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).
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 © 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.
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.

Welcome to the first in a new Lonsec Insights series called Manager in Focus. Manager in Focus aims to demystify the investment process and give access to the brightest minds in Australia’s investment community.

In this first Manager in Focus video, Peter Green, Head of Equities Research at Lonsec Research brings together Dushko Bajic, Head of Australian Equities, Growth at First Sentier Investors, Jared Pohl, Cofounder of ECP Asset Management and Stephen Wood, Principal and Portfolio Manager at Eiger Capital to discuss their qualitative research and investment processes, what they look for in target investments, how they have built and maintain their team and what they do when things don’t go as planned. Each of these managers run funds that have been rated as Highly Recommended by Lonsec Research in the recent Australian Equities review.

IMPORTANT NOTICE: This video 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 video.
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 video, which may change during the life of this video, 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 video 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 video 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 video 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 video at any time and discontinue future coverage of the financial product(s).
Disclaimer: This video 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 video, which is drawn from third party information or opinion 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 video 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 video or any loss or damage suffered by the viewer or any other person as a consequence of relying upon it.

Copyright © 2021 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This video 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 video 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 video 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.

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.

Secondary investments refer to the buying and selling of an investors interest and unfunded commitments in pre-existing private equity funds. Given the absence of an established trading market, the transfer of interests in private-equity funds can be a complex, time consuming and a labour-intensive process of negotiation. The volume of secondary market transactions has been climbing over the years, largely in-step with the growth of private assets generally. That said, the market can be cyclical, reflecting not only exit conditions but also the need for liquidity from investors which in turn dictates the price or discount paid for such interests.

A ‘traditional’ secondary transaction includes the transfer of investments and unfunded commitments from one Limited Partnership (LP) to another. The sale typically requires the consent of the General Partner (GP). There are several other secondary transactions such as ‘tail-end’, ‘structured joint venture’, ‘structured secondary’ to name a few but the common link between them all is they are predominately driven by the LP. As depicted in the graph above, these ‘traditional’ secondary market transactions have made up an overwhelming majority of aggregate secondary market transactions historically. In recent years however, the emergence of GP-led secondary transactions has become increasingly common, so much so that in 2020 they accounted for approximately 50% of all secondary transaction volume with the trajectory expected to continue for 2021.

What is a GP-led secondary transaction?

A GP-led transaction is when the GP initiates the transaction, generally in the desire to restructure the fund with the key objectives being to either extend the fund’s life, raise additional capital and/or return cash to existing investors. These can take numerous forms with the most common being a ‘continuation vehicle’ whereby the GP of an ageing fund believes it needs more time to maximise the value of its assets than the fund’s remaining term allows. The GP therefore establishes a new continuation vehicle to transfer residual assets. Existing LPs are then given the option of rolling their interests into the new fund or liquidating. The liquidation is typically financed by raising additional capital from new investors or ‘rolling’ of existing investors. Other GP-led transactions may involve preferred equity, priority distribution rights and transfer of follow-on capital commitments.

GP-led single asset secondaries have been of particular prevalence of late. These are similar to a ‘continuation’ vehicle albeit the new vehicle will only contain one asset and therefore closely resembles a co-investment. In these cases, GP’s don’t wish to be a forced seller of what is deemed a ‘trophy’ asset due to an ageing fund and/or desire for investor liquidity. The GP is of the view there is considerable value to be gained by holding and in some cases re-investing in the business for a longer duration to see the value creation plan come to greater fruition.

What has led to this sudden growth in GP-led secondaries?

Traditionally a GP’s exit path has been one of either a trade sale to another private equity sponsor, a strategic sale such as a merger or acquisition to another business or a public market IPO. The GP-led transaction has opened up a fourth avenue for an ‘exit’ of sorts.

Several factors are potentially at play but market conditions are likely to be a key driver of this trend. Industry dry powder continues to surge to all-time highs, with an estimated US$1.9 trillion globally yet to be deployed. Dry powder has built over the years from both strong fund-raising activities from growing investor interest and GP’s slowing deal activity due to becoming increasingly selective of the quality of businesses purchased alongside the market multiple being paid. This dynamic was exacerbated by a slowdown of deal activity throughout 2020 as exit conditions were less favourable and therefore GP’s were more inclined to hold onto assets they were familiar with. Other contributing factors that may be driving this trend is the notion of GP-led secondaries can provide the opportunity for a GP to reset fees and crystallise carried interest albeit an additional injection of capital or rolling of carried interest into the new vehicle is common.

Buyer beware

Historically, GP-led secondaries were often referred to as ‘orphaned’ or ‘zombie’ funds as they tended to have a few remaining assets that were either hard to sell at desired valuations or troubled assets that required time, investment and restructuring which were transferred into a new vehicle whereby creating a liquidity event for existing LPs and reset of expectations. While these certainly still exist, especially following a pandemic, the quality of the businesses within the Funds and the rationale for conducting transactions has largely evolved. Nonetheless, it is critical to conduct thorough due diligence of each transaction, specifically the quality and experience of the GP, motivation for the transaction, the potential conflicts that may exist, the alignment of the GP within the new fund, the valuation being paid by new LPs, the terms of the new fund (i.e. fees, preferred equity, unfunded commitments, use of capital etc.). As always, private market transactions are very much a relationship game and those with strong relationships tend to be notified first and given priority access to the higher quality, more attractive deal flow.

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 © 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.
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.

Trend following strategies have undergone notable evolution in their programmes over time. We discussed these changes, the motivation driving them, and their overall programme impacts in our 2019 Alternatives Sector Review. Market expansion, specifically expanding the tradeable instrument set to non-traditional and alternative markets, was briefly highlighted as one such modification at the time. In Lonsec’s view, this has been an acute and accelerated focus of managers of late, being a key research agenda item and translating to model enhancements warranting a more detailed discussion. That said, peer group constituents have generally utilised such markets or instruments in other strategies historically and/or have incrementally expanded the market set traded within their trend programmes over time. The pace of market inclusion of late has however been pronounced in the majority of researched trend peers.

The definition of alternative or non-traditional markets is inchoate being generally manager specific albeit with some commonality across trend peers. A key point is that these markets are distinct from traditional futures contracts and foreign currency forwards and can refer to markets, albeit not mutually exclusive, which are potentially more difficult to access (e.g. traded on specific exchanges), over-the-counter (OTC) or manual/voice-traded, exotic, or less liquid, by way of example. Assets can include esoteric interest rate swaps, cash (physical) equities, emerging market currencies, cash bonds, credit (e.g. ITRAX Xover, CDX HY and IG), volatility (e.g. VIX, VSTOXX) and certain commodities (e.g. Henry Hub Natural Gas futures, rapeseed), amongst others.

Man AHL’s Alpha strategy has doubled the quantum of markets traded post 2008 driven heavily by non-traditional markets/instruments additions with this now totalling over 350 markets, the majority of the c.530 instruments the programme can currently trade. For further context, since 2020, 13 US natural gas basis markets; two Asian REITs; 10 US sector ETF options; 10 US single name credit default swaps (CDS); three equity variance swaps were added to the AHL programme alone. The firm has largely been at the forefront of this continually evolving area in Lonsec’s view. This trend is also visible with newer entrants into the domestic market such as PIMCO TRENDS, an equity-hedge focused trend following product. PIMCO has incrementally expanded its tradeable markets over time with a c.10% (+18) increase in instruments occurring since January 2020. Additions include a range of equities and credit indices (e.g. CDX IG, ITRAX IG, ITRAX Xover), rates, currencies and commodities markets.

Winton has accelerated the use of OTC and non-traditional markets within its programme since 2020 with 32 new markets (the programme trades over 150 markets) added in December 2020, including interest rate swaps and a range of non-traditional commodities (e.g. Dutch Natural Gas). This was later followed by five credit default swaps and a further 17 Chinese commodity markets. Non-traditional markets now comprise 20% of that programme’s risk allocation. Integration of non-traditional markets within domestically available trend products has been a lesser focus in Lonsec’s view for Aspect which nonetheless has implemented non-traditional markets into its diversified programme (e.g. interest rate swaps and CDS were added in Q4 2017 and Q1 2018, respectively) and AQR (AQR on specifically product philosophy grounds) although the latter does trade a more relatively diversified currency programme. Both also manage standalone alternative market programmes whilst market expansion remains a key research agenda item.

Reasons driving this change are interrelated. A common observation amongst trend managers is that the behaviour of traditional commodity trading advisor (CTA) markets has changed post the Global Financial Crisis (GFC); for example, interest rates in many developed economies have remained at all-time lows through central bank actions and increased correlation in traditional commodity markets such as WTI Crude Oil to broader equity benchmarks. This has created a less favourable environment for trends and has partly impacted returns over the past decade. Relatedly, traditional futures markets have been impacted more by risk-on/risk-off market sentiment. Whereby higher correlations intra and inter markets and asset classes have been evident, there has been a pursuit to broaden diversification within programmes to discover markets with improved correlations. This has been an outcome of research into non-traditional markets.

Notably, these markets have demonstrated correlation benefits to traditional futures and FX markets (e.g. 0.5 correlation between a dedicated AQR Alternative trends strategy and the BarclayHedge CTA Index simulated over January 1990 to December 2020) (AQR, 2021). This is however programme dependent. Further, such markets have generally not exhibited increased correlation to the extent otherwise evident in traditional futures and FX markets post the GFC (AHL, 2021). This improves overall programme diversification. Research has also shown these markets to have displayed attractive Sharpe ratios when applying time series, momentum-based models through back-testing over an extended period (AQR, 2021). Arguably of most critical importance, such markets have been additive to the desired convexity (i.e. CTA smile or ‘crisis alpha’) synonymous with trend following, that is, being able to perform well in equity bull and bear markets whether that be via a dedicated non-traditional markets trend strategy or as programme additions to an existing trend following strategy. We believe the long-running AHL Alpha product which, as detailed earlier, has included a high number of non-traditional markets over time, provides a good indication of this convexity profile (below).

Figure 1 – Monthly Excess Returns (measured against Bloomberg AusBond Bank Bill Index A$) of AHL Alpha vs. MSCI ACWI NR Index A$. Period: September 2009 to September 2021.
Source: Lonsec

A broader market set available for trading has also meant product evolution amongst systematic and trend following managers in more recent times with dedicated non-traditional markets trend following strategies. Man AHL stands as an outlier having managed the dedicated non-traditional markets (e.g. OTC asset classes, emerging markets, ETFs, less liquid futures and credit and swaps markets) focused Evolution programme since the mid 2000’s. Aspect has managed a programme dedicated to alternatives markets (e.g. OTC asset classes, emerging markets, ETFs, less liquid futures and harder to access credit and swap markets) since 2017 whilst AQR (2018) and Winton (2020) have launched products in the years following.

The process to implement such markets however naturally creates a range of complexities, namely relating to operations and execution/trading which requires navigation. The ability to trade such markets effectively ultimately requires prior experience to understand their nuances. Access, needless to say, is paramount, particularly for esoteric markets where new relationships may need to be cultivated with specialist brokers. Further, these markets can be manual, or voice traded, or sometimes available only on niche exchanges. The ability to establish trading relationships is therefore integral whilst potential upgrades to a firm’s execution capability may be required. That said, some markets such as ETFs, swaps and futures can leverage a manager’s existing trading infrastructure given these more align with traditional CTA assets. Counterparty (e.g. multiple clearing and execution brokers, monitoring of credit ratings) and collateral risk management cannot be understated as well.

Liquidity is an important consideration for competitive pricing but also to ensure product redemption terms are not compromised (i.e. the portfolio retains the ability to liquidate its positions at a reasonable time and pricing is not overly impactful). Higher trading costs can be expected for a variety of reasons (e.g. traded only niche exchanges, cannot be directly traded) potentially contributing to less volume but this is market dependent with access issues being on occasions a more pressing issue. There may be however a need to have a diverse set of banks and electronic communication networks at a manager’s disposal. That said, with the influx of participants, an argument could be mounted around liquidity improving through time. Analysis from AQR indicates that alternative trends comprise only US$8.8bn of total managed futures assets under management (US$110.5bn) as at December 2020 albeit growth in alternative trend strategy assets has been steadily increasing since 2012 (AQR, 2021). From a process standpoint, strategy capacity, given these markets are less liquid in general, can be impacted. There is also the potential for such markets to not provide the intended correlation benefits expected thereby compromising diversification properties which investors should be mindful of.

A trend towards China

Expanding into China has also been a noteworthy development amongst trend following peers via research into potential model enhancements (e.g. market expansion) and product development. This has been driven by the China Securities Regulatory Commission (CSRC), alongside the People’s Bank of China and the State Administration for Foreign Exchange’s decision to expand the framework of the Qualified Foreign Institutional Investor programme (QFII) which became effective in November 2020. This scheme provides the regime for offshore investors to gain direct access to onshore Chinese assets. The recent reformations to this framework further highlights China’s willingness to further open up and insitutionalise its capital markets.

Administrative benefits have been an important feature from this framework’s evolution (e.g. a simplified, digitised application process combined with swifter turnaround times for outcomes) alongside relaxation of qualification requirements (Mark, 2020). The revised scheme has also been expanded to cover all types of asset managers, notably, hedge funds who were previously restricted (Mark, 2020). Of perhaps greater relevance is the expansion of investment markets and instruments. The revised scheme now enables investment in securities and shares listed on China’s National Equities Exchange and Quotations; derivatives relating to bonds, interest rate and foreign exchange traded in the China Inter-bank Bond Market; private investment funds and commodity futures contracts and options traded at the relevant futures exchanges subject to approval (PricewaterhouseCoopers, 2020).

Lonsec has since observed a strong focus in research agendas and strategic direction of some of its trend following managers post these recent rule changes, particularly a focus on research into and potentially expanding (regulatory approval pending which is discussed later) its tradeable markets to commodity futures contracts. The greater breadth of commodity markets available in China alongside some idiosyncratic and exclusively traded markets on local commodity future exchanges are key attractions of these markets. Greater diversification in return drivers, programme breadth and correlation benefits; similar to the reasons underpinning the trend managers’ expansion into non-traditional and OTC markets has driven this geographical push.

Highly differentiated markets exclusive to Chinese futures exchanges include egg and bitumen by way of example which can provide correlation benefits to existing programmes (Bordigoni, Chang, Mackiic, Rossini, and Straker, 2021). Recent analysis by Man AHL into systematic investing in China prompted by the QFII scheme changes highlights this across a range of Chinese commodities. Apple, for example, showcases an attractive correlation profile (measured as monthly correlation over January 2015 to December 2020) with other commonly traded commodities: Corn (-0.09) and Soybeans (-0.33) whilst the average correlation against a range of Chinese and global commodities is only 0.03 (Bordigoni et al., 2021). Similar conclusions are drawn from a more recently published and comparable analysis by Aspect Capital (Aspect Capital, 2021). There are also strong correlation benefits from trading more traditional commodities futures such as globally traded corn with Chinese futures equivalents. Aspect’s analysis highlights that only a 0.29 correlation exists between corn futures respectively traded in China and the US over the period January 2015 to June 2021 (Aspect Capital, 2021). That said, high correlations do exist with China’s silver futures exhibiting near perfect positive correlation with its US equivalent (Bordigoni et al., 2021). Correlations can also time vary with Apples for example being uncorrelated or slightly negatively correlated (-0.05) with WTI Crude for the period of January 2015 to December 2020 (Bordigoni et al., 2021) although exhibits moderate positive correlation (0.38) when the analysis is extended for six further months under Aspect’s study. From an asset class perspective, generally low-to-moderate positive correlations are also evident when comparing Chinese equity indices (e.g. CSI 300) to other broader regional equity benchmarks; likewise this is also a similar observation for bonds (e.g. Bloomberg Barclays China Treasury + Policy Bank 1-10 Years TD Index Unedged US$) when comparing against other equivalent regional fixed income indices (Bordigoni et al., 2021).

Liquidity is a key consideration in the decision to add and delete markets from a programme. Data highlights that China’s commodity exchanges, defined as a combination of the Dalian Commodity Exchange, Shanghai Futures Exchange and Zhengzhou Commodity Exchange, ranked third in terms of volume traded for commodities options and futures in 2020 whilst esoteric markets such as bitumen surpass some more frequently traded global futures such as gold in terms of volume (number of contracts traded) (AHL, 2021). Chinese commodity futures markets being highly liquid is further evident from analysis undertaken by Aspect (Aspect Capital, 2021). This analysis shows Chinese commodity exchanges have overwhelmingly led trading volume (defined by number of contracts traded) in 2020 (Aspect Capital, 2021). When adjusting for US$ traded volumes, there is a lesser skew to Chinese futures with greater representation from global futures contracts with Gold (CMX), WTI (NYM) and brent crude (ICE) being the leaders (Aspect Capital, 2021). Chinese commodity markets nonetheless remain highly liquid, and liquidity has increased over time across metrics such as volume of contracts traded, US$ volume of contracts and open interest.

A key point to bear in mind however that as at the time of writing, individual contracts for commodities are still required to be approved for trading, which is an ongoing and evolving process, whilst stock indices in particular, can only be used for hedging purposes and cash bonds require full-funding (i.e. no leveraged exposure). There could be future developments in these respects. Managers are also required to apply for a QFI licence, some of whom are at various stages of this process. The sentiment ascertained from asset managers is that these should evolve positively in a way through time to enable a gateway of potential diversification and return opportunities.

References

AQR. 2021. Alternative Trends Strategy.

Man AHL. 2021. AHL Alpha Programme.

PricewaterhouseCoopers, 2020, China’s new R/QFII scheme announcement: Braving the wind and             the waves while managing tax uncertainties, October 2020.

Mark, L 2020, China Releases New QFII/RQFII Rules, Haynes Boone, 27 October.

Bordigoni, G, Chang, A, Mackiic, A, Rossini, S, & Straker, K 2021, A Hot Commodity: Systematic          investing in China, pp. 1-12.

Aspect Capital. 2021, Diversification: Made in China, 1 September 2021.

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 © 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.
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.

Increasingly, it is no longer enough for advisers to be reactive when clients ask about sustainable investing. It is vital that you have an ESG/Sustainable alternative as part of portfolio recommendations for your clients.

We have put together 5 questions you should be asking your clients when discussing sustainable investments ranging from how much clients now about ESG and sustainable investing to whether they need to see the sustainability credentials of underlying holdings.

  1. Do you want sustainable/ESG options?

An obvious first question but acting in the best interest of a client means delivering a solution that ties into a client’s interests. For some, it means investing sustainably, for others, it is not a factor. FASEA Code #6 states a solution must consider a client’s long term aims, which may involve investing sustainably.

  1. Do you know what ESG actually means?

This might seem like a simple question, but most investors are unaware that ESG is an investment process and not the means by which the “goodness” of a portfolio can be immediately assessed.

As an investment process, ESG takes into consideration the risk and downside potential of investing in a company (or investment) from an environmental, social or governance perspective. However, it does not mean that such an investment will not take place if the potential upside outweighs these risks. Understanding this difference is important to ensure you match investment suggestions with your client’s values.

  1. Do you want to make a difference to society through your investment choices?

Given that ESG is about investment process and doesn’t necessarily consider whether an investment delivers positively to society, unpacking this difference might narrow the selection of investment options. By narrowing these options, you will ultimately ensure that you are really acting in the best interest of your client by only suggesting solutions that match their views on sustainable investing.

The Lonsec Sustainable Managed Portfolios consider both ESG risk and sustainability measures. These sustainability measures focus on the goodness the funds included in the Portfolios and are underpinned by the United Nations’ 17 Sustainable Development Goals.

  1. Are there specific industries that you would prefer to exclude?

Each client is different and what one considers inappropriate could be appropriate for others Having a good understanding of what lines cannot be crossed is important and once you have this information, you can then identify a solution that meets your client’s requirements.

The filter tool in Lonsec’s iRate® platform allows you to exclude ten specific controversial industries from your product selection.  In addition, our Sustainability reports give in depth reviews of how products support sustainable outcomes and the extent to which any controversial industries are included in a portfolio. This way you can screen out any controversial industries that you client specifically does not want to invest in.

  1. Do you want to be able to see how much “good” your investment is delivering?

As the number of ethical and Sustainable products have grown, many are not as green or sustainable as they claim. With some solutions it is difficult to see exactly how they are delivering on their sustainability claims as the underlying holdings or progress against sustainable goals are not clearly reported.

If visibility of an investment’s sustainability promise is important to a client, you must identify solutions that report openly and clearly on these factors. Lonsec reports on its delivery against its Sustainable goals. The portfolios actively report against a number of factors such as reduction in CO2.

 


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.

With the stapling changes taking effect from November 1 this year, the complete picture will take some time to emerge. We believe it is well intended to stop the proliferation of accounts, though we will see changes in terms of the profile of member accounts among funds going forwards.

Funds should consider how to engage with employers in relation to the changes and will need to emphasise the value of superannuation as an employee benefit, with the future of tailored employment arrangements unclear. We also expect meaningful engagement with a disengaged member base to be challenging.

Camille Schmidt: Market Insights Manager, SuperRatings

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.