Archive for category: News & Insights

By: Brendan Tully, Managed Account Consultant

Recently, there has been much commentary on rising interest rates and inflation and the impacts on investment returns and your clients’ outcomes. There have been very few sectors which have produced positive returns in the last 12 months and so the impacts have been felt across the range of investor profiles. No one has escaped unscathed.

It can be challenging in these conditions to feel confident that your advice is delivering value to your clients. While we like to think that we, and our clients, make rational decisions when it comes to investments, this may not be the case due to information, cognitive and time limitations. Nobel prize winning political scientist Herbert Simon proposed the concept of ‘bounded rationality’-as humans we make partly irrational decisions due to cognitive, information and time limitations. There is an abundance of information and commentary, some of it consistent, some contrary and markets and the macro environment seem to move more quickly than ever. The speed of recent inflation increases, and corresponding interest rate movements, have caught many by surprise.

With this as the backdrop, it is important to consider the context of the advised client and the role that advisors play in a service that is now of more value than ever.

Below are some possible conversations that are occurring with your clients. How do you think through and respond to these rationally?

Do I move funds to cash or dilute my current risk tolerance?

It’s not rational that you can time the markets or grasp how much downside the market has already factored in. Are we at the bottom of the cycle? Can longer term compounding inflation impacts be met by changing to a more conservative asset allocation?

During the GFC in 2008, clients moving to cash locked in an average loss of 8.5%.[1] These loses were compounded as many of these clients stayed in cash and missed the corresponding market rebound. Vanguard’s research[2] indicated that in a US diversified portfolio of 50% equities and 50% bonds, not sold down, saw an average return of 7% between pre GFC peaks and the proceeding 11 years. Understanding the long term impact of investment decisions is one of the key values of advice.

Your advice value?

Clients invest for a purpose which your advice and strategy is designed to deliver. Your value in assisting clients stay true to that course and not falling into an irrational decision cycle should not be underestimated. Has the strategy changed, are the client’s goals still relevant? Has the clients risk appetite changed, if so, is this an elastic response driven by current state or a deeper permanent shift?

Like advisors, my GP is a professional that has my long-term interests in mind, in their case my health. I am not convinced they would call my decision to reduce my prescription by half or my decision to cease all medication for an extended period a rational choice. It would be a decision not without consequence for my long-term health.

The long game.

From a client and business risk perspective is it appropriate to move in and out of client strategy in the hope that we are finding market highs and lows? There will always be market troughs and peaks and many factors outside of your control. Is it rational to make tactical moves at every market shift? In the long game your controllable’s become the client, education, communication, engagement and reaffirmation of objectives and goals and your strategy.

The importance of clarity and context

How do we recognise and replace irrational decisions with rational ones?

One solution is a considered, clear, and articulated Investment philosophy. Your Investment Philosophy is a reference point that reminds you (and your clients) of your fundamental investment beliefs. These are rational beliefs that in times of stress can be replaced with irrational ones and provides clarity when you need it most.

Lonsec has a clear investment philosophy, and every decision is made with these principles in mind. It is the guiding reference that helps provide stability, particularly in times of market upheaval. We have stayed true to these principles because it is what our clients expect, and we know it is the correct approach when playing the long game. As Roy E. Disney said, “when your values are clear to you, making decisions becomes easier.”

Be clear on your value and remind clients of this value in every conversation and decision made. Be clear in your investment philosophy, be great at revisiting goals, be good at assisting your clients in staying the course and have confidence in the resilience of your advice. Effective strategic advice creates immediate and long-lasting client value. Its positive impact will linger long after the market cycle has shifted.

[1] ‘Should you switch to cash when markets are volatile?’ Aware Super October 2019

[2] ‘The global financial crisis: Behind us but far from over’ Vanguard September 2018

Disclaimer:

Brendan Tully is a Managed Account Consultant with Lonsec Group.  This information is for personal, non-commercial purposes only and is not intended to be financial product advice.

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.

For the past 10 years investors have become accustomed to double digit returns from equities and low market volatility. As interest rates normalise we are heading into a different market environment characterised by higher volatility and greater dispersion in returns between stocks. For some investors the last 10 years’ market environment is all they have known, while for others what markets were like prior the global financial crisis of 2008 is a distant memory.

We would argue that the past 10 years which was characterised by record low interest rates and ample liquidity, was not a normal market environment. In fact, it was an anomaly resulting from extreme unconventional monetary policy settings aimed at avoiding a deep recession or a global depression following the breakdown in financial systems in 2008. As central banks sailed down the path of quantitative easing (QE), at the back of their minds they were scratching their heads as to what will be their exit strategy from QE. Roll forward to today and inflation has given central banks their exit strategy, with key central banks raising interest rates and tapering their respective QE programs in order to stem demand and dampen inflation.

The move towards higher interest rates is a rest for the global economy and markets. Debt has become more expensive and companies which existed due to readily available cheap debt are disappearing or at a minimum being repriced aggressively. In this environment we are likely to see the strong get stronger and an increase in merger and acquisition activity as cashed up companies look for opportunities to grow their market share by acquiring companies with weaker balance sheets.

From a portfolio perspective, in this period of transition the traditional 60/40 portfolio has suffered as both equities and bonds have repriced as interest rates and bond yields have risen. So, does this mean that the traditional ‘balanced’ portfolio is dead? Our view is that the transition to higher interest rates will be painful however that as we reset to a more ‘normal’ market environment a ‘balanced’ style portfolio made up of equities, bonds and other assets such as alternatives will come back into vogue. In recent years a strategy of simply having an overweight to equities has been a winning strategy. However, we expect greater market volatility will make investing in equities less clear-cut and investors will need to be more discerning as to the companies they hold. Furthermore, the ‘unsexy’ world of bonds will become more interesting as bond yields rise and the relative attractiveness of bonds to equities increases.

We believe that we are heading back to markets of old where investors should expect single digit equity returns over the long term and higher levels of market volatility. In terms of total portfolio returns, we expect that diversification will become more critical and bonds will play a greater role in contributing to portfolio returns in the future.

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.