Archive for category: News & Insights

Japan’s output gap is narrowing, but price pressures are still non-existent

Despite the longest economic expansion in the country’s post-war history, few at the Bank of Japan would be celebrating. While official statistics indicate that the output gap is improving, inflation remains stubbornly low, forcing the Bank to maintain its stimulus program for longer than expected. Members voted in January to maintain the short-term interest rate target at 0.1% and lowered its inflation forecast for the fiscal year ending March 2019 from 1.4% to 0.9%.

Underlying price pressure is still weak despite an improving output gap

Source: Bank of Japan, Lonsec

Japan’s September quarter GDP growth was revised down to a contraction of 2.5% annualised from an initially reported fall of 1.2%. The downturn has been linked to a string of natural disasters, including flooding in July, a typhoon in September, and an earthquake in Hokkaido, all of which has affected exports and tourism.

The rise in the sales tax from 8% to 10% is due to come into effect in October 2019, and while it might provide an initial boost in consumption it is likely to prove crippling to consumer demand in the medium term and risks pushing the economy into recession (which is exactly what previous increases achieved). If there is any good news, it is that a rebound in business investment is likely to contribute to a recovery in the March quarter of 2019, but even a recovery could be vulnerable to the global slowdown.

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How new technology is facilitating the implementation of more advanced portfolios

In the not-to-distant past, managed accounts were seen as a single cog in a client’s overall investment solution. While offering advantages for certain clients seeking a more personalized approach, advisers and model managers were limited in their ability to provide diversified, multi-asset model portfolios using a managed account structure.

Fast forward to today and the situation is very different. Developments in platform technology have meant that managed account solutions encompass a variety of portfolio structures, from single sector equities to holistic multi-asset portfolios. This has made managed accounts far more relevant to financial advisers as they seek portfolio solutions that can meet different client objectives and risk characteristics. Instead of offering an alternative for clients with sufficient knowledge of how managed accounts work, advisers can now use managed accounts to provide a full, actively managed investment solution that meets their clients’ needs.

This flexibility has led to improved implementation and greater efficiency compared to the traditional notional (paper-based) model portfolio structure. Today’s managed account structure enables effective implementation of a range of different investment philosophies and portfolio construction approaches. A good example of this is dynamic asset allocation, which under a notional model portfolio structure is impossible to implement responsively due to the administrative complexities involved.

There has also been an evolution in the composition of portfolios within managed accounts whereby multi-asset portfolios are becoming increasingly investment vehicle agnostic, with portfolios increasingly including a mix of Separately Managed Accounts (SMAs), Exchange Traded Funds (ETFs) and traditional managed funds. Greater flexibility and the ability to implement dynamic asset allocation views in a timely manner will become more important, especially as we move into a market environment characterized by increased volatility and potentially lower returns.

Along with this increased flexibility, there is of course a greater requirement for the model manager to be sufficiently equipped to manage, implement, monitor and report on the managed portfolios. As the managed account sector matures, with large institutions increasing their presence in the market, the barriers to entry from a platform, responsible entity, and superannuation trustee perspective have increased. This means that financial advisers need to conduct appropriate due diligence on their model managers to ensure they have not only the right research and investment expertise but also robust governance structures and reporting processes.

The trend towards multi-asset managed portfolios will only continue to grow as financial advisers recognise the efficiency that managed accounts can bring to their businesses. The ability to construct and implement dynamic, multi-asset portfolios has enabled advisers to enhance the value of their offering and provide clients with better portfolio communications and a superior advice experience. Technology platforms supporting managed accounts have already made significant advancements, and this will undoubtedly continue as model managers are able to access an ever-expanding range of investment products, allowing advisers to implement more sophisticated model portfolios.

As technological barriers are removed and managed accounts become more central to the way advice businesses operate, the challenge for advisers is to partner with the right model manager to ensure that solutions are aligned with their investment philosophy and that the manager is able to meet the needs of the adviser’s clients. For the model manager, the challenge is to offer the right mix of capabilities while remaining competitive. This inevitably requires both parties to adapt, but the reality of change is impossible to ignore. In this new world, success starts with acknowledging the change and creating a strategy that anticipates the growing power of managed accounts and their revolutionary impact on the advice industry.

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Volatility the new normal as super returns take a hit

Super members suffered sharp declines in December 2018, pushing many into negative territory for the year, with the likelihood of further losses over coming months as market volatility and political risk continue to challenge the outlook.

The latest data from superannuation research house SuperRatings, reveals major fund categories all suffered declines in December 2018, contributing to an already horror fourth quarter. The median return for the Balanced option in December was -1.2 percent, contributing to a loss of nearly 5 percent for the quarter (-4.7%) but keeping members just above water for the year, with a gain of 0.6 percent.


Interim results only. Median Balanced Option refers to ‘Balanced’ options with exposure to growth style assets of between 60% and 76%. Approximately 60% to 70% of Australians in our major funds are invested in their fund’s default investment option, which in most cases is the balanced investment option. Returns are net of investment fees, tax and implicit asset-based administration fees.

Members in the median Growth option or exposed solely to domestic or international equities were not as fortunate. Growth option members suffered a -1.7 percent decline in December and -0.3 percent for the year, as heavy losses in the fourth quarter clawed back earlier gains. Members in the median Australian Shares option experienced declines of -0.9 percent in December and -3.4 percent for the year, while the median International Shares option recorded a loss of -3.9 percent for December and -1.7 percent for the year.

SuperRatings Executive Director Kirby Rappell believes the latest data will be a cause for concern for many super members but argues it’s important to keep a long-term perspective.  “For many super members 2018 will be remembered as a turning point”, said Mr Rappell. “Volatility is likely to be a feature of markets over the coming months and members can expect ongoing fluctuation in returns”. “However, it’s important to keep a long-term perspective and recognise that super returns have been overwhelmingly positive over the last decade.”

Despite the declines, super members remain well ahead over a ten-year period, with $100,000 invested in the median Balanced option in December 2008 now worth $204,264, while the median Growth option is worth $215,051 over the same period. Those invested in domestic and international shares have performed even better over the last ten years, despite a more volatile 2018 with $100,000 invested in the median Australian Shares option in 2008 now worth $227,120 and the median International Shares option rising to $233,166 over the same period. Meanwhile, $100,000 invested in the median Cash option ten years ago would only be worth $130,306.

Growth in $100,000 invested over 10 years to 31 December 2018

As we enter a more challenging investment environment, the importance of reviewing your superannuation fund to ensure it is in line with your retirement objectives is paramount.

Release ends

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Why following the winner might make you a loser

An all too common mistake in investing, is to simply back last year’s winner. On the face of it, it seems appropriate to follow what worked last time and all too often investors pile into the best performing asset class of the last year in the hope that success will be repeated. However, as the below table shows, very rarely do asset classes consistently outperform and backing last year’s winner could very easily end up making you a loser.

This table reveals the best performing asset classes for each financial year since 2008, and shows that, on a very regular basis, one year’s winner fails to repeat its outperformance in the following year.

Chasing last year’s winner (financial year returns)

Source: Lonsec, Bloomberg, FE

Conversely, the table reveals that avoiding asset classes that performed poorly in the previous year can cost investors in the following year. For example, if investors had reduced their exposure to Aussie shares following a negative return in 2012, they would have missed out on one of the better performing asset classes in the subsequent two years (+21.9% and +17.3% respectively).

It’s a reminder that a well researched, diversified portfolio is better over the long term than chasing last year’s winners. Identifying your long term goals and building a portfolio to achieve that aim, rather than just chasing an immediate performance ‘sugar hit’ is more likely to deliver the desired outcome.

Lonsec portfolios utilise our extensive manager and equity research knowledge to build portfolios that aim to perform over the medium and long term. Reducing the volatility of the portfolio is a key goal of our selection process and asset allocation decisions.

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SuperRatings’ views regarding the Productivity Commission’s final report

Synopsis of SuperRatings’ views regarding the Productivity Commission’s final report Superannuation: Assessing Efficiency and Competitiveness:

SuperRatings supported the need for a review of the current system and we engaged with the Productivity Commission by providing data and insights, including a formal submission regarding the draft report at that time.

Our submission focused on areas where we foresee implementation issues that could potentially present challenges. As a general principle, we support initiatives that:

  • ensure unintended multiple accounts are consolidated;
  • make it easier for members to engage with their superannuation;
  • provide simple, easy to use tools and information to help inform members;
  • improve member outcomes;
  • require funds to demonstrate how they are providing quality member outcomes; and
  • improve MySuper requirements.

Our responses to the key recommendations and findings were as follows…

Recommendation 1: Defaulting only once for new workforce entrants

  • SuperRatings supports the recommendation of creating a default account only for members who are new to the workforce or do not already have a superannuation account and do not nominate a fund of their own.
  • We note that the proliferation of member accounts has been the catalyst for a number of issues, which persist within the superannuation system such as balance erosion due to multiple insurance policies and account keeping fees.
  • We agree that a centralised system is needed to facilitate this change. A centralised system will remove some of the administrative burden for members seeking to consolidate their superannuation accounts and improve efficiency of the process.

Recommendation 2 and 3: ‘Best in show’ shortlist for new members and independent expert panel for shortlist selection

  • We do not believe that the overall approach covered by recommendations 2 and 3 is workable in practice.
  • One of the key considerations is the role of government in directing the superannuation system. We believe that there would be clear risks involved if the Australian Government, either directly or indirectly, were seen to be endorsing specific products for selection by consumers.
  • SuperRatings has more than fifteen years of experience as one of Australia’s leading providers of information about superannuation funds to fund members, employers and trustees. During this time, we have gradually evolved a sophisticated approach to rating and comparing a range of superannuation products.
  • As a result, we also have an appreciation of the practical challenges involved in creating lists of rated products and explaining our ratings to consumers, product providers and other interested parties.
  • The “Best in Show” shortlist recommendation also has unintended consequences for employer-sponsored corporate funds. We assume that the intention of the Productivity Commission’s recommendation is to publish a list of funds that could be joined by any new employee in any occupation or industry, i.e. those classified as “Public Offer” funds.
  • However, based on SuperRatings data, we note that in the past some of the best performing funds have been “Limited Public Offer” funds.

Recommendation 4: Elevated MySuper and Choice outcomes tests

  • SuperRatings support the Productivity Commission’s recommendations for strengthening the MySuper authorisation and have long held the view that the emphasis placed on size alone should not be the key determinant when assessing the viability of a fund.
  • Our in-house analysis suggests there are examples of good small funds delivering quality member outcomes in a cost controlled manner, helped in part by their ability to know and understand their demographic.
  • Conversely, there are examples of larger funds for whom demonstrating quality member outcomes may not be as easily attainable despite the potential size benefits.

Recommendation 5: Cleaning up unintended multiple accounts

  • We are supportive of legislation to ensure that unintended accounts are sent to the ATO once they meet a definition of ‘lost’. Policies that aim to reunite members with any existing superannuation accounts are a positive step towards reaching the true level of membership across the industry.
  • Whilst we support auto-consolidation of the aforementioned accounts by the ATO, a framework addressing trustee reporting requirements is essential to ensure that any unnecessary processing delays are avoided and that funds are allocated into the member’s most appropriate account.
  • In relation to the transfer of accounts from Eligible Rollover Funds (ERFs) to the ATO and prohibiting further accounts from being sent to ERFs, we believe further information would be useful regarding investment of ATO-held super, fees and charges for ATO-held super and governance of ATO-held super.

Finding 3.7: Association between fees and returns

  • SuperRatings does not ascribe to the view that higher fees are clearly associated with lower net returns over the long term. Superannuation products levy a variety of fees and charges, some of which may ultimately add to retirement balances.
  • For a number of providers with a high investment fee, it can be attributed to allocations to higher cost asset classes, which have been a key reason for their consistently strong performance outcomes for members.
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Super Funds Must Learn to Embrace Third-Party Advice

There has always been an element of tension between super funds and financial advisers. From the super fund’s perspective, the adviser is a possible threat to member retention and can disrupt the fund’s engagement process. For the adviser, the super fund can sometimes seem like a closed shop, unwilling to give up control of the advice experience or shed any real light on its investment process, structures and strategy. At face value, the two should be natural enemies.

While there will inevitably be some antagonism between the two, the reality is that both funds and advisers need each other – now more than ever before. In a post-Royal Commission environment, the most successful super funds will be those that actively engage with third-party adviser networks, giving their members the flexibility to choose how they access financial advice. For advisers, success means rising to the challenge of ever higher standards and increased scrutiny, which requires them to have the information and tools to justify investment decisions based on their client’s best interest.

Finding a common path will require a big shift in thinking but the rewards will be more sustainable growth for funds and advisers, as well as better member outcomes. With the median fund currently providing one financial adviser for every 14,230 members, the ability to access scale is crucial for future growth. Third party advice networks facilitate greater reach through their advice channels, while concerns over quality control can be managed through the delivery of accurate and timely information to advisers and dedicated monitoring.

While funds must be prepared to give up some control, advisers will need to work harder than ever to ensure their advice is in their clients’ best interest. The limitations of many advice businesses have been laid bare by the Royal Commission. There will likely be significant turnover in coming years, with more advisers distancing themselves from aligned groups. This provides a significant opportunity to support and build traction within the new advice landscape.

Overcoming the ‘us vs them’ mentality

SuperRatings found that funds with a dedicated strategy focused on servicing third party advice networks have been rewarded with improved member retention, which can aid membership growth. These relationships can be mutually beneficial for funds and advisers, with funds able to service and engage with more members, and advisers able to access a broader client base and a more diversified pool of funds.

Which is why it’s surprising that many funds are yet to fully take advantage of these opportunities. According to SuperRatings’ data, only 53% of Not for Profit (NFP) funds have formal relationships with advisers, which have traditionally been the domain of retail funds through vertically integrated business functions. Even fewer NFPs have a dedicated servicing team for third party advisers – only 27% compared to 79% of Retail Master Trusts (RMTs) – which is essential for enabling advisers to provide a competitive service.

Third party adviser network trends (% of Not-for-Profits)


Source: SuperRatings. Data to 30 June 2017

When it comes to being open and transparent with advisers, super funds also have a lot of work to do. SuperRatings’ analysis shows that only 5% of NFP funds provide data feeds to third party advisers, compared to 73% of RMTs, while 30% of NFP funds (92% of RMTs) provide access to client reports, which enable advisers to provide timely, informed advice to their clients. Funds are also reluctant to allow advisers to transact on behalf of their members, with only 25% of NFPs offering this capability, meaning there are still significant barriers for advisers to effectively engage with funds and provide a streamlined service.

Empowering advisers means more opportunities for funds

Funds and advisers need each other, but how can they go about creating mutually beneficial and trusting relationships? The answer is by sharing information and being transparent about members’ needs. For advisers, this means having access to high quality investment product research that enables them to efficiently assess a wide range of NFP, retail and corporate funds, and ensures they have an in-depth understanding of how each fund stacks up. Equally, super funds need to support this process by giving advisers the information they need to make decisions in their client’s best interest. Transparency is no longer a radical strategy for super funds – it not only reduces friction for the adviser and their client by making it easier to do business, it means that the adviser is in a position to assess the product and consider it for their client. Communicating third party assessments, such as Lonsec’s well recognised investment option ratings, also helps advisers to easily identify and justify high quality superannuation offerings. We expect to see significant changes in funds’ external advice offerings in coming years, particularly as funds continue to report growing success in this area. SuperRatings is supporting this evolution by making its specialised superannuation research available to financial advisers via Lonsec’s market leading iRate platform, giving advisers the tools to make in-depth fund comparisons and ensure that they can fully justify their fund decision on a best interest basis.

With potential risks over default models and concerns about the sustainability of the old model, it is impossible for funds to ignore these opportunities. While funds and advisers might not always see eye to ey, they can’t afford to allow their differences to get in the way of the vast opportunity staring them in face.

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When to let it go

Thankfully my kids have moved on from their ‘Frozen’ phase and the tunes of ‘Let it go’ are well and truly buried away in the back of the DVD cabinet. As professional investors, one of the biggest challenges we face is when to ‘let it go’. When we make an investment into a stock or managed fund the investment rationale is clear, attractive valuations, positive earnings growth, solid investment team, appropriate investment style. However, what happens when our investments don’t follow the course we anticipated and perform poorly? An even more difficult decision is when to let go of a ‘winner’?

Behavioural factors play a big role in terms of how people react to events and the subsequent decisions they make. The belief that things will turnaround, the comfort of the pack (we all go down together), ‘falling in love’ with an investment. Such emotions impact all of us even the most experienced investor. The main line of defense to minimise the impact of behavioural factors in a decision making process is to always point back to your investment philosophy and the underlying process which underpins that philosophy. If your overall philosophy is one of generating returns with lower downside risk than the market do the underlying investment align to this philosophy? have they provided downside protection? if not, why? (are there cyclical reason for this or is there something structural impact the return profile). If an investment has provided this type of return profile what have been the factors contributing to this e.g. certain sector or country exposures, and do you expect these factors to work in the future? If we use a managed fund as an example it is important to look out for any changes to how the manager is managing money which may be reflected in a change in the risk and return profile of a fund. Is there a change in how the manager positions their investment approach to what they communicated a few years ago?

The main forum for our manager and stock decisions for our managed portfolio are our Manager and Security Selection Investment Committees.  The committees are made up of senior members of our Research and Investment Consulting teams, our CIO as well as our external experts. Decisions to ‘let an investment go’ are made via the committee process. Investment recommendations are supported by qualitative and quantitative analysis. If we use managed funds for example this would include meeting with the manager (outside of the formal annual review process) focusing in on the issues at hand and targeted quantitative analysis which may provide a clue as to where the problem rests, an example being where a manager has taken stock-specific risk which is uncharacteristic of the manager.

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Is the Australian small cap miracle an illusion?

Australia’s small cap shares have rarely failed to capture investors’ imaginations, not least for their ability to generate eye-watering returns when company narratives become reality. Since the start of 2016, sustained growth from small industrials combined with a rallying mining sector have produced remarkable performance for investors willing to move outside Australia’s biggest names.

Now, confronted with a rolling bear market, small cap managers are experiencing a period of pain and possibly some introspection. The past three years have taught us that dreams can be kept alive, even if they don’t always come true. Looking back, it’s fair to say that small cap outperformance was not a broad-based phenomenon. But even in an environment of elevated volatility and with market risks tilted to the downside, this does not necessarily mean that opportunities have dried up.

Taking a look at Lonsec’s peer group of small cap managers, past returns have shown significant dispersion due to a range of different sector and stock exposures. As we now know, the small cap rally was led by a narrow group of shares over the preceding six months to January 2018, and this trend continued through the second half of 2018, albeit with increased volatility.

The range of small cap fund manager returns has been wide
(returns to October 2018)

Returns based on Lonsec’s small cap fund manager peer group

Source: Lonsec

For the 2018 financial year the Small Ordinaries Index returned +24% (wouldn’t that be nice!) but this is not representative of the performance of the broad range of small cap stocks. Closer analysis reveals that 20 stocks delivered 60% of these gains, while the median stock in the index returned a more down-to-earth +9% for the year.

These top 20 hot stocks that drove the small cap index over the last 12 months are essentially companies with exposure to three themes which have dominated small cap strategies. That is, stocks exposed to the Chinese ‘Daigou’ distribution channel, resource stocks exposed to the emerging battery technology theme, and emerging technology companies.

Small cap darlings have been driving performance (FY19 P/E ratio)

Source: Lonsec, Bloomberg

Looking at the largest 20 shares in the small cap index, eleven had a P/E ratio of over 20x and the average P/E of this group was 30x. Among these were a number of market darlings which have delivered strong returns for investors but due to their popularity saw their valuations pushed ever higher. Prior to the start of Lonsec’s annual review of small cap managers, the FY19 P/E ratio of the ASX Small Ordinaries Index was in excess of 19x versus the historical average of around 13x, indicating a large part of the index gains have come from multiple expansion more so than earnings growth.

Small cap sectors have seen significant divergence
(period returns to end November 2018)

Source: Lonsec, FE

Most recently, those fund managers that have held up better than the peer group average (in the face of significant declines in share markets) have done so due to a significantly higher cash weighting in their portfolios. Managers generally anticipate volatility in equity markets will remain elevated in the medium term. As the price of risk is reassessed, valuations remain lofty and earnings growth remains elusive.

But all is not lost. Managers continue to see a broad range of attractive investments across the smaller company sector, with funds able to provide exposure to a number of niche opportunities and fast growing emerging trends, including the impact of growth in IT spending and the transition to cloud based computing, as well as quality domestic franchises expanding into larger global markets.

Add to this the disruption we have seen in financials as new business models compete with established players, along with the recovery in certain commodity markets from cyclically depressed levels, and there still plenty of themes to capture investors’ attention. The rally in small caps may be over for now, but opportunities remain for those managers who can identify the emerging trends.

To find out more about Lonsec’s Australian equities research, sign up for a free research trial or get in touch with our client services team.

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or 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.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

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. 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, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2018 Lonsec Research Pty Ltd, ABN 11 151 658 561, AFSL 421 445. All rights reserved. Read our Privacy Policy here.

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Are we late cycle?

2018 was marked by a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of the year. This has been reflected in a pull-back in most equity markets and an increase in expected volatility.

This article is intended for licensed financial advisers only and is not intended for use by retail investors.

Welcome back and we wish you all a healthy and prosperous 2019.

2018 was marked by a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of the year. This has been reflected in a pull-back in most equity markets and an increase in expected volatility.

The increase in volatility has been the culmination of a number of factors including:

  • increased geopolitical tensions, primarily in the form of protectionist measures by the US with its key economic partners China and Europe,
  • a normalisation of interest rates in the US,
  • tightening of liquidity, and
  • idiosyncratic issues impacting specific stocks and sectors such as the technology sector, which was a key growth engine of the US market.

On the home front we have seen house prices decline causing concerns on the possible impact on the broader economy.

The current environment comes off a period of extraordinary market returns supported by accommodative monetary policy, liquidity being pumped into global markets via quantitative easing as well as some sugar hits in the form of corporate tax cuts in the US. We believe that we are in the late stages of the cycle. However, late cycles can vary in their duration. According to analysis conducted by Heuristics Analytics, who input into our Lonsec investment committee process, late cycles have lasted as long as five years in the 1960s when productivity was strong and wages and inflation were low, and more than three years in the 1990s. Beyond these long late cycle environments typically late cycles have lasted for 12 to 18 months.

While we see economic and liquidity conditions becoming more challenging we do not think that we have reached the tipping point in terms of the economic cycle. We are also beginning to see some value appear in markets however we think it is too early to allocate to some of these areas at this point. From a portfolio perspective we have maintained our active tilt to alternative assets with a neutral allocation to equities. The exposure to alternative asset is intended to provide additional diversification where volatility has increased in traditional asset classes.

From an investment selection perspective we continue to look to further diversify our portfolios. Within our direct equity portfolios, we are seeking opportunities to diversify stock and sector exposure, recognising the concentrated nature of the Australian equity market. We have also taken advantage of the increased market volatility to invest in what we believe to be quality companies at attractive prices. An example of this has been the allocation to Costa Group, which we invested into after the stock retreated by approximately 30%. Within our multi-asset portfolios we have been focusing on fund managers with active strategies that we believe will be able to take advantage of the increased market dispersion.

By Lukasz de Pourbaix

This article has been prepared for licensed financial advisers only. It is not intended for use by retail clients (as defined in the Corporations Act 2001) or any other persons. This information is directed to and prepared for Australian residents only. This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

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Australia’s property market falls at fastest rate in decades

The housing market continues to dominate the headlines in Australia. Housing prices fell 4.8% in 2018 according to CoreLogic, driven by sharp falls in the Sydney (-8.9%) and Melbourne (-7.0%) markets. Price falls are now also evident in the middle and lower segments of the market, while auction clearance rates and volumes are trending lower. Lending to investors and ‘upgraders’ has slumped as banks tighten lending criteria. Suggestions that a potential credit crunch will lead to further significant declines in house prices has some commentators projecting that Australia’s record 27-year run without a recession is coming to an end.

Monthly % falls in Sydney and Melbourne house prices

Source: CoreLogic

The RBA sees the correction in house prices and the tightening of lending conditions as a healthy development, reducing financial stability risks and potentially prolonging the cycle. Investor loans have decreased, interest only loans have declined, and loan-to-value ratios are lower. The RBA recognises, however, that the high levels of household debt and falling house prices could amplify a downturn in the case of an external shock to growth.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd (Lonsec), ACN 608 837 583, a corporate authorised representative (CAR number 1236821) of Lonsec Research Pty Ltd, ABN 11 151 658 561, AFSL 421 445.

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or 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.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

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. 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, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2018 Lonsec Investment Solutions Pty Ltd, ACN 608 837 583, a corporate authorised representative (CAR number 1236821) of Lonsec Research Pty Ltd, ABN 11 151 658 561, AFSL 421 445. All rights reserved.

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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.