved product lists. Lonsec and its representatives, Authorised Representatives and their respective associates may have positions in the financial product(s) mentioned in this document, which may change during the life of this document, but Lonsec considers such holdings not to be sufficiently material to compromise any recommendation or advice.
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Before making an investment decision based on the rating(s) 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 our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Where Lonsec’s research process relies upon the participation of the fund manager(s) or product issuer(s) and they are no longer an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).
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In 2020 Lonsec introduced ESG assessment scores for all its managed fund reviews. More than just a simple style classification, Lonsec reviews the actual implementation of ESG through the investment process and incorporates that assessment as one of the factors that determine a fund’s final investment rating. Now well into the second year of our enhanced review process we have noticed some clear actions by managers over the last twelve months to improve their overall ESG implementation.

The most immediately obvious change, year over year, has been an increase in the public provision of ESG policies by managers and a clear improved trend in reporting on proxy voting and engagement. Importantly, though, ESG policies are improving in quality, clarity and commitment. Lonsec favours policies with clear ESG objectives and beliefs, and board or CEO signoff and buy-in. Lonsec is pleased to note an overall improvement in proxy voting policies, with more of them referencing ESG as important considerations and leading policies clearly stating how a manager might be expected to address and vote on particular issues.

Unfortunately, there remains a clear gap, however, between voting expectations and actual outcomes. Lonsec is concerned that actual voting decisions, particularly for ESG and Sustainability labelled funds, might not align with the expectations of fund investors, particularly with respect to environmental, Paris agreement based and diversity issues. For this reason, Lonsec places a high level of importance on clear, reporting of voting decisions, with leading fund managers providing clear rationales for why they have voted in a particular way. This is especially important where client expectations are likely to be aligned a to a certain perspective, given the type of fund invested in. There have been a few clear leaders in this respect with some delivering improved functionality and transparency of voting intentions and rationales for contentious decisions, published prior to the AGM’s and votes being lodged. Lonsec sees this as a is a very positive move and would encourage its widespread adoption.

Engagement is also a key ESG implementation approach where managers have improved their overall policies and reporting. Assessment of engagement activities by Lonsec however, remain difficult. As most managers prefer to engage “behind closed doors”, a thorough review of the passion, commitment and position being taken by managers is difficult to assess. Disappointingly a recent interview with Man Group CEO indicated that many of his largest institutional shareholders, who claim engagement as a key plank of their stewardship activities, don’t actually engage on key issues like remuneration policies, even when his company tries to engage with them! For this reason, Lonsec’s process looks for the manager to deliver clear proof points where strong engagement is claimed.

These broad improvements have meant that, overall, managers are scoring higher than they were a year ago on Lonsec’s proprietary scoring models. As a result, the “the bar is being lifted” and managers who’s ESG approach is static are likely to slip in our relative rankings.

Lonsec does note, however, that there is still considerable room for improvement by many managers on the transparent integration of ESG into their investment processes. While an increasing number of managers are utilising external ESG ratings and data, or proving their own ESG research, there remains room for improvement in articulating how said research actually impacts investment decisions. Overall ESG risk measurement at the portfolio level and clear feedback loops to portfolio decisions are largely missing from most managers processes.

Lonsec is also keen for managers to be more transparent about the nature of their ESG styles and how that might impact security selection. There is a wide variety of approaches to ESG integration, not all of which naturally align with broad investor expectations. Lonsec would welcome simpler descriptions of the ESG approach being adopted rather than the common, more generic, “ESG is integrated into our research/investment process” with an explanation of how this actually works.

All in all, Lonsec is pleased to report improving policy and reporting transparency from managers and is looking for continued improvements on investment process descriptions and robustness.

Author: Tony Adams

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’s complete suite of managed accounts is now available on Macquarie’s wrap platform with the addition of the new Sustainable portfolios. The Sustainable portfolios provide greater choice for clients seeking investment strategies that align with their personal values and demonstrate strong environmental, social and governance (ESG) practices.

Recognising the growing demand for responsible investment solutions, Lonsec developed the Sustainable portfolios’ Balanced, Growth and High Growth risk profiles with a unique philosophy that looks through both lenses of ESG, which focus on the underlying managers’ process, approach and integration of ESG factors, along with Sustainability measures, which focus on the funds’ positive impact on the world.

To measure the portfolios’ contribution to society and the environment, we assess funds against the UN’s Sustainable Development Goals (SDG) framework. We look at the activities of the companies held in a fund and net the positive contributions to the 17 SGDs against the negative impact of exposures to controversial industries.

Deanne Baker, Portfolio Manager for the Sustainable portfolios said, ‘The Sustainable portfolios now have a 6-month track record and, not only have the outperformed the Benchmark over the last 3 and 6 months, but they have also made positive contributions across a number of the SDGs including SDG 11 Sustainable Cities and Communities, 3 Good Health and Well Being, SDG 1 No Poverty, SDG 5 Gender Equality, SDG2 Zero Hunger and SDG 7 Affordable and Clean Energy. With the addition of our Sustainable portfolios on Macquarie, we are thrilled to offer an investment solution that aligns with the needs of our clients and can have a positive impact on the planet”.


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 Sustainable portfolios ended the financial year strongly, comfortably outperforming the strategic benchmark. The portfolios now have a 6-month track record having being launched in December last year and they have outperformed their respective FE Multi-Asset Benchmark Indices over the last 3 and 6 months. Returns from Dynamic Asset Allocation were positive with the overweight position in Australian Equities adding value.

In addition to outperforming the strategic benchmark, the Sustainable portfolios have a dual objective of making a positive contribution to society and the environment. Deanne Baker provides an update on the portfolios’ top contributions to the United Nations Sustainable Development Goals (UN SDGs).

 


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 Retirement portfolios outperformed their respective peer group benchmark over the June quarter. From an income perspective, the portfolio continues to deliver on its objectives, generating 4.14% income (before franking) over the 12 months to June.  Pleasingly, that income has been sourced across a range of asset classes. The portfolio remains diversified by accessing a wide range of income sources from equity dividends.

Lonsec’s view remains that inflation will for the most part be transitory, nonetheless, the Retirement portfolios are well positioned should inflation turn out to be more pervasive.


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 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.

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.