News & Insights Archives - Page 28 of 34

Superannuation facing grim financial year

Despite a recovery in the March quarter, superannuation funds are heading for a disappointing 2018-19 financial year, with global growth challenges and a loss of market momentum meaning funds will struggle to make up for sharp losses in the December quarter.

According to estimates from leading superannuation research house SuperRatings, balanced option returns were largely flat through March as markets were weighed down by weaker economic data and fears of further falls in home prices.

The typical balanced option (defined as an option holding between 60-76% growth assets) returned an estimated 0.8% in March as the share market recovery came to a halt. The typical growth option also grew at 0.8% following strong gains in January and February of 3.2% and 3.4% respectively.

Estimated median balanced option returns to 31 March 2019

Period	Accumulation returns	Pension returns
Month of March 2019	0.8%	1.0%
Financial year return to 31 March 2019	3.2%	4.2%
Rolling 1-year return to 31 March 2019	6.3%	8.0%
Rolling 3-year return to 31 March 2019	8.4%	9.3%
Rolling 5-year return to 31 March 2019	7.1%	8.1%
Rolling 7-year return to 31 March 2019	8.5%	9.6%
Rolling 10-year return to 31 March 2019	8.8%	9.8%
Rolling 15-year return to 31 March 2019	7.5%	8.2%
Rolling 20-year return to 31 March 2019	7.3%	–

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

While funds have recovered from a horror December quarter, a weakening outlook will make it challenging for funds to make up further ground before 30 June. According to SuperRatings, the estimated financial year-to-date return for the median balanced option is 3.2%, which so far ranks as the seventh worst result since the introduction of the super guarantee in 1992.

Median balanced option financial year returns since the
introduction of the Superannuation Guarantee

Median balanced option financial year returns since the introduction of the Superannuation Guarantee

*Financial year-to-date return

Source: SuperRatings

Meanwhile, the federal budget went largely unnoticed by markets, which had already anticipated many of the tax and infrastructure spending measures. Australians will head to the polls on 18 May, and while super is unlikely to be a defining election issue, there will be plenty of debate around Labor’s proposed changes.

“The federal budget delivered no surprises either for markets or for the super industry,” said SuperRatings Executive Director Kirby Rappell. “This is not a bad thing, because often the best thing a government can do is leave super alone.”

“The focus during the election will be on Labor’s proposed changes, which include reductions in contribution caps and the removal of imputation credit cash-outs, which will have a significant impact on SMSFs.”

Mr Rappell said falling home prices combined with weaker share market performance is the biggest challenge currently facing retirees.

“Falling house prices have a negative wealth effect that flows through to consumer spending, but they also throw a spanner in the works for many Australians approaching retirement who may have planned on downsizing and adding the windfall to their nest egg.”

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” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the merits of the superannuation or pension financial product(s) alone, without taking into account the objectives, financial situation or particular needs (‘financial circumstances’) of any particular person. 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 SuperRatings advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each superannuation or pension financial product before making any decision about whether to acquire a financial product. SuperRatings’ research process relies upon the participation of the superannuation fund or product issuer(s). Should the superannuation fund or product issuer(s) no longer be an active participant in SuperRatings research process, SuperRatings reserves the right to withdraw the rating and document at any time and discontinue future coverage of the superannuation and pension financial product(s).

This media release is subject to the copyright of SuperRatings. 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 media release 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 SuperRatings. This media release 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 SuperRatings copyrighted material, applies to such third party content.

April 17, 2019/by Kirby Rappell

News & Insights

Budget’s fate will be determined by the economy

Last night Treasurer Frydenberg handed down his first budget a month before the regular budget season. With the possibility of a May election, this budget is as much a political statement as an economic one, with tax measures to please key voter groups, a further boost to infrastructure spending, and the much-vaunted return to surplus. But the implementation of these measures depends on the re-election of the current government, while the surplus itself remains at the mercy of the economic outlook.

The long-awaited surplus

As expected, the underlying cash balance is forecast to return to a surplus of $7.1 billion in 2019-20, or 0.4% of GDP. Revenue growth is being driven by an improving economy, and a surplus may even be achieved slightly sooner than expected given the rise in commodity prices (especially iron ore) and associated company tax receipts.

Budget aggregates

Source: Budget 2019-20

The Budget also forecasts that the surplus will be maintained through the four-year period. However, these forecast surpluses remain small at less than 1.0% of GDP and are based on a range of assumptions. If the global and domestic economies slow, or if the government is not as frugal as it expects to be, the slim surpluses could easily be eroded.

Commonwealth revenue and expenses (% GDP)

Source: Treasury

Income tax cuts

Another key selling point of this Budget is the income tax cuts, both to low- and middle-income earners and high-income earners. The Low and Middle Income Tax Offset (LMITO) will be more than doubled from $445 to $1,080 for this financial year. From 2022-23, the Government will increase the top threshold of the 19% tax bracket from $41,000 to $45,000 and increase the Low Income Tax Offset (LITO) from $645 to $700.

These measures have promised more than what the opposition proposed and are designed to peel low- and middle-income voters away from Labor. These measures are likely to be passed in parliament with oppposition support given many of the measures align with Labor policies, but it will be interesting to see Labor’s response to match these.

The long-term tax changes will take effect from July 2024 and will see a reduction in the marginal rate from 32.5% to 30% for those earning between $45,001 and $200,000. Tax changes this far out will inevitably be subject to future changes and election bargaining, and will likely not receive Labor’s support given their opposition to tax cuts for wealthier Australians.

Taxation receipts (% GDP)

Source: Treasury

Infrastructure spending boost

Infrastructure spending for the next ten years has been increased from $75 billion to $100 billion, or around 0.4% of GDP. This is a small increment from the already committed infrastructure spending and a lot of the money is scheduled for the outer years. Some of the bigger projects include the $2 billion fast rail from Geelong to Melbourne, the $3.5 billion Western Sydney Rail, the $1.6 billion M1 Extension in NSW, the $1.5 billion North-South Corridor in SA, and the $800 million Gateway Motorway upgrade in QLD.

Economic outlook is still shaky

While the budget has delivered a surplus, it remains at the mercy of the economic outlook. The Government is assuming GDP growth of 2.25% this financial year, and 2.75% for the next two years. It also assumes the unemployment rate will remain at 5.0% until 2020-21 and that wages growth will pick up to 3.25% in 2020-21. While the labour market remains strong and is likely to continue to improve further, the wages growth assumption seems optimistic.

The Budget also forecasts inflation to return to 2.5% in 2020-21. This also seems overly optimistic and will likely be revised down again given that wages growth has been incredibly modest despite a tightening labour market. Australia’s GDP growth also faces a range of external uncertainties, including a slowdown in our biggest trading partner China, a slowdown in Europe, and geopolitical risks including Brexit and China-US trade tensions. Overall the economic outlook remains subdued.

Implications for the Australian dollar, RBA and financial markets

The RBA left the cash rate unchanged at 1.5% at its April meeting, however the easing bias saw the Australian dollar trade lower. In contrast, the Budget failed to move the dollar as markets had anticipated the surplus and there were no surprises in the budget measures. While income tax cuts and infrastructure spending—as well as other spending on education and health—are supportive of the economy, there is little in the Budget to boost productivity or shift the economic fundamentals. This means the RBA will likely remain in wait-and-see mode before deciding on the next rate move.

Australia holds on to its AAA rating

Australian general government net debt has been increasing since 2010 but is forecast to peak at 19.2% of GDP in 2018-19. The expected return to surplus and improvement in our fiscal position had already seen Standard & Poors lift its outlook for Australian sovereign debt from ‘negative’ to ‘stable’ back in September 2018. With few surprises in this Budget, Australia is likely to maintain its coveted AAA rating, along with only a handful of other countries.

At below 20%, its net debt-to-GDP ratio remains in the middle of the pack compared to other AAA-rated economies, while the average for advanced economies is higher at a 70% ratio. Holding onto the AAA rating means the Australian government can continue borrowing at cheaper interest rates (compared to lower-rated peers), with the rating favourably affecting the state and local governments as well as Australia’s banks, which tend to be rated one or a few notches below the sovereign credit rating.

Net government debt in advanced economies (% GDP)

Source: IMF World Economic Outlook Database, October 2018; Bloomberg

This is an election budget containing few surprises. A return to surplus is undoubtedly welcomed, but the forecast surpluses are slim and vulnerable to the economic outlook. This Budget does not change the economic outlook for Australia, meaning the RBA will remain in wait-and-see mode with an easing bias. While the Budget contains many measures to please the electorate, it remains unclear whether they will be implemented, especially the long-term tax changes. With a federal election looming, it will also be interesting to see the response from Labor, which currently leads the government in the opinion polls.

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

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

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

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

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

April 3, 2019/by Amy Li

News & Insights

Are pockets of value appearing in the market?

In recent years valuations across most asset classes have been sitting in the expensive range. Strong tailwinds from central banks in the form of low interest rates and liquidity support via quantitative easing have largely been responsible for these stretched valuations, while markets have been further fuelled by both strength in the cycle as well as shorter-term positive sentiment.

However, we are currently witnessing a shift in market dynamics as central banks move away from quantitative easing and interest rates gradually move higher from their previous historic lows. Cyclical indicators such as production figures and the output gap are also tapering off and shorter-term sentiment has moved into negative territory. This has resulted in increased volatility in markets and some asset classes retreating from their previous highs.

At the end of 2017 emerging market equities was one of the best performing sectors in the market, with the index (MSCI Emerging Markets TR Index AUD) returning just over 27% for the year. Roll forward one year and the sector was one of the worst performing, with returns of -4.7% as at the end of 2018. The sector has suffered amid concerns of a Chinese slowdown, a strengthening US dollar and other idiosyncratic country-specific issues which have seen large flows out of the sector.

Despite the negative news from a valuation perspective, Lonsec’s proprietary internal rate of return (IRR) model is signalling that the emerging market equities sector is beginning to present value from an absolute as well as asset class relative basis. Our analysis indicates that the valuation support for the sector has continued and the sector now offers a significant premium above developed markets. While risks remain in the sector and the threat of a China slowdown continues to be a topic of debate, in our view the emerging markets sector offers an attractive return premium relative to developed markets, warranting an active tilt to the sector.

Responding to market movements with Dynamic Asset Allocation

Our Dynamic Asset Allocation approach means we can be flexible across asset classes and adjust asset allocation positions for the medium term to navigate market changes. We recently reflected our view of the emerging markets opportunities by making changes to our Multi-Asset and Listed Diversified Managed portfolios and increasing our exposure to the emerging markets sector ahead of developed markets.

March 27, 2019/by Lukasz de Pourbaix

News & Insights

Which fund managers are most exposed to Brexit?

The date for Britain’s departure from the European Union is still very much TBC. Prime Minister May went to Brussels to ask for an extension beyond the 29 March deadline, and assuming a deal is finally agreed to by the House of Commons, Britain will have until 22 May to complete the withdrawal. If a deal doesn’t pass, the cliff-edge is moved back to 12 April.

While the British parliament is adamant that a no-deal scenario must be avoided, a ‘hard Brexit’ remains on the cards so long as no deal is forthcoming. Then again, even if a deal is made, it is difficult to know what the ramifications will be for markets and the economy. Given the event risk this represents, Lonsec has surveyed the global equities universe to create an overview of product exposures for the UK and Europe. The UK represents 6.2% of the MSCI World ex Australia Index and the EU countries ex-UK represent 16.3%. In short, at least one fifth of the index is directly exposed to Brexit.

These exposures presented below represent a point-in-time snapshot (December 2018) and are subject to change as these are actively managed strategies. It is worth noting that any adverse outcomes for fund managers who are over- or under-exposed to the UK and Europe could be largely offset by subsequent currency movements.

Several managers have significant UK and EU exposure

The below chart shows global equity funds with greater than 10% exposure to the UK. For comparative purposes, the reference index’s composition includes 6.2% exposure to the UK.

Global equity fund managers’ European exposure (%)

Global equity fund managers’ European exposure (%)
Source: Lonsec

Value managers tend to have the highest Brexit exposure

The below chart demonstrates the propensity for ‘value’ managers to be overweight UK domiciled securities. Value investors typically target stocks which they deem to be trading at below their intrinsic value and are therefore not representative of the company’s long-term fundamentals. Lonsec posits that this could be reflective of the harsh depreciation that UK securities have experienced during the Brexit fiasco, which on this metric could be looking attractive to ‘value’ orientated investors.

Average UK exposure by sub-sector (%)

Value managers tend to have the highest Brexit exposure
Source: Lonsec

Location of fund manager’s HQ can create an investment bias

The below chart illustrates the proclivity for global equity fund managers domiciled in the UK to be overweight domestic equities. This may be reflective of a home bias which is common for fund managers due to the greater familiarity and understanding of their domestic market.

Office locations of managers with >10% UK exposure

10% UK exposure” width=”561″ height=”301″ class=”alignnone size-full wp-image-5666″ style=”margin: 0;” />

Source: Lonsec

Protecting against Brexit chaos

Given the significance of the European and UK markets, the Brexit issue is not one that investors can afford to completely ignore. The challenge, however, is not in the evaluation of the risks associated with different outcomes but in managing the uncertainty involved in determining both the market’s reaction to developments and the short- and medium-term economic impacts. For wealth managers who recommend global exposure for their clients, this creates an extra layer of complexity in determining appropriate investment products and asset allocations.

The Brexit issue, along with other geo-political risks, are actively considered by Lonsec’s investment committees and feed into our model portfolio weights. Addressing these challenges requires a diverse mix of expertise, combining macro-economic, portfolio management, and research capabilities. For those interested in the broader topic of managing uncertainty in a portfolio context, our upcoming Lonsec Symposium is a must-attend event that will draw on the knowledge of Australia’s leading strategists and retirement experts.

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

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

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

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

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

March 25, 2019/by Rui Fernandes

News & Insights

The cost of ‘sustainable’ super may not match performance

Super members searching for a ‘sustainable’ investment fund are exposed to the same challenges as those in more traditional funds with the sector delivering a wide range of performance outcomes and charging a range of fees, according to new research on the sector by superannuation research house SuperRatings.

The SuperRatings research reveals that the median performance of ‘sustainable’ investment funds is lower than the median performance of the SuperRatings SR50 Balanced (60-76) Index, comprised of traditional balanced super funds. Furthermore, the ‘sustainable’ funds have higher median fees. The combination of the two means a sizeable number of ‘sustainable’ funds produce sub-optimal returns at relatively high fee levels. ‘Sustainable’ funds include funds that select their investments based on environmental, social and governance (ESG) factors.

However, there are a number of ‘sustainable’ funds that outperform the market, while some also have lower fees than many Balanced options. The chart below reveals that the top quartile of sustainable funds charges a total fee of $519 or less per annum on a balance of $50,000, compared to the median SR50 Balanced (60-76) Index fee of $606. Looking at returns, the top quartile of ‘sustainable’ funds has delivered a 10-year return of 8.9% or more per annum, which is in line with the SR50 Balanced (60-76) Index.

Sustainable super fund fees and returns

Source: SuperRatings

The below table shows the top returning super funds that are classified as sustainable due to the fund’s incorporation of ESG and socially responsible investing criteria. HESTA’s Eco Pool balanced option has delivered the top return over 10 years of 11.1% per annum, which is considerably higher than the SR50 Balanced (60-76) Index return of 8.9% per annum.

Top performing sustainable super funds

Fund	Total fee on $50k balance	10-year return (% p.a.)
HESTA – Eco Pool	$670	11.1%
VicSuper FutureSaver – Socially Conscious Option	$463	10.3%
AustralianSuper – Socially Aware	$448	10.0%
WA Super Super Solutions Pers – Sustainable Future	$573	9.5%
UniSuper Accum (1) – Sustainable Balanced	$281	9.3%
Sustainable Balanced option median	$662	8.5%
SR50 Balanced (60-76) Index median	$606	8.9%

Returns over 10 years to 28 February 2019
Source: SuperRatings

There are a range of factors that must be taken into account when assessing the extent to which ESG factors affect a fund’s investment decisions, as well as the cost involved. For example, some funds may apply a simple screen on certain industries, while others may conduct more in-depth analysis on individual businesses, which may justify a higher fee. This makes it difficult to provide a definitive ranking of sustainable fund performance.

When considering sustainable alternatives, it is important to look at each individual fund’s mandate, their process for investing sustainably, and of course the industries and businesses they do and do not invest in,” said Mr Rappell.

“When we speak to financial advisers, they tell us that ESG factors are becoming more and more important for their clients. Advisers need the capability to examine and compare sustainable funds to ensure that the product is the best fit for their client both in terms of their risk and return preferences, as well as their social and environmental values.”

March 25, 2019/by Kirby Rappell

News & Insights

Alternative assets saved us during the GFC—can they save us now?

Over the past few months Lonsec has seen a noticeable increase in the number of fund managers seeking to bring alternative products to the market. This trend has been largely driven by market factors, with investors anticipating a period of increased volatility, lower returns, and a challenging valuation environment for key asset classes, which have remained at fair to expensive levels for a number of years.

The ability of alternative asset managers to provide diversification to traditional asset classes, as well as achieve positive absolute returns during market downturns, is an attractive proposition, especially for those who believe the market has reached a turning point. Fund managers have been keen to offer their own solutions, ranging from market neutral and risk premia strategies, to global macro and liquid alternatives.

The appeal of alternatives is due in no small part to their track record during the global financial crisis, which saw strategies like managed futures deliver positive returns even as market panic reached its crescendo. As the chart below shows, global managed futures funds like the Winton Global Alpha Fund outperformed global shares, which remained beaten down for around four years after the GFC.

Managed futures outperformed following the GFC

Source: Lonsec

The Winton Global Alpha Fund, which is a managed futures strategy for example generated 25.6% for the year ending 2008 compared to global equities which generated -26% (MSCI AC World ex Australia TR Index AUD). However, as the chart also shows, extrapolating such exceptional performance into the future is dangerous and can lead to a mismatch between expectations and reality.

Diversification does not mean downside protection

While certain alternative strategies performed exceptionally well during the GFC, most financial advisers will tell you that recent performance has been mixed at best. The chart below shows rolling three-year returns for a range of alternative strategies, including multi-asset strategies (Invesco and Aberdeen) and managed futures (AQR and Winton).

Performance has been divergent, highlighting the heterogenous nature of alternative assets even among similar strategies. Some alternatives products have generated negative returns during periods when equity markets were relatively strong and have also struggled to protect capital in down markets.

Managed futures have struggled in recent years

Source: Lonsec

This brings us to the major issue investors must understand when thinking about alternatives: diversification is not downside protection. Alternative assets may provide protection in certain market environments, and certainly there have been periods when this has been the case, with the GFC being the most powerful case study. But when markets are volatile and there is no clear trend, investors should not expect alternatives to rescue their portfolio.

Take managed futures as an example. These strategies seek to identify price trends across a range of asset classes (equities, bonds, commodities and currencies), using futures contracts to take long and short positions. A key contributor to the underperformance of these strategies in recent periods has been the lack of persistent trends within these asset classes. In the case of multi-asset strategies, the lack of market volatility (at least until very recently) has made it challenging to generate alpha through relative value trades.

A better way to incorporate alternatives in your portfolio

Despite some common misconceptions, alternatives can be an invaluable part of your portfolio if you understand what they can and cannot do. Indeed, alternatives are a mainstay of many institutional portfolios, as well as major not-for-profits like some of the big US college endowment funds. We don’t have to look far afield to Australia’s own sovereign wealth fund, which has significant exposure to alternative assets. As at the end of 2018, 14.6% of the Future Fund’s assets were invested alternatives, which does not even include the allocations to private equity, property and infrastructure.

Future Fund asset allocation

As at December 2018

Source: Future Fund, Lonsec

Alternative assets provide a different source of returns to traditional assets, which can be beneficial to portfolios where there is heightened uncertainty and a risk of markets moving up and down. They may offer downside protection in certain environments, but they should not be positioned within a portfolio as an ‘insurance policy’ against down markets. Considering the market outlook over the next 12 months, we believe that markets will be characterised by periods of heightened volatility.

Central bank policy will continue to be a major driver of sentiment, and market reaction to themes such as the US-China trade war and Brexit will continue to contribute to volatility. If this is the case, then it will likely continue to be a challenging period for managed futures. Lonsec’s preference is to allocate to diversified multi-asset strategies that are in a position to take advantage of the increased volatility.

However, given the heavy reliance on manager skill in the sector, manager selection becomes a very important factor, and understanding exactly what individual strategies bring to a portfolio and how they may perform in different market environments is critical. This is the foundation of Lonsec’s research-driven approach to portfolio construction. Alternatives can be valuable source of alpha and diversification, but choosing the right products means understanding which individual strategies are likely to achieve your portfolio’s objectives.

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

March 25, 2019/by Lukasz de Pourbaix

News & Insights

How reporting season shaped the market

The Australian equity market reacted positively to the February reporting season, providing a relief rally after beating the market’s pessimistic expectations. But while results were not as weak as feared, it has generally been a tough environment for earnings, with more company downgrades than upgrades. In absolute terms, earnings expectations for FY19 have been tracking lower and overall market earnings are now expected to grow at around 4% in FY19, down from 7% in FY18.

Positive results for the Resources sector

Results from the Resources sector were the highlight, with earnings expected to grow by 13% in FY19, driven by ongoing strength in commodity prices and the strong balance sheets in the sector. The short-term outlook remains positive for the sector if spot prices remain around current levels, which could lead to material earnings upgrades for the likes of BHP and RIO over the next 12 months. This is in contrast to the Industrials and Financials sectors where earnings growth expectations remain in a downtrend, which is expected to continue through FY20.

Companies are still paying dividends

We saw a number of companies (including BHP, RIO, WES, WOW, FMG, CTX and MFG) lifting their dividend payout ratios and announcing special dividends or share buyback plans. This was driven in part by management looking to return excess capital and franking credits to shareholders ahead of potential policy changes following this year’s federal election.

Looking ahead at 2019

The ongoing slowdown in the housing market, policy uncertainty ahead of the federal election, and the outcome of the US-China trade negotiations remain the key headwinds for equity markets over 2019. These factors are increasingly reflected in outlook commentaries across our investment universe. In Lonsec’s view, the recent contraction in the growth rate of corporate profits will need to be reversed to justify current valuation levels, particularly given the momentum of the market rally to date during this calendar year.

How has earnings season affected Lonsec’s portfolios?

Looking specifically at the impact to our portfolios, the stocks in the Lonsec SMA—Core portfolio had a relatively strong reporting period in February, with CSL, CPU, WPL, QUB and REA delivering strong double-digit earnings growth. Meanwhile CBA, RHC, COL, and CGF reported broadly flat or negative earnings growth over the half. Looking ahead, earnings across the portfolio are expected to grow by around 5% over FY19, driven by the overweight position in Healthcare and underweight exposures to Financials and Materials.

This document has been prepared 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 Australian Financial Services Licence (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. We can be contacted on 1300 826 395, by email to info@lonsec.com.au, or by writing to L7, 90 Collins Street, Melbourne, Victoria, 3000. You can also visit our website at www.lonsec.com.au.

This document has been prepared for the exclusive use by financial advisers, institutions and wholesale clients and is not intended for use by members of the public or retail customers and should not be relied upon by any other person.

This document contains general information only and does not take into account your individual objectives, taxation position, financial situation or needs. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. The views contained in this document are those of the author and are based on information known at the time of publication. That information may change. LIS assumes no obligation to update this document following publication. You should not rely on this document in making an investment decision about any security, but should make your own independent enquiries.

LIS is authorised under its AFSL to provide financial product advice, but is not authorised to issue financial products. Investors wishing to invest in Lonsec managed portfolios may only do so via another licensed product issuer. A Product Disclosure Statement (PDS) or Investor Directed Portfolios Services (IDPS) Guide is available from the relevant product issuer for any Lonsec portfolio referred to in this document. You should read the PDS or IDPS Guide and consider whether a product is appropriate for you before making a decision to invest. If you invest in a Lonsec portfolio, Lonsec may receive fees in relation to that investment. Investments in the portfolios managed by Lonsec are subject to investment risks including possible delays in repayment and loss of income and principal invested. Neither Lonsec Research, nor any other member of the Lonsec Group, guarantee the return of capital or the performance of any of the portfolios.

LIS has taken all due care in the preparation of this document. To the maximum extent permitted by law, Lonsec Group, its related bodies corporate, directors or employees make no representations or warranties as to the accuracy or completeness of this document including, without limitation, any forecasts and disclaim all liability for any loss or damage of any kind (whether foreseeable or not) that may arise from any person acting on any statements contained in this document. Past performance is not a reliable indicator of future performance. Future returns may be affected by a range of factors including economic and market influences.

Copyright of this document is owned by Lonsec. You may only reproduce, circulate and use this document (or any part of it) with the consent of Lonsec.

March 22, 2019/by Danial Moradi

News & Insights

Market hopes are still ahead of the Fed

The market made its view clear at the end of last year: no more rate hikes. As the US Fed threw its tightening rhetoric into reverse, markets dramatically shifted their expectations for the next interest rate move, with a cut to the funds rate firming as a distinct possibility. As the chart below shows, the probability of a rate cut based on the pricing of December 2019 Fed futures rose to 38% in March, while the probability of a rate increase is effectively zero.

Probability of a Fed funds rate move (December 2019 meeting)

Source: Bloomberg, CME, Lonsec

All that was left was for markets to see if the Fed’s FOMC members had arrived at the party on time. This week’s meeting coincided with the release of the Fed’s updated growth and inflation forecasts, as well the notorious ‘dot plot’, which indicated where individual voting members believe the target rate should move to based on current economic data and their view of monetary policy. As expected, members’ views have changed significantly compared to the last dot plot released in December 2018, as the chart below shows.

Fed dot plot versus previous quarter

Source: Lonsec, FOMC

In particular, the majority of members believe the funds rate should remain where it is at a target range of 2.25–2.50% for the rest of 2019, compared to the previous quarter when only two members saw rates staying where they were. Looking forward to 2020, the dot plot shows the median view is for rates to again remain on hold, although most see rates rising by at least 25 basis points. Even out to 2021, there is a firmer bias towards either no change or a more modest rise.

Interestingly, though, there is nothing pointing to a rate cut, which implies there is still a disconnect between what the Fed is thinking and what markets are hoping for. Over the long run nothing much has changed, although as a famous economist once said, in the long run we’re all dead.

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

March 21, 2019/by Lukasz de Pourbaix

News & Insights

Fund Manager of the Year Nominees Announced

Nominees for the Lonsec Money Management Fund Manager of the Year have been announced, with the winners to be announced at the 2019 Fund Manager of the Year Awards on 16 May. Congratulations to all who have received a nomination! A full list of nominees is available below:

Australian Large Cap Equities
Platypus Australian Equities Fund
AB Managed Volatility Equities Fund
Bennelong Australian Equities Fund

Australian Small Cap Equities
Fidelity Future Leaders Fund
Eley Griffiths Group Emerging Companies Fund
Perennial Value Microcap Opportunities Trust

Long/Short Equities
Solaris Australian Equity Long Short Fund
Antipodes Global Fund
Platinum International Healthcare Fund

Responsible Investments
Alphinity Sustainable Share Fund
Pengana WHEB Sustainable Impact Fund
Australian Ethical Australian Shares Fund (Wholesale)

Global Equities
Generation Wholesale Global Share Fund
Ironbark Royal London Concentrated Global Share Fund
AB Global Equities Fund

Global Emerging Market Equities
Fidelity China Fund
Colonial First State Asian Growth Fund
Robeco Emerging Conservative Equity Fund

Australian Property Securities
Pendal Property Securities Fund
Legg Mason Martin Currie Real Income Fund
Charter Hall Maxim Property Securities Fund

Global Property Securities
Principal Global Property Securities Fund
SGH LaSalle Global Property-Rich Fund
Quay Global Real Estate Fund

Direct and Hybrid Property
Aust Unity Retail Property Fund
Aust Unity Diversified Property Fund
Charter Hall Direct Office Fund

Infrastructure Securities
Colonial First State Global Listed Infrastructure Securities Fund
Magellan Infrastructure Fund
RARE Emerging Markets Fund

Australian Fixed Income
Legg Mason Western Asset Australian Bond Fund
Macquarie Australian Fixed Interest Fund
Janus Henderson Australian Fixed Interest Fund

Global Fixed Income
Colchester Global Government Bond Fund
PIMCO Global Bond Fund
Legg Mason Western Asset Global Bond Fund

Alternative Strategies
P/E Global FX Alpha Fund
Winton Global Alpha Fund
Partners Group Global Value Fund (AUD)

Multi Asset
Cbus Industry Growth
BMO Pyrford Global Absolute Return Fund
MLC Wholesale Inflation Plus Moderate Portfolio

Retirement and Income
Pendal Monthly Income Plus Fund
Legg Mason Martin Currie Real Income Fund Class A Units
Challenger Annuities

Emerging Manager
Lennox Australian Small Companies Fund
Daintree Core Income Trust
Quay Global Real Estate Fund

Listed Investment Companies & Trusts
Australian Foundation Investment Company Limited
Mirrabooka Investments Limited
MCP Master Income Trust

Separately Managed Accounts
Quest Australian Equities Concentrated Portfolio
iShares Enhanced Strategic Growth
AB Concentrated Global Growth Equities Portfolio

ETF Provider of the Year
BetaShares
Vanguard
Van Eck

March 7, 2019/by Libby Newman

News & Insights

Importance of diversification in times of uncertainty

February was another positive month for equity markets as they continued their upward trajectory, boosted by the Federal Reserve’s decision to place rate hikes on hold.
This article is intended for licensed financial advisers only and is not intended for use by retail investors.

February was another positive month for equity markets as they continued their upward trajectory, boosted by the Federal Reserve’s decision to place rate hikes on hold. But how long can markets remain placated? Despite the reprieve, key market risks remain, including a reduction in liquidity as central banks cease their quantitative easing programs, and tighter credit conditions, which have had a significant impact on those parts of the market supported by cheap debt and ample liquidity.

In uncertain market environments such as the one we find ourselves in, diversification becomes ever more critical to managing portfolio risk. Diversification across asset classes is key, but diversification across different investment strategies – such as absolute return and long-short equity strategies – is also essential.

There has been a lot of debate around whether bonds, which are traditionally seen as diversifiers to equities, can continue to deliver meaningful diversification benefits given the relatively low-yield world we are in. The chart below shows the rolling one-year correlation between global equities and global bonds. It shows that the correlation is not static: there are periods of negative correlation but also periods of significant positive correlation. Equity and bond correlations are influenced by a variety of factors. Rapid changes in real rates and inflation have tended to result in a positive correlation, an example being the ‘taper tantrum’ in 2013, which saw a surge in Treasury yields and a sell-off in equity markets. Conversely, growth shocks have tended to result in a negative correlation between equities and bonds as investors generally seek safe haven assets such as treasuries.

Equities and bonds are not always negatively correlated

Source: Lonsec, FE
Global equity returns based on the MSCI AC World ex Australia TR Index AUD. Global bond returns based on the Bloomberg Barclays Global Aggregate TR Index AUD Hedged.

So, do bonds still have a role to play in portfolio diversification? In our view bonds continue to play a key diversification role despite the low yield environment, and indeed we have seen bonds act as a diversifier to equities in recent periods where there has been a flight to safety. However, it is important to recognise that correlations between asset classes can change, and under certain conditions they may become correlated when you don’t want them to. This is why Lonsec’s managed portfolios are constructed to provide not only asset class diversification but diversification across a range of investment manager strategies and styles, which will perform differently as market conditions change. Given the current market uncertainty, this is an essential means of managing portfolio risks and delivering superior investment performance through the market cycle.

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

March 6, 2019/by Lukasz de Pourbaix