We have made changes to the Lonsec Listed Managed Portfolios following a review. These changes were effective as of 15 March 2022.

The changes have been made to the Lonsec Listed Managed Portfolios with the aim of:

– Reducing our Overweight allocation to Emerging Markets back to Neutral (lowering exposure to EMMG/VGE).
– Increasing allocation to Real Assets (increasing exposure to IFRA).
– Increasing diversification within our Global Equities allocation while reducing the Overweight exposure to the Technology sector. This is achieved by adding VVLU to the portfolios, funded by taking profit on NDQ and trimming exposures to VEU and QUAL.


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 © 2022 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.

Given the impact the Russian-Ukraine conflict has had on financial markets, Lonsec has surveyed relevant Global Emerging Market Equity managers to ascertain their exposure to Russian, Ukrainian and Belarussian securities through the months of December 2021 to February 2022. Where such exposures are identified, Lonsec has also ascertained the underlying holdings and what steps managers have taken given the equity market fall-out from the conflict.

In terms of products with exposures, Lonsec notes that throughout the month of February 2022 the situation was fluid and highly volatile. Key market events included the closure of the Moscow Stock Exchange for all trading alongside major foreign exchanges suspending trading of all Russian Global and American Depository Receipts (GDRs/ADRs). These actions severely limited the optionality of asset managers to respond and transact as desired.

In light of this, asset managers who held Russian equity holdings in mid-to-late February 2022 have been forced to write these off entirely following a period of these being severely impaired. These actions have already been taken and are reflected in unit prices. Additionally, such managers have typically placed hard limits on not acquiring Russian, Ukrainian and Belarussian securities for the foreseeable future.

This report aims to outline exposure levels and commonly held Russian stocks from those relevant asset managers within the Global Equities – Global Emerging Market sub-sector, an overview of the Russian equity market alongside a more detailed sequence of events.

Lonsec rated universe: Global Equities – Global Emerging Markets Funds Russian Exposure Weights
APIR Funds 31-Dec-21 31-Jan-21 28-Feb-21
ETL4207AU GQG Partners Emerging Markets Equity Fund – A/Z Class 15.1% 8.3% 1.3%
ETL3590AU Ashmore Emerging Markets Equity Fund 7.8% 6.4% 0.6%
ETL4930AU NB EME Select Trust – I Class 7.3% 6.1% 0.8%
ETL1713AU NB EME Select Trust – W Class 7.3% 6.1% 0.8%
LAZ0003AU Lazard Emerging Markets Equity Fund 7.2% 6.5% 2.4%
ETL0032AU Aberdeen Standard Emerging Opportunities Fund 6.3% 6.0% 1.5%
UBS8018AU UBS Emerging Markets Equity Fund 5.6% 3.3% 1.2%
VAN0221AU Vanguard Active Emerging Markets Equity Fund 5.4% 5.0% 1.2%
CHN8850AU Redwheel Global Emerging Markets Fund 4.1% 4.0% 0.2%
ETL7377AU GQG Partners Global Equity Fund – A Class 3.1% 1.8% 0.2%
PER0736AU BMO LGM Global Emerging Market Fund 2.6% 2.5% 1.4%
BTA0419AU Pendal Global Emerging Markets Opportunities Fund – WS 2.4% 4.9% 0.9%
ETL0201AU Legg Mason Martin Currie Emerging Markets Fund 2.3% 2.1% 0.2%
EMMG BetaShares Legg Mason Emerging Markets Fund (Managed Fund) 2.2% 2.1% 0.2%
FID0031AU Fidelity Global Emerging Markets Fund 1.9% 2.5% 0.4%
FEMX Fidelity Global Emerging Markets Fund (Managed Fund) 1.9% 2.5% 0.4%
FID0010AU Fidelity Asia Fund 0.0% 0.0% 0.8%

 

MSCI EM Benchmark 3.6% 3.2% 1.6%*

(*On March 4th, 2022, MSCI announced Russia would be removed from the Index effective March 9th, 2022)

 

MSCI Russia 25 / 50 Index constituents, index weights, performance and Lonsec Global Emerging Markets sub-sector portfolio representation as of 28 February 2022

 

Stock name Sector Index Weight (%) Performance (31 Dec 21 – 28 Feb 22) No. of funds holding
GAZPROM Energy 21.1% -51.5% 5
NK LUKOIL Energy 16.0% -45.1% 9
SBERBANK ROSSII Financials 8.9% -68.8% 7
GMK NORILSKIY NIKEL Materials 7.0% -38.7% 2
TATNEFT Energy 4.8% -47.5%
POLYUS Materials 3.6% -40.5% 2
TCS GROUP HOLDING REPR CLASS A RE Financials 3.6% -61.0% 5
SEVERSTAL Materials 3.1% -38.6% 2
NOVOLIPETSK STEEL Materials 3.0% -39.7%
MOBILE TELESYSTEMS PUBLIC JOINT AD Communication 3.0% -30.8% 2
NK ROSNEFT Energy 2.9% -64.1% 2
POLYMETAL INTERNATIONAL PLC Materials 2.7% -52.3%
YANDEX NV CLASS A Communication 2.5% -70.1% 5
SURGUTNEFTEGAZ PREF Energy 2.5% -41.2%
AK ALROSA Materials 2.3% -51.2%
PAO NOVATEK GDR Energy 1.9% -83.6% 3
SURGUTNEFTEGAZ Energy 1.8% -60.4%
X5 RETAIL GROUP GDR NV Consumer Staples 1.7% -54.7% 1
MOSCOW EXCHANGE Financials 1.7% -54.4% 1
INTER RAO EES Utilities 1.4% -50.0%
UNITED COMPANY RUSAL Materials 1.3% -41.4% 1
PJSC PHOSAGRO GDR Materials 1.1% -71.7%
MAGNIT PJSC SPONSORED RUSSIA RU DR Consumer Staples 0.6% -89.3%
OZON HOLDINGS ADR PLC Consumer Discretionary 0.4% -66.7%
MAIL RU GROUP GDR LTD Communication 0.4% -75.9%
HeadHunter Group PLC Communication 0%* -70.6% 1
Fix Price Group Ltd – GDR Consumer Staples 0%* -87.5% 1
Globaltrans Investment Plc Industrials 0%* -89.7% 1

* Not included with the MSCI Russia 25 / 50 Index

Timeline of events

January 2022

  • The build-up of Russian troops along the border of Ukraine and heightened tensions compelled some Managers to reappraise the geopolitical risks and pair back their associated Russian exposures throughout the month.

February 2022

  • Sanctions against Russia escalate throughout the month from the US, UK and EU. Asset managers faced increasing liquidity issues trading their Russian equities. On February 22, the US announced full blocking sanctions on several Russian banks and cancelled Russian sales of sovereign bonds on US money markets.
  • February 24, Russian troops invade Ukraine which brings further international condemnation. As a result, Russia’s local bourse fell 40%.
  • February 25, Russia’s Central Bank closed the Moscow exchange, suspending all stock and foreign currency trading.
  • February 25, asset managers begin to severely impair their Russian assets and introduce fair value pricing to calculate unit prices due to the inability to trade and accurately price Russian assets.
  • February 26, the European Union announces sanctions to limit Russia’s ability to access an estimated US$630bn in reserves to finance war and avoid the impact of sanctions being applied.
  • 27 February, the US and EU announce a ban on Russian banks from the SWIFT interbank transaction system which is the backbone of the international financial transfer system. The sanction cuts Russia off from the international banking system crippling their ability to trade with the rest of the world.
  • 28 February, major stock exchanges progressively introduced suspensions on trading Russian equity American Depository Receipts/Global Depository Receipts (ADRs and GDRs).
  • 28 February, the Russian Ruble succumbs to heavy exchange pressure, weakening by over 20% against the greenback. In an effort to stabilise the currency, Russia’s Central Bank called an emergency meeting and increased interest rates from 11% to 20%.
  • 28 February, asset managers begin to write down their Russian asset entirely.

March 2022

  • 1 March, S&P Global Ratings downgrades several Russian banks and placed the ratings of another 19 on CreditWatch negative.
  • 2 March, Russia’s Central bank desperately attempts to prevent a run on Russian bank reserves by announcing lower reserve requirements. The Central bank announced that the liquidity gap in the Russian banking system was US$68 billion dollars, a 27% increase in the gap in just one day.
  • 3 March, the International Energy Agency unveils a 10-point plan to reduce Europe’s dependency on Russian gas. Europe currently is immensely reliant on Russian oil with roughly 40% of its gas supplied by Russia.
  • 4 March, Major index providers, such as MSCI, FTSE and S&P begin to announce that the Russian market is “uninvestable” with indices recalculated by 9 March. All Russian assets were marked down to effectively zero.
  • 4 March, the Australian Federal government called on Australian superannuation funds to divest Russian assets. Australian superannuation funds confirm that they are set to encounter losses of up to A$2bn on Russian assets when trading resumes on the Moscow Stock Exchange.
  • 6 March, Visa, Mastercard and American Express announce that they will be suspending all foreign transactions associated with Russia.
  • 8 March, countless top brands and industry leaders such as Disney, Exxon, Shell, Apple and McDonalds either suspend operations in Russia or make plans to wind them down. Further, the US announced a ban on all imports of Russian Energy in addition to banning exports of oil refining technology making it substantially more difficult for Russia to continue the modernisation of their oil refineries.
  • 10 March, Russian companies begin looking into the possibility of relocating employees from Russia.

Conclusion

While share price movements have been severe in isolation, Lonsec notes that losses at an overall fund level have tended to be relatively contained given Russia makes up only a small proportion of emerging markets universe. There were however a small number of managers which had a material allocation to Russia through the early parts of 2022. While these exposures were progressively paired back in most instances, the write-off of the remaining holdings will however meaningfully impact Fund performance in the short-to-medium term.

Regardless of direct exposure, Lonsec highlights that Russia’s invasion of Ukraine will continue to meaningfully influence financial markets for the foreseeable future given the long-lasting repercussions on global trade. The idea of a single and open global economy is now a distant dream given the geopolitical tensions between superpowers Russia, China, the US and NATO nations. This comes off the back of already fractured relations following the onset of the pandemic in 2020. The onset of war and related sanctions add fuel to an inflation bonfire initially lit by a resurgence in demand as the world emerged from the pandemic. Higher interest rates could well be imposed at an even quicker rate than expected, potentially stifling economic growth and asset prices in the process.

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.
Warnings: Past performance is not a reliable indicator of future performance. The information contained in this document is obtained from various sources deemed to be reliable. It is not guaranteed as accurate or complete and should not be relied upon as such. Opinions expressed are subject to change. This document is but one tool to help make investment decisions. The changing character of markets requires constant analysis and may result in changes. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) 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. It does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).
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).
Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. 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 Lonsec. Financial conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. 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, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.
Copyright © 2022 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This document is subject to copyright of Lonsec. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this document may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec.
This document may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to Lonsec copyrighted material, applies to such third party content.

We initially developed our tests of tomorrow following the Royal Commission to gain insight into the areas which may be focused on, should such an industry overhaul occur again, and we have continued to review and adjust these over time. Our suite of tests includes inactive account transfers, disclosure of fees, insurance and investment risk, legacy products, how well scale is being leveraged and retirement product development.

Kirby Rappell, Executive Director, SuperRatings 

 

With stapling reducing the flow of members defaulted into employer plans, funds need to focus on their acquisition strategies in this new environment and the channels through which to obtain members including corporates, direct acquisition and external advisers. 

 

Fees and investments continue to be key hygiene factors when selecting a default fund, we are seeing corporates adopt a more values-based overlay to their decision-making.

 

Camille Schmidt, Market Insights Manager, SuperRatings

Volatility and market uncertainty is increasing as markets react to news about interest rate rises. We asked Chief Investment Officer, Lukasz de Pourbaix, to give us an update on whether the current market situation has impacted Lonsec’s dynamic asset allocation views and whether any changes will be made to the Lonsec portfolios’ positions.

Lukasz explains that as part of Lonsec’s Investment Committee oversight process the team will continue to analyse and closely monitor the evolving situation. Rebalancing portfolios will become increasingly important over the next 12 months however the portfolios have a good built-in diversification across investment strategies and styles and Lonsec is comfortable with the portfolios’ current positions.


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 © 2022 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.

I hope everyone had the opportunity to have a restful break.

Markets have kicked of 2022 with a bang. Inflation is on everyone’s lips and we saw markets gyrate widely ahead of the US Federal Reserve’s meeting in January. What is certain is that markets do not like uncertainly and in this instance the market was trying to process whether the Fed will raise rates, and if so by how much and when. Additionally, markets were eager to understand the Fed’s direction on their liquidity support for the economy via quantitative easing (where the Fed buys government bonds), which has been an anchor for markets for the best part of the last decade. The Fed essentially indicated that inflation may increase further before it moderates, that a rate rise in March is possible and that liquidity support through quantitative easing will continue to slow down. In addition to inflation, the ongoing flow on effects from the pandemic and growing geopolitical tensions between Russia, the Ukraine and western powers has also contributed to market volatility.

As we have learned from previous periods of volatility, it is important not to react emotionally in such periods and focus on fundamentals. In periods of market volatility quality assets often get oversold. During the last two years we have witnessed a record level of new retail investors enter the market, as reflected by the surge in new online share trading accounts being opened and for many this will be their first encounter with a market downturn. No doubt there will be some nervous investors.

In our view inflation is a concern, however we don’t think that exiting the market and going into cash is the answer. Real returns from cash will be negligible and trying to time a re-entry point in the market is difficult. Despite the pull back in markets, assets generally remain in expensive territory. What has changed is that cyclical and liquidity/policy indicators have softened and some of the short term risk indicators have risen. As bond yields have risen the attractiveness of bonds relative to equities is improving.  In such environments diversification is important. Our portfolios have exposure to a range of assets and investment styles that can perform in a variety of market environments. Exposure to asset classes such as infrastructure can assist in generating real returns. Furthermore, alternative assets such as gold and diversified strategies should dampen overall portfolio volatility. We are also reviewing are overall exposure to different factors i.e. growth, quality and value to ensure that we are not overexposed to a single part of the market.

As we did during the previous ‘covid’ market pull back, we are holding interim and more regular investment committee meetings to assess the evolving market situation. We are also engaging with fund managers to obtain a range of perspectives on the current market dynamics.


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 © 2022 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.

Inflation continues to dominate the discussion. Most of us agree that interest rates will go up at some point from their record lows. The question is by how much and when.  Chief Investment Officer, Lukasz de Pourbaix, provides an update on the outcomes and key discussion points from Lonsec’s latest quarterly Asset Allocation investment committee meeting and the rationale behind our current Dynamic Asset Allocation (DAA) positions.


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.

As this is our final newsletter for 2021, I’d like to take the opportunity the wish you all a relaxing festive season and all the best for 2022. On behalf of the Lonsec, I would like to thank you for your support and for entrusting us with your clients’ investments and we look forward to working with you in the coming year.

Rather than recapping on 2021, I thought it would be of value to look to the future and provide you with a sense of the top three investment themes to consider for 2022.

1. Increased opportunity for bottom-up active investments

We are observing the rise in dispersion in returns within asset classes across individual securities and sectors. We expect this dynamic to continue as market conditions evolve. For the best part of the last 10 years markets have been driven by unconventional central bank monetary policy strategies, primarily quantitative easing, which have distorted markets. This policy action has resulted in an incredible rise in the value of risk assets and for most clients it has resulted in a significant rise in their asset values.

This environment has resulted in certain investment styles and sectors dominating market returns. An example of this has been the incredible ascent of growth stocks within the technology sector.

We think that we are heading into an environment where investors will need to be more selective in security and sector allocations and that the “easy money” related to simply investing in high beta parts of the market has been made. This does not necessarily mean that value stocks will now take the mantle in terms of driving returns. It just means that investors will need to be more active in their security selection, irrespective of style.

2. Inflation to dominate the market narrative

Central bank policy settings will be a critical consideration for portfolios in 2022. It is safe to say that most of us agree that interest rates will go up at some point from their record lows. The question is by how much and when. The market has been trying to price this in which has been evident in the movements we have observed in bond yields. From a domestic perspective, our view is that the RBA will be in no rush to raise rates as wage growth has remained sanguine compared to the US, where we have seen core inflation go up and an upward pressure on wages.

Central banks have also flagged a desire to reduce monetary support via quantitative easing strategies commonly referred to as tapering. Moderate inflation can be positive for equities, but spiraling inflation will be negative for most asset classes.

From a portfolio perspective, we think it is too early to position the portfolios for a single scenario. While there are real inflationary pressures present, there is no doubt that there is a transitory component to the current inflationary environment driven by Covid and the impact it has had on supply chains. We think it is prudent to have some exposure to assets that may benefit from inflation, such as real assets and gold, and we also recognise that the situation is fluid. Portfolio diversification remains your best defense.

3. X Factors to cause market gyrations

The last two years have taught us that life can change very quickly and that some things are simply out of our control. We continue to be in a global pandemic and the situation is dynamic. The prospect of new Covid variants is real, and we need to acknowledge that we are likely to experience bouts of market volatility depending on the direction the pandemic takes.

Furthermore, geopolitical risks are ever present and the most recent heightening of tensions between China and the US reminds us of this.

From a portfolio perspective it is important not to be reactive to ‘x factor’ events and to consider whether these scenarios have any long-term structural impact on markets, aside from the short-term market volatility they may cause. This is why having a clear investment philosophy is critical, as it allows you to navigate such events in a structured and considered way.

As always, the market will no doubt bring surprises as we navigate 2022. I look forward to continuing the discussion.


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.

In response to growing demand from advisers, Lonsec has launched a new risk profile of its Listed Managed Portfolios onto the HUB24 platform. The new Conservative profile adds to the Balanced, Growth and High Growth profiles already available on HUB24. The Conservative portfolio has been designed for investors with a preference for a portfolio that exclusively invests in listed securities on the ASX, including direct equities and Exchange Traded Funds (ETFs). The portfolio has an investment objective of generating excess returns of +1.6% above the cash rate over a minimum time frame of 4 years.

The Conservative portfolio was initially launched as a model portfolio in December 2010 and has generated total returns of 6.9% p.a. since inception, including an income return of 3.3% p.a.; well ahead of its peer group and internal objectives.

The Conservative portfolio has a long-term average exposure of around 40% to growth assets and around 60% to defensive assets. While the underlying asset class exposure and fund selection reflect each risk profile’s objectives, the overall long-term weightings to growth and defensive assets are aligned to each risk profile.

As with all the Listed Managed Portfolios, the Conservative profile is actively managed by Lonsec’s Investment Solutions team, using a combination of active and passive securities to achieve its investment objectives at a lower overall cost for investors.

The new Conservative portfolio is currently available exclusively on HUB24 and leverages Lonsec’s investment knowledge and extensive research capabilities in listed structures to help advisers and their clients achieve their investment goals.


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.

What is Private Debt?

Private debt, similar to public debt is an advance of money to a borrower with obligations to make interest payments on the amount borrowed (principal) and repay the principal at a predetermined maturity (typically 3-5 years). The term ‘private’ refers to these loans not being traded or issued in public markets albeit there is a limited secondary market for senior loans between private market participants. Private debt tends to be either Sub-Investment Grade loans or unrated by credit rating agencies. As with all debt transactions, the priority ranking is a key determinant of the level of risk and therefore yield. Debt offered ranges from senior secured to mezzanine finance with a key advantage of private debt solutions being a more tailored financing solution with more flexible financing structures (e.g. Payment in Kind (PIK) or preferred equity structures).

Market Overview

Private debt markets predominately comprise of three segments: commercial loans to businesses, consumer loans and residential mortgages. As of December 2020, the private debt market (excluding mortgages) was estimated to be US$848 billion in size. Within Australia, the largest segment is residential mortgages (62.5%) followed by commercial loans (32.7%). Historically loans have predominately been supplied by banks (>90%) while the remaining balance being provided by Non-Bank Financial Institutions (NBFIs). NBFIs are non-depositary financial institutions; meaning, unlike Authorised Deposit-taking Institutions, (ADIs), they do not hold deposits and are not beholden to the strict capital adequacy and lending standard regulations of Governments. Since the Global Financial Crisis (GFC), NBFIs have been gaining market share due to such regulations making it uneconomical in some cases for banks to participate in lending. Given the rise of NBFIs as an important source of capital, NBFIs have in turn developed investment products in order to finance their growing lending activities while also providing investors access to the asset class with more attractive yields than otherwise available in the public market.


Debt structures are varied and highly bespoke

Private debt consists of direct lending and syndicated financing solutions. Direct lending is where the investment manager acts as the sole lender. These transactions tend to be provided to small-mid sized businesses (i.e. US$10-75m EBITDA). Direct lending is highly selective and relationship driven given the close consultation between the lender, the management team and shareholders of the company. Direct lending typically involves a lengthy due diligence, are a highly tailored financing solution with the lender exhibiting a great deal of control over the structure, use of capital, covenants and terms. The lender also takes a more hands-on approach to monitoring the business, similar to that undertaken by direct private equity deals. Further, in the case of a default, the lender can take control of the business to greater ensure repayment.

In terms of syndicated financing, this offers groups of lenders the opportunity to lend to generally mid- to large-size businesses (i.e. US$75m+ EBITDA) for mergers, acquisitions and private equity buyouts, while allowing the lead financer to diversify their individual loan risk across a number of lenders. The terms of the loan structure are generally standardised and determined by the lead financer and therefore individual lenders have less control over the business and the loan structure more generally. Syndicated loans also allow for a single debt facility called Unitranche which combines varying levels of debt seniority and security. Syndicated loans are highly prevalent within the market and albeit the degree of information of the underlying company and covenant protection is far less onerous. In 2019, 87% of global leveraged loans were covenant-lite according to S&P Global market Intelligence, rising from 8% ten years earlier. As mentioned early, there is a limited but active secondary market for trading individual loan should liquidity be desired or to reduce exposure to an industry or company.

Why invest in Private Debt?

A conservatively managed, well diversified private debt strategy can offer investors a viable alternative to fixed income, particularly in a low interest rate environment. Private debt can offer a reliable income source with a low level of portfolio volatility and more broadly act as a diversify due to its lower correlation to public markets. The floating rate nature of the underlying loans also offer protection in a rising rate environment while being a lower risk investment compared to other alternative strategies including private equity.

What are the risks?

Private debt is generally illiquid, can offer limited transparency and is largely unregulated. The private debt market has experienced tremendous growth in recent years which has led to a build-up of substantial dry powder and in turn competition for deals which has driven down yields. Disciplined lending standards are integral component of navigating the landscape, particularly given the low-doc, covenant-lite loan terms prevalent within the market. Understanding the market segment and robustness of the security of income to service the debt is critical, alongside the leverage multiple and security of assets written against. Knowledge and relationships are critically important, further, the ability to ‘step in’ to restructure, refinance and in some cases ‘take the keys’ by converting debt into equity to protect capital is crucial for asset managers undertaking direct lending.

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.
Warnings: Past performance is not a reliable indicator of future performance. The information contained in this document is obtained from various sources deemed to be reliable. It is not guaranteed as accurate or complete and should not be relied upon as such. Opinions expressed are subject to change. This document is but one tool to help make investment decisions. The changing character of markets requires constant analysis and may result in changes. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) 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. It does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).
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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Copyright © 2021 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This document is subject to copyright of Lonsec. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this document may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec.
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