SuperRatings is pleased to announce the Super Fund of the Year Awards finalists.

This year’s event reflects our commitment to evolve with the industry as we have joined with Super Review and Momentum Media as the exclusive Research Partner to deliver an awards night dedicated to the superannuation industry.

Join us in celebrating those funds that have delivered outstanding outcomes for their members. Finalists across all award categories have shown great commitment to helping their members navigate a rapidly changing market and we are pleased to be able to help recognise their efforts across our most extensive range of awards yet. The judging criteria for the award categories are both quantitative and qualitative and have considered over 90% of the assets reporting to APRA as part of the process.

You can see the methodology for all awards here.

For a full list of the awards and finalists please visit the link below.

Congratulations to all finalists and we look forward to recognising those that continue to innovate, develop and deliver strategies that meet the changing needs of their members.


Winners will be announced at a black-tie gala event at Grand Hyatt, Melbourne on Wednesday, 25 October 2023.

 

 


SuperRatings Pty Limited ABN 95 100 192 283 AFSL No. 311880 (SuperRatings) are acting as a research partner for the Super Review Super Fund of the Year Awards (Awards) issued by Momentum Media Group Pty Ltd on 25 October 2023 .The Awards are determined using SuperRatings proprietary methodologies, are solely statements of opinion, subjective in nature and must not be used as the sole basis for investment decisions. The Awards do not represent recommendations to purchase, hold or sell any products or make any other investment decisions. Investors must seek independent financial advice before making any investment decision and must consider the appropriateness of the information, having regard to their objectives, financial situation, and needs. Past performance is not an indication of future performance. Awards are current for 12 months from the date awarded and are subject to change at any time. SuperRatings does not represent these Awards to be guarantees nor should they be viewed as an assessment of a Super Fund or the Super Funds’ underlying securities’ creditworthiness. SuperRatings receives a fee from the financial product issuer(s) for researching the financial product(s), using objective criteria. SuperRatings’ rating(s) outcome is not linked to the fee or the Award. SuperRatings and its associates do not receive any other compensation or material benefits from product issuers or third parties in connection with the Award. SuperRatings makes no representation, warranty or undertaking in relation to the accuracy or completeness of the Awards. SuperRatings assumes no obligation to update the Awards after publication. The Award is for the exclusive use of the client to whom it is presented and should not be used or relied upon by any other person unless with express permission from SuperRatings. Except for any liability which cannot be excluded, SuperRatings, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document and any Award or any loss or damage suffered by the reader or any other person as a consequence of relying upon it. ©SuperRatings 2023. All rights reserved.

Congratulations to all the winners and nominees for this year’s Fund Manager of the Year Awards. For Lonsec and Money Management, these awards are a celebration of the very best of the funds management industry and we will recognise the very best innovations and products and services that improve the investment outcomes of Australians.

As research partner for the awards, we applied the same rigorous approach we take to researching and rating funds to evaluating the nominees and choosing winners in each of the 18 group award categories. It has been an honour to partner with Money Management for these awards and congratulations again to Franklin Templeton for being named Fund Manager of the Year.

Australian Property Securities Fund of the Year 

The nominees for the Australian Property Securities Fund of the Year highlight the variety in the sector by showcasing both A-REIT and ‘real asset’ mandates and differing investment styles. Nominated funds have all been well-rated by Lonsec over an extended period and have been able to deliver consistent risk-adjusted performance over the medium-term.  The nominees are:

  • Cromwell Phoenix Property Securities Fund
  • Martin Currie Real Income Fund – Class A
  • SGH Property Income Fund

Global Property Securities Fund of the Year

The nominees for the Global Property Securities Fund of the Year represent both Australian and off-shore investment firms. These funds, which have been well rated by Lonsec, have navigated a turbulent period for REIT markets well, allowing them to deliver a consistent level of risk-adjusted performance over the medium-term.

  • Ironbark Global Property Securities Fund
  • Quay Global Real Estate Fund – Unhedged
  • UBS CBRE Global Property Securities Fund

Infrastructure Fund of the Year

The nominees for the Infrastructure Fund of the Year are representative of the dynamism in the listed infrastructure space, both by investment style but also the underlying investment structures. The funds have all been well rated by Lonsec over time, with the managers delivering to investors the listed infrastructure premia during a volatile period in markets and meeting their investment objectives.

  • ClearBridge RARE Infrastructure Value Fund — Unhedged
  • CFS FC Global Infrastructure Securities Fund
  • Lazard Global Listed Infrastructure Fund

Unlisted Real Estate Fund of the Year

The nominees for the Unlisted Real Estate Fund of the Year are part of Lonsec’s universe of direct property funds that provide investors with access to a range of commercial and social property sectors. All nominated managers have built strong property capabilities and have demonstrated a commitment to sound capital management over time.

  • Australian Unity Healthcare Property Trust – Wholesale Units
  • Centuria Diversified Property Fund
  • Charter Hall Direct Industrial Fund No.4

Australian Large Cap Equity Fund of the Year

The nominees for the Australian Large Cap Equity Fund of the Year recognise those funds that have been well-rated by Lonsec over an extended period, and those managers that have been able to deliver consistent risk-adjusted performance in line with performance objectives over the medium-term.

  • Allan Gray Australia Equity Fund
  • Dimensional Australian Value Trust
  • DNR Capital Australian Equities High Conviction Portfolio
  • Lazard Select Australian Equity Fund (W Class)
  • Quest Australian Equities Concentrated Portfolio SMA

Australian Small Cap Equity Fund of the Year

The nominees for the Australian Small Cap Equity Fund of the Year recognise those funds that have successfully delivered on investment objectives, demonstrated superior stock selection and have been well-rated by Lonsec over an extended period.

  • First Sentier Wholesale Australian Small Companies Fund
  • OC Dynamic Equity Fund
  • Spheria Australian Smaller Companies Fund

Global Equity Fund of the Year

The nominees for Global Equity Fund of the Year have demonstrated ability to consistently meet their investment objectives, have a track record in applying their investment research and portfolio construction processes, as well as being rated ‘Recommended’ or higher by Lonsec.

  • Arrowstreet Global Equity Fund
  • Barrow Hanley Global Share Fund
  • Lazard Global Equity Franchise Fund
  • PM Capital Global Companies Fund
  • Realindex Global Share Value – Class A

Global Emerging Market Equity Fund of the Year

The nominees for Global Emerging Market Equity Fund of the Year have been sourced from Lonsec’s universe of Global Emerging Markets sector, including funds within the Regional Asia and India sub-sector. The award recognises funds that have been highly rated by Lonsec over the past three years, demonstrated asset allocation and security selection skills, and consistently delivered on its investment objectives.

  • Fidelity Asia Fund
  • FSSA Asian Growth Fund
  • Lazard Emerging Markets Equity Fund

Multi-Asset Fund of the Year

The nominees for the Multi-Asset Fund of the year recognise those products that have been well rated by Lonsec over an extended period of time, and those Managers that have been able to consistently apply their investment process, meet investment objectives through the cycle, and demonstrate portfolio management skill in asset allocation and security selection

  • Australian Retirement Trust – Super Savings – Growth
  • BlackRock Tactical Growth Fund – Class D
  • CareSuper – Sustainable Balanced
  • ipac Income Generator (Class K)
  • Perpetual Balanced Growth Fund

Passive – Equity Fund of the Year

The Passive Equity Fund of Year award recognises an equity based strategy that has demonstrated a strong track record of success with respect to its underlying index, a superior liquidity profile plus costs that are at least in-line with peers.

  • Betashares Australia 200 ETF
  • iShares Core S&P/ASX 200 ETF
  • SPDR S&P World ex Australia Carbon Control Fund
  • VanEck Australian Equal Weight ETF
  • Vanguard US Total Market Shares Index ETF

Passive – Other Asset Class Fund of the Year

The Passive Other-Asset class Fund of Year award considers all the passive fixed income, commodities, or alternative strategies within the Lonsec universe. It recognises the Fund with a strong track record of success with respect to its underlying index, a superior liquidity profile plus costs that are at least in-line with peers.

  • Betashares Australian Bank Senior Floating Rate Bond ETF
  • Global X Physical Gold ETF
  • iShares Core Composite Bond ETF
  • iShares Global Bond Index Fund
  • VanEck Australian Floating Rate ETF

Australian Fixed Income

The nominees for the Australian fixed income category are well rated by Lonsec over an extended period of time. The award recognises managers who have the ability to deliver consistent returns while providing downside protection during challenging markets which are a testament to their robust research and risk management processes, skills and expertise.

  • Janus Henderson Australian Fixed Interest Fund
  • Macquarie Australian Fixed Interest Fund
  • Pendal Sustainable Australian Fixed Interest Fund
  • Perpetual Active Fixed Interest Fund (Class A Units)
  • Western Asset Australian Bond Fund – Class A
  • Yarra Enhanced Income Fund

Global Fixed Income of the Year

As with the previous Australian Fixed Income award, the nominees for the Global fixed income category are well-rated by Lonsec over an extended period of time. The award recognises managers who have the ability to deliver consistent returns while providing downside protection during challenging markets which is a testament to their robust research and risk management processes, skills, and expertise.

  • Bentham Global Income Fund
  • Brandywine Global Opportunistic Fixed Income Fund – Class A
  • Perpetual Dynamic Fixed Income Fund
  • PIMCO Income Fund – Wholesale Class
  • T. Rowe Price Dynamic Global Bond Fund – I Class

Alternatives Fund of the Year

The nominees for the Alternatives fund of the year recognise those products that have demonstrated a track record of success, offer several competitive advantages against their closest peers and have been rated highly by Lonsec for at least three review cycles. Further, over the long term, each of these Funds has met or exceeded their respective investment objectives, achieved favourable absolute returns in a risk-adjusted manner while providing diversification to investors’ broader portfolios

  • Australian Retirement Trust – Super Savings – Diversified Alternatives
  • CC Sage Capital Absolute Return Fund
  • Hamilton Lane Global Private Assets Fund (AUD)

Responsible Investment Fund of the Year

The nominees for the Responsible Investment Fund of the year recognise those products that have demonstrated a clear integration of ESG into their investment process and deliver a portfolio with a high alignment with the Sustainable Development Goals as well as having at least a recommended rating from Lonsec.

  • Ausbil Active Sustainable Equity Fund
  • Australian Ethical Emerging Companies Fund (Wholesale)
  • Candriam Sustainable Global Equity Fund
  • Impax Sustainable Leaders Fund

Innovation Award of the Year

The Innovation Award recognises a manager that has brought a differentiated product to the Australian market.  Differentiation can take the form of fee leadership, product structural evolution or additive capabilites to standard asset class products.

  • Betashares Capital
  • Generation Life
  • L1 Capital

Emerging Manager of the Year

The nominees for Emerging Manager of the Year have been selected by Lonsec’s team of Sector Managers. To be eligible for this award, nominees must have a track record of five years or less within the Australian intermediated market, and have at least one product that Lonsec has assigned a ‘Recommended’ or higher rating.

  • Aikya Investment Management
  • Fortlake Asset Management
  • Pzena Investment Management
  • Ruffer LLP
  • Skerryvore Asset Management

Fund Manager of the Year

To be eligible for the Fund Manager of the Year Award, Managers must have demonstrated a sound investment culture and good governance over an investment cycle and across a number of asset classes.

  • BlackRock Investment Management (Australia)
  • Franklin Templeton Australia
  • Lazard Asset Management
  • Macquarie Asset Management
  • VanEck

Disclaimer: Lonsec Research Pty Ltd (ABN 11 151 658 561 AFSL 421445) (Lonsec) are acting as a research partner for the Fund Manager of the Year Awards (Awards) issued by Momentum Media Group Pty Ltd on 22 June 2023 The Awards are determined using Lonsec proprietary methodologies, are solely statements of opinion, subjective in nature and must not be used as the sole basis for investment decisions. The Awards do not represent recommendations to purchase, hold or sell any products or make any other investment decisions. Investors must seek independent financial advice before making any investment decision and must consider the appropriateness of the information, having regard to their objectives, financial situation, and needs. Past performance is not an indication of future performance. Awards are current for 12 months from the date awarded and are subject to change at any time. Lonsec does not represent these Awards to be guarantees nor should they be viewed as an assessment of a fund or the funds’ underlying securities’ creditworthiness. Lonsec receives a fee from the financial product issuer(s) for researching the financial product(s), using objective criteria. Lonsec rating(s) outcome is not linked to the fee or the Award. Lonsec and its associates do not receive any other compensation or material benefits from product issuers or third parties in connection with the Award. Lonsec makes no representation, warranty or undertaking in relation to the accuracy or completeness of the Awards. Lonsec assumes no obligation to update the Awards after publication. The Award is for the exclusive use of the client for whom it is presented and should not be used or relied upon by any other person unless with express permission from Lonsec. 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 and any Award or any loss or damage suffered by the reader or any other person as a consequence of relying upon it. ©Lonsec 2023. All rights reserved.

As we look to the future of service delivery in the administration space, we believe supporting funds to enhance their operational efficiencies and drive down costs, the ability to integrate with non-core administration systems, technological capability and adaptability, strong contact centre capabilities, where applicable, and capacity in a merger-heavy operating environment, are key elements impacting successful administration service delivery.

Scott Abercrombie, Head of Superannuation Consulting


Any advice that SuperRatings provides is of a general nature and does not take into account an individual’s financial situation, objectives or needs. Because the information that SuperRatings receives about superannuation and pension financial products is from a number of sources, it is not guaranteed to be completely accurate. Because of this, individuals should, before acting on the information, consider its appropriateness having regard to their own financial objectives, situation and needs and if appropriate, obtain personal financial advice on the matter from a financial adviser. Before making a decision regarding any financial product, individuals should obtain and consider a copy of the relevant Product Disclosure Statement from the financial product issue.

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.
Warnings: Past performance is not a reliable indicator of future performance. The information contained in this document is obtained from various sources deemed to be reliable. It is not guaranteed as accurate or complete and should not be relied upon as such. Opinions expressed are subject to change. This document is but one tool to help make investment decisions. The changing character of markets requires constant analysis and may result in changes. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).
Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Where Lonsec’s research process relies upon the participation of the fund manager(s) or product issuer(s) and they are no longer an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).
Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Financial conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.
Copyright © 2022 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This document is subject to copyright of Lonsec. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this document may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec.
This document may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to Lonsec copyrighted material, applies to such third party content.

After years of low inflation and low interest rates, we have finally entered a new period in the economic environment of higher inflation and higher interest rates. But how high will inflation be and by how much will interest rates rise? Periods of transition from a market perspective increase uncertainty and subsequently increase market volatility.

From a dynamic asset allocation perspective, over a number of years we have built up our exposure to real assets and have included alternative assets such as gold, as inflation risk was growing. While we have maintained an underweight exposure to fixed interest, we have ensured that our exposure to the sector has been diversified which has become increasingly important as bond yields continue to rise. The rise in bond yields will means that at some point the yields on offer will become attractive again and warrant an increase exposure. It is fair to say that we believe the coming period will be one where bottom up investment selection will be a key contributor to performance compared to the recent past which has been dominated by low interest rates and ample liquidity which supported a strategy of being long equities and short bonds, which drove performance for many strategies.

From a bottom up perspective, we have seen extreme market activity. On the equities side, the winners have been largely concentrated to those parts of the market that are expected to benefit from a higher inflation environment such as energy and resources. This market environment has seen value style managers outperform growth style managers in recent months, as any long duration investments such a growth equity stocks, which are priced for future growth, have been sold down irrespective of their quality. While the performance of growth style investments has been disappointing, we don’t think it is the time to throw the baby out with the bath water. The market has already pulled back and provided companies are supported by earnings and have solid balance sheets, a long term allocation to growth is still warranted as part of a diversified portfolio. Similarly, on the fixed interest side, bonds have sold off as bond yields have risen. Clients are rightly nervous about their portfolio bond allocation, however if we look forward, bonds are looking much more attractive now on a forward-looking basis than they have in a while.

In volatile times, when returns can look ugly, it is tempting to be reactive and want to sell the ‘losers’ however markets are forward looking and it is important to consider what is already priced into the market. Challenging times ahead but history tells us that market pull backs tend to be sharp but also generally don’t last long.


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.

Years of accommodative monetary policy combined with ample liquidity from central banks, remnants of the global financial crisis of 2008, may be coming to a gradual end. We are arguably entering a transition period in the economic environment from one of low inflation, low interest rates backed by unconventional monetary policy (quantitative easing), to one of higher inflation and the potential of higher interest rates. Adding fuel to inflationary pressures has been a global pandemic where supply chains have been disrupted like never before, heightened geopolitical risks with the Russian invasion of Ukraine, known as the breadbasket of Europe, putting price pressures on everything from crude oil, wheat to sunflower oil, and globalisation, the accepted mantra for economic growth for decades, which is now under increased scrutiny with talk of a deglobalised world.

Periods of transition from a market perspective are always challenging. They are characterised by increased uncertainty and subsequently increased market volatility. In such environments it is a balancing act between defense and offence. In recent years, an offensive game has been a clear winner, however defense has become increasingly important. While we do not have a crystal ball on how high inflation will be and by how much interest rates may rise, the likely trend is up. With this in mind, considering assets that can assist in navigating a higher inflation environment is important. While there is no perfect hedge for inflation there are assets that can benefit from a higher inflation environment. Some of these include real assets such as infrastructure and property, commodities including gold, floating rate notes and inflation linked bonds.

Within Lonsec’s portfolio suite, we have built up our exposure to real assets for a number of years and have included assets such as gold as inflation risk was growing. Within fixed interest we diversified sovereign bond exposures with short-dated bonds and credit exposures. Given the nature of the Australian equity market, domestic investors will also have a structural exposure to commodities via the market. In such environments it is important not to swing the pendulum too far in terms of focusing solely on defense. In uncertain times and periods of market volatility, opportunities do arise. With this in mind we have retained a bias to growth assets and we think that the ability to generate positive active returns has increased and greater price dispersion in markets will provide more attractive entry points for quality assets that may have previously been out of reach due to excessive valuations.

The winds of change may be coming but markets are always evolving and reviewing your game plan is prudent.


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.

Exchange Traded Funds (ETFs) have been available on the ASX for over 2 decades, but in recent years, this category’s variety and representation within Australian portfolios have grown rapidly.

By offering exposure to different global markets, industry sectors and strategic themes, as well as non-equities asset classes like bonds and commodities, ETFs can provide relatively low-cost “building blocks” for a diversified portfolio.

However, as with any investment, it’s very important to understand what you are putting your money into, and to ensure that it suits your specific needs.  Here are five questions to ask yourself, or your financial adviser, before you purchase an ETF.

Question 1: Does it accurately capture the market exposure that I want?

You wouldn’t judge a book by its cover, so make sure to look beyond the ETF’s name to properly assess the underlying exposure of the product. Common misunderstandings include:

  • Mistaking a “picks and shovels” exposure, through owning suppliers and supporters of a sector, for that sector’s output. For example, a portfolio of cryptocurrency miners and exchange operators is not the same as a direct investment into cryptocurrency;
  • Confusion between ETFs linked to a commodity’s spot price, which is the price for immediate delivery, and those representing a futures curve, which will move with expectations for longer-term pricing; and
  • Overlooking exchange rate movements, which can influence your returns from anything not priced in Australian dollars. This impact can be neutralised with a currency-hedged ETF.

Question 2: Is the exposure active, passive, or somewhere in between?

Early ETFs were purely passive, usually linked to an equities index like the S&P/ASX 200, but now, there are also actively managed portfolios within an ETF structure. “Smart beta” portfolios which apply rules-based investment strategies are becoming more common too, for example, one might invest in a basket of stocks which screen well on quality factors. The exposure type affects fee levels and return potential, with passive ETFs tending to be the cheapest, but lacking the potential to outperform an index benchmark.

Question 3: How liquid is this product?

It is possible for the price of an ETF to diverge from that of its underlying exposure, particularly in volatile market conditions such as the COVID-19 panic in early 2020. To ensure that investors can get in and out of a product when they want to, ETF providers often employ a Market Maker, an institution which quotes separate prices to buy and sell units. Generally, ETFs with a smaller pool of units on issue are more likely to have poor liquidity, and this can show up in a wide spread between the buy and sell prices. Using “at-limit” orders when trading ETFs can help ensure that you receive the price you expect.

Question 4: How does the fee compare to alternatives, and what are the trade-offs?

Low cost is a major benefit of ETFs, but when you have several to choose from, it’s worth understanding why one’s management fee is cheaper. Active management usually costs more, and ETFs linked to a major market benchmark are sometimes priced higher because the index provider takes a cut of the total fee. Unusual products may carry a scarcity premium, while new or smaller-scale offerings may have lower fees, both to compensate for their initially poor liquidity, and also to entice more patronage over time.

Question 5: How does it fit with the rest of my portfolio?

Any new investment should be considered in the context of your existing portfolio. ETFs can provide valuable diversification, but they can also be a source of inadvertent overlap or concentrated exposure to certain sectors or factors. For example, ETFs linked to the S&P 500 index, the NASDAQ 100 and an actively-managed global growth strategy might overlap in high exposure to the Big Tech stocks, so this combination might not provide adequate diversification.


IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2022 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

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

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

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

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

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

 

MSCI EM Benchmark 3.6% 3.2% 1.6%*

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

 

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

 

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

* Not included with the MSCI Russia 25 / 50 Index

Timeline of events

January 2022

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

February 2022

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

March 2022

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

Conclusion

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

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

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.
Disclosure as at the date of publication: Lonsec receives fees from fund managers or product issuers for researching their financial product(s) using comprehensive and objective criteria. Lonsec receives subscriptions for providing research content to subscribers including fund managers and product issuers. Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other advice. Lonsec’s fees are not linked to the product rating outcome or the inclusion of products in model portfolios, or in approved product lists. Lonsec and its representatives, Authorised Representatives and their respective associates may have positions in the financial product(s) mentioned in this document, which may change during the life of this document, but Lonsec considers such holdings not to be sufficiently material to compromise any recommendation or advice.
Warnings: Past performance is not a reliable indicator of future performance. The information contained in this document is obtained from various sources deemed to be reliable. It is not guaranteed as accurate or complete and should not be relied upon as such. Opinions expressed are subject to change. This document is but one tool to help make investment decisions. The changing character of markets requires constant analysis and may result in changes. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).
Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Where Lonsec’s research process relies upon the participation of the fund manager(s) or product issuer(s) and they are no longer an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).
Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Financial conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.
Copyright © 2022 Lonsec Research Pty Ltd (ABN 11 151 658 561, AFSL No. 421445) (Lonsec). This document is subject to copyright of Lonsec. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this document may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec.
This document may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to Lonsec copyrighted material, applies to such third party content.

After several weeks of diplomatic tensions, over the last few days the word has watched in shock as Russia invades Ukraine. By way of background, the Ukraine was part of the former Soviet Union and gained independence from the USSR in 1991 following the gradual collapse of communism in central and eastern Europe in 1989. The recent tensions can be traced back to 1994 when the Budapest Memorandum was signed by the US, UK, Russia and the Ukraine when the Ukraine essentially agreed to give up their nuclear weapons and in return recognition of their sovereignty and ‘assurances’ of assistance should they face aggression. The west also opened the door for former Soviet states such as the Ukraine and Georgia to become members of NATO which was deemed to be unpalatable to the Russian government. Roll forward and we have seen Russian annex the Ukrainian region of Crimea in 2014 as well as making incursions into the eastern Ukrainian regions of Donetsk and Luhansk. The situation is complex and the coming days and weeks will provide us greater clarity on the direction tensions may take.

From a market perspective, we have seen markets price in the risk of a conflict with five-year credit default swaps blowing out for Russia and the Ukraine debt reflecting the additional risk for swapping out sovereign default risk. Equity markets are likely to be volatile until there is more clarity on the situation.

Russia & Ukraine 5yr Credit Default Swaps (bp)

Source: Capital Economics

Geopolitical risks are difficult to predict and even more difficult to manage for within a portfolio context. In recent years we have seen growing tensions between China and the US, North Korea agitate, and ongoing conflicts in the Middle East, such as the Syrian conflict. Typically, markets tend to react sharply and quickly to geopolitical events. If we look at how markets reacted during the Gulf War in the early 90s when Iraq invaded Kuwait, the S&P 500 feel sharply but also recovered quickly. The chart below shows the drawdown from previous peak in the market. While every conflict is different, markets like certainty and a clear direction. Until that time, expect markets to be volatile.

 S&P 500, Drawdown from previous peak (%)

Source: Capital Economics

As we see the Russia/Ukraine conflict escalate our expectation is that energy prices will increase given Russia is a large oil and gas producer and Europe relies heavily on Russian energy. A significant development has been the move to block Russian banks from the SWIFT global payments system and freeze the Bank of Russia’s reserves which are expected to severely restrict movement of capital from Russia. We also saw the decision by Germany to suspend the Nord Stream 2 gas pipeline project, a gas pipe connecting Russian gas to Germany. This is significant because Germany essentially shut down its nuclear power stations opting for gas via the new pipeline. It will be interesting to observe whether this will be a catalyst for Europe to rethink their energy sources to reduce their reliance on Russian gas.

We are monitoring the developments in the conflict and are assessing what our potential exposure is to Russia and Ukraine within the portfolios. Our portfolios remain diversified, and we hold assets such as gold and alternative assets within the portfolios which have been included to assist in managing risk. Coupled with this, we continue to assess the impact growing inflation may have on our portfolios having recently held interim investment committee meetings as new information comes to hand.


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.

When it comes to choosing a good financial adviser, it is important to find someone that you trust, shares your investment ethos and who has experience investing for someone at your stage in life.

Whether you are nearing retirement or just starting your investing journey, asking these five questions will help you find the right adviser with whom you can build a good partnership.

Who is the adviser’s ideal client?

It is important to understand who their ideal client is, the market in which they operate and if that is for you. For example, if you are in pre-retirement, you want an adviser that has experience in this area as they will be more familiar with your needs.

Choosing someone who has experience with your life stage will also guide how they interact with you. For example, advisers dealing with younger clients are more likely to embrace video and other digital platforms.

You need to feel comfortable with how an adviser communicates with you and that you can understand and use the information presented.

What is the proposition?

You need to understand what areas the adviser is most comfortable with, their particular areas of expertise and how innovative and open to new areas of advice they are.

It is also crucial to understand their approach to ongoing advice, and if that resonates with how you want the relationship to evolve.

Other things to consider include how often they communicate with you to show how your investments are performing, how receptive they are to you contacting them and what you can expect from your review meetings.

What is their investing approach?

What is the adviser’s approach to driving income, growth and managing portfolio risk? For example, if your investment goal is to generate income, you should choose an adviser that can target this. Conversely, if you are happy to forgo returns to manage your risk more closely, an adviser that understands this is paramount.

Active or passive investments?

You should know the adviser’s investment philosophy for active or passive investments. Some advocate passive investments, such as index funds, while others favour actively managed portfolios.
Preferences for passive or active investments have an impact on costs, potential risks and returns. An adviser should be clear about these when discussing investment options.

Another thing to consider is how an adviser manages cash in a portfolio.

While returns from cash are negligible right now, it does have a role to play in a diversified portfolio. Asking about an adviser’s approach to cash can give you an idea into how they manage portfolio risk.

Listed or unlisted investments?

If liquidity and transparency of holdings is important to you, an adviser comfortable managing portfolios made up of assets with these characteristics may be more appropriate for you.

Holding listed and unlisted assets may have different tax and cost implications and may also impact the regularity of reporting. The adviser needs to have experience managing these in a way that is appropriate to your portfolio and life stage.

Working with a financial adviser is a partnership and asking these questions of prospective advisers can help you decide if you can work with them and trust them with your money.


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