Following the reprieve in July, markets returned to being volatile in August as the narrative of higher inflation and subsequent higher rates re-gained momentum. In line with previous similar periods, all asset classes sold off with the exception of Australian equities which generated positive returns driven by materials and energy sectors. In such environments where narrow parts of the market drive returns, portfolio diversification is less effective. However, we would argue that diversification remains your best line of defense over the medium to long term, as the likelihood of generating consistent long term risk adjusted returns by investing in a narrow basket of assets is low.

When markets are volatile it can be difficult to focus on the long term and on the positives. However, as we see risks associated with higher interest rates and growing geopolitical tensions amplify, opportunities do and will present themselves in such periods. As with previous market downturns, be it the tech wreck or the global financial crisis, market dispersion creates opportunity, particularly on an individual security level, as markets tend to indiscriminately sell off entire segments of the market irrespective of the quality of individual assets. In such environments we see the good, the bad and the ugly sell off, which has been the case with the technology sector where companies with high debt and ‘promises’ of earnings sell off, alongside companies with strong balanced sheets and strong growth profiles.

Similarly, on an asset classes level, as assets reprice, asset classes that were previously unattractive on measures such a valuation, now deserve another look. A good example of this are bonds. For the best part of 10 years government bonds have been unattractive offering low yields and looking expensive on all valuation measures. This dynamic was fueled by central banks suppressing bond yields via measures such as quantitative easing (QE) coupled with the fact that inflation was non-existent. Roll forward to today and bond yields are above the 3% range, inflation is back and central banks are stopping or tapping on the brakes on QE. Therefore, the forward-looking risk return profile for the asset class is looking very different than the prior 10 years.

We expect volatility to remain with us for the coming months. Key central banks have been clear that they will continue to raise rates until they see evidence of inflation subsiding. The risk of a global recession is elevated as the lagging impact of higher interest rates are yet to come to the fore. From an Australian perspective the composition of the Australian economy, which is heavy on energy and materials, is expected to buffer Australia to some degree from a deep recession and our base case is that if we do go into a technical recession, it will be mild relative to other regions.

As market participants, thinking about the ‘x-factor’ risks is important. In the coming months, outside of inflation the thing to watch will be energy security, notably in Europe as the northern hemisphere winter approaches. The Russian invasion of Ukraine has had a material impact on European energy security, and we have witnessed key European economies look to pivot quickly to sure up energy for the winter, ranging from turning coal plant back on, delaying closing down nuclear plants through to finding alternative energy providers. Germany has already signaled that if they have a strong winter, they may need to ration energy and slow down industrial production to ensure households have enough heating. Such a scenario would further exacerbate the economic slowdown in Europe and would have implications for markets.

Change and transition is never easy and we are going through a significant change in the global economy and markets at the moment. It is a time to be vigilant but also a time to keep a long-term perspective, consider the facts, lean on your investment process and leverage people’s market experience.


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.

Can lifecycle MySuper products deliver on their promise of a lower risk position at retirement coupled with competitive returns over a member’s lifetime? Find out how we compare the universe of MySuper products irrespective of whether they follow a lifecycle or single-default strategy.

Bill Buttler, Senior Manager, Consulting

Camille Schmidt, Market Insights Manager, SuperRatings


Please see below a further insight by SuperRatings

‘Making Sense of MySuper Investment Options’

 

Can lifecycle MySuper options really deliver a Magic Pudding or is it all just pie in the sky?

Experience working with members and employers suggests a real lack of understanding of the difference in approach between a lifecycle product and the alternative ‘single strategy’ product type. Yet in a future environment where legislation such as Your Future, Your Super is designed to encourage members to compare performance and determine whether they should potentially change funds, it is fundamental that members should understand and be able to compare the two product types. Particularly, since 37% of the 75 MySuper products registered with APRA as at 31 March 2022 were designated as ‘lifecycle’ products.

We found that 90% of trustee directed options are estimated to pass the performance test in its current form based on 30 June 2022 data. This is an improvement from the March 2022 data which estimated that 20% of the options assessed would have failed the test. The volatile market over the second half of the financial year emphasised the importance of diversification and long-term strategy within superannuation investments, as funds experienced unique conditions relative to earlier periods in the eight-year assessment.

 

Kirby Rappell, Executive Director, SuperRatings

In this video, Dan Moradi, Portfolio Manager for Listed Products, provides an update on the Australian equity market following an interesting August reporting season and takes an in-depth look at how sectors and companies performed.

Similar to FY21, this year we had a challenging backdrop heading into the second half of the year, with the ongoing business disruptions caused by Covid, particularly with the Omicron wave that surged around Christmas. But given these challenges, what we saw during the reporting season from company results was pleasing, reflecting a stable operating environment and demonstrating that the underlying fundamentals of our domestic market remains strong despite the ongoing market volatility. Labour costs, labour constraints, price rises, and inventory management dominated discussions and outlook statements over the reporting period. To-date the market seems to be navigating these headwinds relatively well and we’ve seen many companies passing on the additional costs to end consumers to protect their profit margins.


The information in this video is prepared by Lonsec Investment Solutions Pty Ltd ABN 95 608 837 583 (LIS, we, us, our), a Corporate Authorised Representative (CAR) No. 1236821 of Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec Research). Any express or implied rating or advice presented in this video 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 you must consider your financial circumstances or seek personal financial advice on its appropriateness. Read the Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product.

Past performance is not a reliable indicator of future performance. 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 information not verified by LIS. This video may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material.

The information contained in this video 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. This video is not intended for use by a retail client or a member of the public and should not be used or relied upon by any other person. This video is not to be distributed without the consent of LIS. 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 video 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.

You may not reproduce, transmit, disseminate, sell or publish this video without our written consent.

Can lifecycle MySuper options really deliver a Magic Pudding or is it all just pie in the sky?

Experience working with members and employers suggests a real lack of understanding of the difference in approach between a lifecycle product and the alternative ‘single strategy’ product type.  Yet in a future environment where legislation such as Your Future, Your Super is designed to encourage members to compare performance and determine whether they should potentially change funds, it is fundamental that members should understand and be able to compare the two product types. Particularly, since 37% of the 75 MySuper products registered with APRA as at 31 March 2022 were designated as ‘lifecycle’ products.

The value proposition of a lifecycle product is to place members in a lower risk strategy as they approach retirement, while still maintaining overall lifetime return by investing more aggressively during the earlier years of the member’s career. A fair comparison of lifecycle and single strategy products must therefore take into account both return over a typical member’s lifetime and the relative risk position at or near retirement.

Measuring lifetime investment performance

We have determined a methodology for calculating an ‘Equivalent Lifetime Return’ (ELTR) for MySuper products.

For a single strategy option, the ELTR is simply the annualised return for the option over the stated period (e.g. 5 years to 30 June 2022).

For a lifecycle strategy, the ELTR is the annualised return over a member’s lifetime from age 20 to 67 using each lifecycle stage option’s returns over the selected period, applied to the years during which the member would be invested in each lifecycle stage. For more detail and an example, refer to the Appendix to this article.

The ELTR as defined is designed to be calculated from the normal performance data published by super funds and collected by SuperRatings.  Other methods could be used, but this definition is consistent with the use of long-term average rates of return which forms the basis for current performance comparisons across the industry.

Evaluating Risk at Retirement

There are several possibilities for measuring the portfolio risk of an investment option, including Growth / Defensive allocation and standard deviation of return.  We have opted to use the ‘Standard Risk Label’ published by funds as part of their MySuper Dashboards.  Despite some known shortcomings, the Standard Risk Measure has the virtue of being developed within the superannuation industry and being legislated for this purpose.  In our comparisons, ‘Risk at Retirement’ is the Standard Risk Measure for the investment portfolio that would apply to a member at age 67 under a specific MySuper product.  For single strategy MySuper products, it is simply the Standard Risk Measure for that strategy.  For lifecycle products, it will typically be the lowest risk option in the product’s ‘glidepath’.

Product sample set

For this comparison, we included only registered MySuper products for which at least 5 years of historical performance is available.  Returns were calculated to 30 June 2022.  There were 45 products in total, of which 15 were classified as ‘lifecycle’ structures.

Top performers by ELTR

The following table summarises the Top 10 performing MySuper products by Equivalent Lifetime Return (ELTR):

Rank Fund Name Structure ELTR Risk at Retirement
1 Qantas Super Lifecycle 7.94% Medium to High
2 Hostplus Single strategy 7.76% Medium to High
3 Aware Super Lifecycle 7.45% Medium
4 AustralianSuper Single strategy 7.28% High
5 HESTA Single strategy 6.75% High
6 Vision Super Single strategy 6.71% High
7 UniSuper Single strategy 6.65% High
8 Lutheran Super Single strategy 6.60% Medium to High
9 Cbus Single strategy 6.55% Medium to High
10 VicSuper Single strategy 6.46% High

Perhaps as expected, the list is dominated by single strategy products with High or Medium to High risk profiles.  Qantas Super and Aware Super were the only funds with lifecycle products to make the Top 10, and Aware Super was the only product that was able to put retiring members into a ‘Medium’ risk position at age 67.

Above-median performers by Risk at Retirement

Advocates of lifecycle products might contend that their objective is not necessarily to be in the Top 10 performers, especially if it involves a higher risk categorisation at retirement.  Outperforming the median return might be a more realistic and consistent goal.

The median ELTR for our sample set was 5.92% per annum.

The chart below displays the 23 products which exceeded the median ELTR by risk at retirement category. We found that 9 out of 15 (60%) lifecycle products achieved an ELTR greater than the median, while 14 out of 30 (47%) single strategy products exceeded this benchmark.

Evidently, several lifecycle products have been able to deliver above-median performance (measured over a member’s lifetime) whilst placing their members in a lower-risk position close to retirement.

Conclusions

The aim of this research was to demonstrate a means of fairly comparing different types of MySuper products and assessing whether lifecycle products are able to deliver on their promise.  Our main conclusion is that yes, there are lifecycle products that are able to deliver above-median lifetime performance whilst achieving their risk objectives near retirement.  Nevertheless, the top performing products remain predominantly single strategies that are able to maintain exposure to higher returning assets (but with a higher risk classification) up until retirement.

The next questions are of course – how important is ‘de-risking’ near retirement for ‘disengaged’ members?  Is there such a thing as a ‘disengaged’ member approaching retirement?  Is a ‘one-size fits all’ approach to retirement risk suitable to address the differing needs of retirees?  A secondary aim of this research is to open up these more fundamental questions in the context of measurable objectives.  If we have achieved this objective, we may indeed have baked a magic pudding.

Appendix:

  1. Calculating the ELTR

The return shown in the MySuper performance tables is the Equivalent Lifetime Return (ELTR) calculated by SuperRatings for the 5 year period ending 30 June 2022. The model can determine the ELTR using either returns over 1, 3, 5, 7, 10, 15 or 20 years. The reason we haven’t focused on simply compounding 1-year returns is due to the volatility that we see over the short term.

For a single strategy option, the ELTR is simply the annualised return for the option over the stated period (e.g. 5 years to 30 June 2022).

For a lifecycle strategy, the ELTR is the annualised return over a member’s lifetime from age 20 to 67 using each lifecycle stage option’s returns over the selected period, applied to the years during which the member would be invested in each lifecycle stage. For example, if a lifecycle strategy has (say) a High Growth option applying up to age 50, then a Balanced option from age 50 to 60 and then a Capital Stable option applying until retirement, the ELTR would be calculated by compounding 30 years of the High Growth option’s returns together with 10 years of the Balanced option’s returns and 7 years of the Capital Stable option’s returns, converted to an average annualised rate of return over the entire 47-year period.

One challenge for this approach is the fact that there is currently insufficient data to provide 40 or more years of actual historical returns for each component investment option.  To overcome this issue, the ELTR calculation is based on published average returns over a shorter time period, such as 1 year, 3 years, 5 years, 7 years, 10 years, 15 years or 20 years. In each case, the average return over the stated period is used as a proxy for each lifecycle stage’s return during the appropriate period of membership.  For example, if the stated period is 5 years, a time-series of returns is developed for the member’s lifetime with the 5-year return used as the proxy return at each age i.e. the High Growth option 5-year return is used as the return for the member from ages 20 to 50, the Balanced option 5-year return then applies for ages 50 to 60 and finally the 5-year return for the Capital Stable option is applied from ages 60 to 67. These returns are then compounded over the 47 years and converted to an average annualised rate of return.

  1. Risk at Retirement

The measure of Risk at Retirement used for this analysis was determined by the product’s investment strategy at an assumed retirement age, which is age 67 for the purposes of this article.  The risk metric is the Standard Risk Label at age 67 as disclosed in the product’s Product Dashboard.

Markets were buoyed in July by data from the US suggesting that inflation may have peaked. All asset classes enjoyed strong returns and we saw a sharp rebound in segments of the market which were previously sold down on the back of inflation fears, such as the technology sector. During the month we observed a sharp reversal in short-term price momentum indicators which turned from red to bright green suggesting market sentiment had turned positive. So, is this the start of the next bull market or is it a false start and more pain is to come?

Despite the uptick in market performance, if we look at the facts, not much has changed. Inflation still remains high, the market continues to price in interest rate rises and there is evidence that the global economy is slowing. While we are starting to see some ‘green shoots’ in terms of the external drivers that have contributed to inflation showing some signs of easing, such as the improvement in global supply chains, the jury is still out as to the effectiveness of the current rate hiking cycle on controlling inflation. Since July the US Federal Reserve has reconfirmed their commitment to rate rises until they see clear evidence of inflation abating. Furthermore, we may see more aggressive quantitative tightening (QT), which in effect seeks to reduce central bank balance sheets to fight inflation. This has resulted in a resumption of market volatility. There are also the ‘X-Factors’ such as the conflict in Ukraine and the resultant pressure on energy prices, as well as the growing tensions between China and the West in relation to Taiwan. Both ‘X-Factor’ events are unpredictable and are contributing to the inflationary pressures we are currently observing.

We at Lonsec still believe that inflation will eventually peak and we may see central banks seek to reduce rates at some point in the coming 12 months as the economy shows further signs of slowing. The global economy is already showing signs of slowing with consumer sentiment falling, certain parts of the market such as construction under increased pressure, and indicators such as PMIs, while still broadly positive, showing signs of weakening. If central banks overshoot in their rate hikes the economic slow down will be more pronounced plunging world economies into a recession.

From a portfolio perspective, we have maintained our neutral asset allocation stance and continue to keep our portfolios relatively diversified. We expect more of the same in the coming six months with markets overreacting to short-term news, be it positive or negative, as markets try to navigate where inflation will land. We are continuing to look for evidence of inflation peaking and subsequent stabilisation of bond yields. Staffing remains an issue across sectors and companies are more hesitant in providing forward guidance. We are also closely watching company earnings. To date, companies have been able to pass on rising costs to the end consumer. However, the extent to which this will continue is yet to be seen.


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.

The challenges of owning a ‘balanced’ portfolio consisting of equities and bonds is front of mind given the broad market volatility that has occurred in 2022. ‘Balanced’ portfolios can differ in the proportion of growth assets they hold, anywhere from 50% – 70% growth and 30% to 50% defensive assets. For the purposes of Lonsec’s analysis in this thought piece, we have used 60% growth and 40% defensive assets as the benchmark portfolio, consisting of 30% S&P/ASX 200 TR Index, 15% MSCI AC World Index ex Australia NR Index (AUD Hedged), 15% MSCI AC World Index ex Australia TR Index (AUD), 20% Bloomberg AusBond Composite 0 Year Index AUD, and 20% Bloomberg Global Aggregate TR Index (AUD Hedged). This represents a broad and fairly vanilla exposure to 60% equities and 40% bonds.

The so called ‘death of the 60/40 portfolio’ has been raised many times following the GFC. That being said, this portfolio has performed exceptionally well over this period. The average calendar year return from 2009 to 2021 has been 9.3%, with the highest returning year being 17.8% (2019) and the lowest returning year being -0.5% (2018). With volatility mostly at the lower end of historical norms, risk adjusted returns have also been strong. Those adopting a buy and hold, static approach to portfolio construction have generally been well rewarded.

That has all changed this year. ‘Balanced’ portfolio returns have been challenged by the war in Ukraine and central banks that have pivoted more quickly than expected to raising interest rates in response to inflation. Figure 1 shows the extent of the sell-off in 2022. For the calendar year until the end of May, the ‘Balanced’ portfolio is down -7.1%. This is the worst start to a calendar year over the 20-year period assessed. Of course, 2002 and, in particular, 2008 ended with deeper drawdowns and at this stage it is highly uncertain how the rest of 2022 will shape up.

Figure 1

Source: Lonsec iRate, data is calendar year returns for a 60/40 portfolio consisting of 30% S&P/ASX 200 TR Index, 15% MSCI AC World Index ex Australia NR Index (AUD Hedged), 15% MSCI AC World Index ex Australia TR Index (AUD), 20% Bloomberg AusBond Composite 0 Year Index AUD, and 20% Bloomberg Global Aggregate TR Index (AUD Hedged). YTD 2022 as at 31 May 2022.

What is different in the 2022 sell-off is the performance of bonds and the breakdown in diversification benefits that they typically offer to a balanced portfolio. While the concept of diversification, the idea of not putting your eggs all in one basket, is fairly well understood, the concept of correlation is less so. If the returns of two asset classes are correlated it means they move up and down together. If assets are negatively correlated it means when the value of one asset rises, the other falls. Ideally, portfolios should be made up of asset class constituents that have a low correlation to each other so that when parts of the portfolio fall in value, other areas of the portfolio rise in value. A negative correlation between risky assets, such as equities, and risk-free assets, such as bonds, has tended to hold for much of recent history, especially in market stress events. However, in 2022, the correlation between equities and bonds has been positive. As depicted in Figure 2, both asset classes have sold off together this year, whereas in 2002 and 2008, bonds offered diversification benefits to falling equity markets.

Figure 2

Source: Lonsec iRate, 2022 correct as at 31 May 2022.

While the negative correlation between equities and bonds is often written about as if a universal law of investing, figure 3 shows that correlations between the two asset classes certainly aren’t static through time and can be highly sensitive to changes in market conditions and regimes. Rolling one-year correlations have been quite volatile over the 20 year period under assessment. A more medium-term representation, as shown by the rolling three year correlation, shows that the two asset classes were generally negatively correlated in the period from 2002 to 2012, but turned more positive in the last several years and spiked early in 2022. The takeaway from this is that positive correlations between equities and bonds are not necessarily anything new, rather the correlations are time varying in nature. Of course, a positive correlation between the two asset classes is less acceptable when markets are falling as they have been this year.

Figure 3

Source:  Lonsec iRate, for the period January 2022 to May 2022. Equities consists of 50% S&P/ASX 200 TR Index, 25% MSCI AC World Index ex Australia NR Index (AUD Hedged), 25% MSCI AC World Index ex Australia TR Index (AUD). Bonds consists of 50% Bloomberg AusBond Composite 0 Year Index AUD, and 50% Bloomberg Global Aggregate TR Index (AUD Hedged).

What does the future state hold? ‘Regime change’ has become the topic de jour, a term used to describe a structural shift in the economic environment. For much of the last 20-30 years, the environment has been dominated by low inflation (and falling interest rates) and moderate growth, an environment which, all else equal, is favourable for both equities and bonds. Importantly, bonds have been a great diversifier while delivering positive returns.

Conversely, a backdrop of higher inflation (and rising interest rates) and low growth is less favourable for equities and bonds. It is this environment that is dominating markets this year. The duration of these changes is never certain and one can never be certain how long a certain regime will persist. High valuations in both equity and bond markets at the start of this year had certainly made markets more susceptible to a correction when sentiment turned. That being said, markets can be fast moving and naturally reset themselves after periods of extreme market performance. 10 year bond yields in the US and Australia have already priced in a number of rate rises and some multi-asset managers, after a period of little exposure to bonds, are now talking about them offering better value in some circumstances.

While stress in financial markets can be worrying, it is important to focus on your long-term investment strategy and ensure portfolio asset allocations are aligned with your goals and objectives. Figure 5 shows that the variance of shorter-term returns can be wide, however the range of potential outcomes tends to narrow over longer-term time horizons. This highlights the time diversification inherent in many multi-asset portfolios.

Figure 4

  Rolling one-year returns Rolling three year returns p.a. Rolling five year returns p.a. Rolling 10 year returns p.a.
Average annualised return 8.07% 7.77% 7.51% 7.60%
Best annualised return 24.62% 15.82% 12.94% 10.00%
Worst annualised return -20.26% -4.21% 1.29% 5.31%

Source: Lonsec iRate using monthly time series of 60/40 Balanced portfolio from 2002 to May 2022 consisting of 30% S&P/ASX 200 TR Index, 15% MSCI AC World Index ex Australia NR Index (AUD Hedged), 15% MSCI AC World Index ex Australia TR Index (AUD), 20% Bloomberg AusBond Composite 0 Year Index AUD, and 20% Bloomberg Global Aggregate TR Index (AUD Hedged).

Note, the average annualised return of the ‘Balanced’ portfolio is between 7.5% and 8.1% p.a. over each rolling timeframe. For those investors with shorter term time horizons, the range of potential outcomes has been exceptionally wide. An investor withdrawing in November 2008 after one year invested experienced a loss of -20.3%. Somewhat unsurprisingly the strongest 12-month return was in the aftermath of the financial crisis in February 2010 with a return of 24.6%. While an obvious lesson here is that investors tend to be well rewarded for investing at the bottom of the cycle (notwithstanding the difficulties of picking the bottom), a major takeaway is that those invested over longer time horizons have a much narrower range of potential outcomes (somewhat easier than picking when to invest). Rolling 10-year periods over the 20 year time period assessed were in the range of 5.3% and 7.6% p.a. The 5.3% p.a. return was for the 10-year period ending December 2011 and included the drawdowns of 2002 and 2008, highlighting that staying the course can be a valuable strategy in itself when correctly aligned to your risk profile and overall objectives.

The multi-asset universe is exceptionally broad consisting of static asset allocation approaches as referenced in the analysis above, in addition to those taking active asset allocation and/or active security selection decisions. If the forward-looking environment continues to be challenged, multi-asset managers will have to lean on these asset allocation and security selection levers to enhance the risk and return profile of their portfolios. Many multi-asset funds have the flexibility in their mandates to tilt portfolios away from their reference asset class benchmark, in addition to introducing other asset classes within their portfolios to support diversification benefits. Forward looking scenario testing and testing of correlation assumptions may also be part of their investment process. Theoretically, this increases the level of diversification and potential return sources available and allows active managers to be more dynamic in responding to changing market conditions or regimes. Funds with greater asset allocation tools can be useful for investors who require greater certainty in outcomes, are close to or in retirement, or have a specific goal suited to the fund in question.

Key takeaways for multi-asset investors

  1. Investing in the right asset allocation for your risk profile and goals is highly important. This may well be a static asset allocation approach, as is the one described in our analysis, or one that is much more dynamic and tactical in its approach.
  2. Return outcomes over shorter term time horizons can be wide. Investors who are willing to invest over the longer term have tended to be well rewarded for taking risk.
  3. The correlation between equities and bonds is time varying and dependent on market regimes. To date, 2022 has been an exceptionally unusual year in the last 20 years with both equities and bonds selling off together.

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.
Disclosure as at the date of publication: Lonsec receives fees from fund managers or product issuers for researching their financial product(s) using comprehensive and objective criteria. Lonsec receives subscriptions for providing research content to subscribers including fund managers and product issuers. Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other advice. Lonsec’s fees are not linked to the product rating outcome or the inclusion of products in model portfolios, or in approved product lists. Lonsec and its representatives, Authorised Representatives and their respective associates may have positions in the financial product(s) mentioned in this document, which may change during the life of this document, but Lonsec considers such holdings not to be sufficiently material to compromise any recommendation or advice.
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It has been a challenging period for multi-asset investors with both equity and bond markets recording some of the worse starts to a year in decades. Global equity markets fell significantly over the quarter and domestically the ASX 300 index has fallen more than 10% since the start of the calendar year. However, what has been most damaging to balanced portfolios has been the significant losses experienced in the bond markets. Bond market indices are down 10%, as persistent and high inflation has seen bond yields rise sharply. The defensive part of many investor portfolios failed when it was needed most.

Deanne Baker explains how the Multi-Asset portfolios are positioned to best navigate through the current challenging environment.


The information in this video is prepared by Lonsec Investment Solutions Pty Ltd ABN 95 608 837 583 (LIS, we, us, our), a Corporate Authorised Representative (CAR) No. 1236821 of Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec Research). Any express or implied rating or advice presented in this video 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 you must consider your financial circumstances or seek personal financial advice on its appropriateness. Read the Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product.

Past performance is not a reliable indicator of future performance. 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 information not verified by LIS. This video may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material.

The information contained in this video 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. This video is not intended for use by a retail client or a member of the public and should not be used or relied upon by any other person. This video is not to be distributed without the consent of LIS. 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 video 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.

You may not reproduce, transmit, disseminate, sell or publish this video without our written consent.

We are currently in an environment we haven’t seen since the mid-1990s, of extremely high inflation and low growth, which has surprised many investors and has been damaging for those that have a low tolerance to risk, such as retirees. Despite negative returns, and while we haven’t been able to avoid the losses entirely, the Retirement portfolios have significantly outperformed the peer group benchmark, protecting retirees. The portfolio also delivered top quartile returns with less risk than the peer group over the 12 months to June 2022. In terms of total return, the portfolio remains comfortably above its Cash plus 2.4% objective over the 4-year recommended investment timeframe.

True to our investment philosophy and approach, having true diversification in the portfolios, being dynamic in how we positioned the portfolio this year, investing in high-quality strategies, and having a strong risk control, have paid off.


The information in this video is prepared by Lonsec Investment Solutions Pty Ltd ABN 95 608 837 583 (LIS, we, us, our), a Corporate Authorised Representative (CAR) No. 1236821 of Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec Research). Any express or implied rating or advice presented in this video 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 you must consider your financial circumstances or seek personal financial advice on its appropriateness. Read the Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product.

Past performance is not a reliable indicator of future performance. 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 information not verified by LIS. This video may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material.

The information contained in this video 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. This video is not intended for use by a retail client or a member of the public and should not be used or relied upon by any other person. This video is not to be distributed without the consent of LIS. 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 video 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.

You may not reproduce, transmit, disseminate, sell or publish this video without our written consent.

It has been a challenging period for multi-asset investors with both equity and bond markets recording some of the worse starts to a year in decades. Global equity markets fell significantly over the quarter and domestically the ASX 300 index has fallen more than 10% since the start of the calendar year.

ESG and sustainable portfolios in general have felt the pain more acutely given the wide dispersion seen in sector returns and the Lonsec Sustainable portfolios were no exception. The portfolios have had a difficult quarter, lagging the peer group benchmark by some margin. Over the quarter, Dynamic Asset Allocation added value in the Balanced risk profile which benefited most from our underweight position in Fixed Income. In the higher risk profiles, DAA was flat to slightly negative as our overweight position in real assets more than offset the gains made in Fixed Income.

Looking ahead, our Sustainable positions remain diversified in order to be resilient to further market volatility. We continue to monitor developments regarding inflation, monetary policy and the global economy and we will adjust our portfolios if necessary to navigate through the challenges ahead.


The information in this video is prepared by Lonsec Investment Solutions Pty Ltd ABN 95 608 837 583 (LIS, we, us, our), a Corporate Authorised Representative (CAR) No. 1236821 of Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec Research). Any express or implied rating or advice presented in this video 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 you must consider your financial circumstances or seek personal financial advice on its appropriateness. Read the Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product.

Past performance is not a reliable indicator of future performance. 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 information not verified by LIS. This video may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material.

The information contained in this video 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. This video is not intended for use by a retail client or a member of the public and should not be used or relied upon by any other person. This video is not to be distributed without the consent of LIS. 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 video 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.

You may not reproduce, transmit, disseminate, sell or publish this video without our written consent.

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.