Managed Accounts Archives

A (corporate) bond renaissance

After a decade of record-low bond yields, fixed income has been making a comeback this year. In Australia, when advisers and investors think of fixed income, they mostly think of term deposits and government bonds, but corporate bonds also make up a significant portion of the global bond market. The global bond market is massive – bigger than the global share market – with different grades of issuers, companies, terms, and structures.

Bond fundamentals

Before we look at the outlook for the corporate bond market, here are some bond fundamentals for you and your clients:

Bonds are credit instruments – companies and governments issue bonds as a way of raising money, borrowing funds from investors in the form of bonds.
Bonds are usually issued for a fixed term – between one and thirty years. Maturity is the term for which the bond is issued.
When you purchase a bond, the bond issuer is legally obliged to pay you regular interest, referred to as coupons. Coupons are usually set at a fixed rate, paid to the bond holder at regular intervals. This is why they are also called fixed income.
Bonds are issued with a face value that is to be repaid to the bondholder at maturity. The full face value is referred to as Par and is usually $100.
As interest rates go up, bond prices decline. This is because interest rates are used to discount the bond cash flows to arrive at the bond’s price. So, if the denominator goes up and the coupon which is the numerator remains fixed, the prices will decline.
Duration and Maturity are not the same thing. When we talk about Duration, we talk about the sensitivity of the bond prices to interest rates. Generally, bonds with long maturities and low coupons have the longest durations. These bonds are more sensitive to a change in market interest rates and thus are more volatile in a changing rate environment.
Corporate Bonds carry a rating from one of three big ratings agencies – S&P Global, Moody’s, and Fitch. Investment-grade bonds (with a rating of BBB-/Baa3 and above) have relatively lower risk and lower returns as they have a stronger payment capacity compared to High Yield or below-Investment grade bonds.
It is important to remember that, unlike government bonds, corporate bonds do not carry the guarantee of a government and therefore investors’ money is at risk. However, corporate bonds have a lower risk than shares in the same company as they sit higher on the capital preservation ladder. This means that if your bond issuer becomes insolvent, you will have priority over hybrid and equity investors when the proceeds of asset sales are applied.

Outlook for the corporate bond market

We see two major factors impacting the short to mid-term outlook for corporate bonds – ongoing stress from higher interest rates and the cost of refinancing.

Ongoing stress from higher interest rates

Central banks are close to the end of their current hiking cycle but this “higher for longer” mantra may be a cause of ongoing stress for some corporate bonds. While in most cases, a pause in rate rises is good for risk assets with an initial rally as they have a stronger payment capacity, this time, the current economic landscape is not conducive to a sustained rally.

We are faced with credit tightening, banking client concerns, sticky inflation, and yield curves that have flattened locally and deeply inverted in the USA. An inverted yield curve is unusual and does not happen often which means that the yield on shorter maturity bonds is higher than longer maturity bonds.

In addition, lower-quality corporate bond issuers such as high-yield corporate bonds are at a higher risk of default because higher interest rates will mean they will need operational revenues and minimal cost increases in order to cover interest costs. With corporate debt maturities coming up within the next year, many of these issuers are going to find it difficult to roll over or even refinance their debt obligations.

Cost of refinancing

The bond maturity wall for US Corporate Bonds has been pushed out by several years, especially for high-yield bonds, making refinancing manageable for now. However, if the US Federal Reserve keeps rates higher for an extended period of time, there is a lot of debt that will need to be refinanced at higher levels than most of these companies have ever seen, or at least experienced in decades. It is worth noting that Australian companies do issue a lot of debt in the US market. This may have an effect here whereby the cost of refinancing may see Australian corporates return to Australia to refinance their debt thereby pushing up domestic corporate credit yields.

USD bond maturity wall

Allied to the bonds maturity wall, the global tightening of bank lending standards will have a knock-on effect for lower grade bonds wanting to refinance. We expect lending standards to remain tight into the next year so if these lower-grade borrowers can’t raise funds in the corporate bond market to refinance their bonds, turning to banks will not be much of an option.

Major US investment banks expect High Yield defaults to revert to the long-run average. of around 4% to 5%, lower than previous crisis/recession levels and higher than current levels of less than around 1%. This may also cause, a longer period of defaults, particularly if the US Federal Reserve decided to hold rates higher for longer.

In summary, the outlook for corporate bonds in a higher for longer rate cycle and the credit-tightening environment now has elevated risks but you are now being compensated with much higher running yields. For example, in a two-year US high-yield corporate bond the yield is now approximately 8.88%*, made up of 4.98% government bond yield plus 3.90% spread. The long-term high yield spread average is 5.4% and for recessionary periods 8% above government bond yields. Given current corporate credit fundamentals, spreads are expected to at least move back toward their historical long-term average.

*as at 6 July 2023

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 © 2023 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.

July 12, 2023/by Ron Mehmet

Insights from our CIO: Cloudy skies and left tails

Inflation is likely to ease substantially in the coming months as base effects roll off and tighter credit conditions hit consumption and aggregate demand. Services inflation, rent rises and wage pressures however persist, meaning inflation could remain sticky and above central bank target ranges for some time. Financial conditions are therefore likely to remain tight as central banks keep a foot on the brake while managing pockets of stress via targeted liquidity support. Domestically, a large number of home borrowers will roll off ultra-low fixed rate home loans onto significantly higher mortgage rates in the coming months. This means there is more tightening to come for the Australian household sector irrespective of how much higher the RBA takes the cash rate.

Consumer confidence remains weak both here and in the US, and with the cash buffers built up during the pandemic largely eroded, signs that economic growth has begun to slow have emerged. US GDP came in well below expectations at +1.1% (annualised) for the first quarter.

The ongoing debate on raising the US debt ceiling, while closer to resolution at the time of writing, is not yet a done deal and represents additional left-tail risk to an already clouded outlook. Our base case is that this issue will be resolved, allowing the US government to meet its financial obligations. However, the combative nature of the current US political arena means a stalemate cannot be ruled out entirely. Failure to reach agreement would have severe ramifications across equity, bond and currency markets.

On a positive note, valuations are looking more appealing across a range of asset classes. Australian equity valuations are almost looking as attractive as they were during the peak stresses of the pandemic on a P/E basis. Tight financial conditions coupled with a weakening cyclical environment lead us to believe that the second half of 2023 continues to present some headwinds for risk assets notwithstanding the more attractive valuations we are seeing.

We remain cautious, and close to benchmark with a slight underweight in global equities. In the current environment, a focus on quality investments, liquidity, active portfolio management, diversification and risk control become even more critical for portfolio constructors. We continue to monitor developments regarding inflation, monetary policy and the global economy, and will adjust our portfolios, as necessary, to navigate through the challenges and opportunities ahead.

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 © 2023 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.

May 30, 2023/by Deanne Baker

Managed Accounts, News & Insights

Insights from our CIO: Caution amidst the calm

An eerie calm has fallen over markets in recent weeks, as the banking stresses of early March fade into the background. Market measures of risk, such as the VIX, have retreated, while global equity markets have rebounded strongly, buoyed by a resurgence in technology stocks.

We remain somewhat cautious. We have seen a rapid shift from record-low interest rates and abundant liquidity to an environment of higher interest rates, central banks shrinking their bloated balance sheets and a general tightening in lending standards. These tighter liquidity conditions will continue to impact the economy and markets over the course of the year.

From a macro perspective, inflation has peaked but is proving sticky. While goods inflation has come down as the covid-era shortages have largely eased, services inflation and rising wage costs are complicating issues. We think central banks may have more work to do to really drive those inflation numbers down. A lengthy period of sub-par growth may be required to tame inflation, meaning a pause is more likely than an outright pivot, barring any further financial instability.

Growth has been surprisingly resilient to date thanks in part to a resilient consumer, tight labour markets, a milder European winter than expected and the China re-opening story. However, our base case remains that growth will slow as the year progresses, as the lagged effect of rising interest rates and cost of living pressures make their way through the economy.

In our view, none of these factors point to a great environment for risk assets despite the more attractive valuations we are seeing. We remain close to benchmark with a slight underweight in global equities while remaining alert to risks and opportunities as they emerge.

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 © 2023 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.

May 1, 2023/by Deanne Baker

Managed Accounts, Media releases

Media release: Lonsec announces key executive appointments

Lonsec Holdings today announces key strategic appointments following the acquisition of Implemented Portfolios Limited in August 2022. Bruce Hawkins joins in the newly created role of Chief Operating Officer, Naomi Christopher is appointed a Head of Marketing and PR across the Lonsec Group and Steve Garth is appointed as Lonsec Product Investment Oversight Committee Chair.

Bruce has over 30 years’ experience in financial services with an extensive track record across investment platforms, superannuation and life insurance. Bruce has held a number of senior positions spanning finance, operations and strategic development with companies including NAB Wealth, Aviva Australia and Xplore Wealth Limited. Prior to joining Lonsec, Bruce was Group Executive – Xplore Wealth at HUB24 Limited leading the Xplore business whilst assisting in its integration into the broader HUB24 business.

Naomi Christopher was most recently National Manager – Marketing and Communications at Implemented Portfolios (IPL) and joined Lonsec Holdings following the acquisition of IPL. Her career in financial services spans 13 years, where she has worked in similar marketing and communications related roles at other financial services businesses such as Midwinter Financial Services (a Bravura owned company) and SQM Research, the funds research and ratings house.

Lonsec CEO and Managing Director of IPL, Mike Wright says “Over the past six months, both the Lonsec and IPL teams have worked tirelessly to understand each business and client groups. I am excited about the growth plans we have for the coming year and the integration of our services to all clients. Bruce has led this integration project and I am delighted that he is joining in a permanent capacity.”

“I am equally delighted that Naomi is taking on the broader Head of Marketing and PR role across the group as she built IPL’s formidable marketing presence” continues Mike.

As part of the integration of the businesses, key Lonsec portfolio managers have been appointed to the IPL Asset Allocation and Investment Committee (AAIC), which is responsible for the investment decisions relating to the IPL portfolios. Lukasz de Pourbaix joined long-standing independent members of the committee post the acquisition of the business by Lonsec in 2022 and will be joined by Nick Field, Associate Portfolio Manager for Lonsec’s listed suite of portfolios. Nick has extensive portfolio management and investment research experience having held various investment research and portfolio management roles for the past 20 years. Nick will provide additional insights and rigour to the AAIC governance process.

Finally, Lonsec has also bolstered its internal portfolio governance framework with the establishment of a group Product Investment Oversight Committee (PIOC). The PIOC is a sub board committee to the Lonsec Board and is responsible for ensuring that the IPL and Lonsec portfolios have the necessary personnel, processes and risk management frameworks in place. Lonsec has appointed Dr Steve Garth as independent chair of the PIOC. Dr Garth brings to the PIOC two decades of experience in key Financial Services roles, including a broad career managing Australian and Global portfolios.

Release ends

For more information, please contact:

Nicci Chaplin
Senior Communications Manager
nicci.chaplin@lonsec.com.au
0402 317 746

February 7, 2023/by Nicci Chaplin

Managed Accounts, News & Insights

A time to reset back to ‘normal’

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.

November 2, 2022/by Lukasz de Pourbaix

Managed Accounts, News & Insights

False dawn?

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

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

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

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

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

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

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

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

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

August 30, 2022/by Lukasz de Pourbaix

Managed Accounts, Media releases

Lonsec shows continued commitment to helping advisers

Lonsec continues to drive investment efficiencies for advisers by expanding its support of Managed Accounts on the Netwealth platform. Lonsec has added to Netwealth’s Global Specialist Series (GSS) Managed Account range, by launching Lonsec GSS Index Plus.

The portfolios are built around core Netwealth GSS passive strategies, and a range of active satellite funds that leverage Lonsec’s extensive research capabilities and backed by its rigorous governance and review process.

‘These new managed portfolios give investors and financial advisers access to investment solutions supported by one of Australia’s largest investment consulting and research teams,’ said Lonsec CEO Mike Wright.

‘Being able to access our portfolio construction and investment selection expertise can help advisers and investors to make better investment decisions and we’re proud to partner with Netwealth to bring these portfolios to the market,’ continued Wright

Lonsec GSS Index Plus offers four portfolios: Moderate, Balanced, Growth and High Growth. Each is designed to achieve different risk and investment objectives over various timeframes. They are constructed using a range of growth and defensive assets such as Australian and global equities, property, fixed interest, and cash.

‘We were excited to develop this suite of portfolios with Netwealth as they offer a cost competitive solution for investors looking for a quality investment providing capital growth and income over the medium to long term. The portfolios also incorporate dynamic asset allocation and use a core/satellite approach to investment selection,’ said Lonsec CIO Lukasz de Pourbaix.

Matt Heine, Netwealth Joint Managing Director said ‘Lonsec bring a wealth of investment research and portfolio construction expertise to this partnership, and we are sure that these portfolios will prove popular with our advisers and investors.’

Lonsec is one of Australia’s fastest growing Managed Accounts portfolio managers, with monthly net inflows recently exceeding $250m. Lonsec also recently acquired the specialist Managed Discretionary Account provider, Implemented Portfolios Limited, who has a deep history and commitment to helping advisers meet the needs of their clients.

Release ends

For more information, please contact:

Rob Hardy
Rob.Hardy@lonsec.com.au

August 17, 2022/by Rob Hardy

Managed Accounts, News & Insights

Market Update – May 2022

In this video, Lukasz de Pourbaix, Executive Director and CIO of Lonsec Investment Solutions provides an update on what’s been happening in the markets, with market volatility and inflation. Lukasz then explains what this means for the Lonsec portfolios.

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.

June 16, 2022/by Lukasz de Pourbaix

Lonsec Retirement Perspectives, Managed Accounts, News & Insights

Why do we have Fixed Income as part of your broader portfolios?

Fixed Income is added to a broad portfolio of assets for several reasons. They include:

Return: Frequent income from the cash flows of the coupon or interest payments to stabilise the risk and return of your client’s portfolio.
Defensive: Capital Preservation. The relatively steady return of capital of fixed-income products (unless there is a credit event default with particular debt security) can partly offset losses from a decline in share prices.
Risk Diversification: Broadening the opportunity set in a multi-asset portfolio to diversify risk.

Although there are many benefits to fixed income products, as with all investments, there are several risks investors should be aware of.

Credit and Default Risk: Federal, State, and Semi-Government bonds and securities have the backing of the relevant Government. Whereas, corporate bonds, are backed by the financial viability of the underlying company. Should a company declare bankruptcy, bondholders have a higher claim on company assets than do common shareholders. Bonds with credit ratings below BBB are of lower quality and considered below investment grade or junk bonds
Interest Rate Risk: This risk happens in an environment like now whereby market interest rates are rising, and the price paid by the bond falls behind. In this case, the bond would lose value in the secondary bond market if sold or market to market on a daily basis like share prices.
Market Risk: The prices of bonds (like shares) can increase and decrease over the life of the bond. If the investor holds the bond until its maturity, the price movements are immaterial since the investor will be paid the par face value (usually the 100 cents in the dollar) of the bond upon maturity. However, if the bondholder sells the bond before its maturity through a broker or financial institution in the secondary market, the investor will receive the current market price at the time of the sale. The selling price could result in a gain or loss on the bond investment depending on the underlying corporation, the coupon interest rate, and the current market interest rate.
Inflation Risk: Inflationary risk is also a danger to fixed-income investors. The pace at which prices rise in the economy is called inflation. If inflation increases, it eats into the gains of fixed income securities. For example, if fixed-rate debt security pays a 3% return and inflation rises by 5%, the investor loses out, earning only a -2% return in real terms.

What’s Better for Fixed Income Investors when Interest Rates are Rising?

During a period of rising interest rates (yields) fixed-income investments that pay a fixed rate of interest, such as bonds are not helpful, for two reasons:

Firstly, there is an inverse relationship between a bond’s price and its yield – as interest rates increase, bonds fall in value, so bondholders can face capital losses if the bonds are sold prior to maturity. If not sold prior to maturity and they do not default, you get the original par value back plus interest.

Secondly, the income stream from fixed-rate bonds remains the same until maturity. However, as inflation rises, the purchasing power of the interest payments declines.

Investments that pay a floating rate of return are likely to be better off in an inflationary environment, as the interest rate they pay is adjusted periodically such as every 90 days to reflect market rates. If interest rates rise, the interest paid by the investment should also increase at the next reset date. Investors in these types of securities and products do like interest rate hikes as they have very little interest rate duration (or term) risk.

Inflation is generally regarded as damaging to holders of cash and cash equivalents securities or products since the value of cash usually does not keep pace with the increased price of goods and services.

Strategies Employed by Lonsec’s Managers For Diversifying Fixed Income Portfolios During a Climate of Rising inflation and Interest rates

Typically, you take into consideration the client’s return, risk, time horizon, and liquidity expectations.

Usually, such a portfolio is expected to have a minimum time horizon of three years and provide monthly or quarterly income with a level of liquidity to pay their monthly retirement benefits with minimal impact on their capital.

The anchor for the fixed income portfolio is an active fund manager with a core portfolio of investment-grade coupon-paying bonds that continually mature at par into the next series of bonds. In the current investment climate, these active managers have already taken defensive positions by reducing interest rate risk in the portfolio to below benchmark levels of duration and rotating into higher quality rated bonds. Yes, the daily mark to market price will fluctuate and I have seen portfolios of fixed-rate bonds in some cases now down 8% over one year to the end of April 2022. However, the fixed income portfolio manager is unlikely to sell them before maturity (assuming fund flows are unchanged), and if the bonds don’t default you will get your par value principle back. As the current bond market correction continues in a typical once-a-decade event now is not the time to crystalize your mark to market paper losses. Continue to focus on your three-year strategy and the fund manager will wait for the opportune time to add interest rate risk to core bond holdings when the economic growth fundamentals start to slow and suggest inflationary pressures have peaked. By then the yields and the carry will be much higher in the portfolio.

The next part of the portfolio is your non-core strategies to enhance your income yield with some additional sub-sector strategies including credit, emerging markets, securitised assets.

Within these sub-sectors, it is important to note the following strategies. During this rate hike period floating-rate (or variable investment) strategies will do better than fixed-rate strategies as short-term rates rise due to the regular monthly or quarterly rate reset higher. Remember Floating Rate Portfolio Managers want short-term interest rates to go higher so they can pass on the higher income to their investors. Since you have a diversified portfolio of strategies this component of your portfolio will do well.

In terms of credit strategies, your typical credit manager will also be already defensively positioned. it is important in terms of capital preservation and market volatility to be higher up the capital structure in senior or senior secured debt rather than unsecured debt or hybrids. If interest rates rise too quickly and too high for an extended period, economic growth slows then the level of defaults is at risk of rising. Better to have a bias towards secured debt whereby you are protected by mortgaged assets. Also, the further up the capital structure you are the equity market beta reduces. What that means is debt lower down the capital structure usually moves in about a 0.7 correlation with equity prices. So, if equity or equities go down say 10% in price, lower down the capital structure debt such as unsecured or hybrids may go down an estimated 7% in price terms (and the reverse happens when share prices are rising and the Fund manager rotates down the capital structure). So, the credit fund manager may have added some floating-rate private secured debt or bank loans (subject to the credit rating) strategies in order to reduce the market volatility and increase capital preservation within your portfolio.

Finally, all the active strategies would be keeping up a higher-than-normal level of liquidity to quickly rotate back into higher-yielding credit and interest rate risk strategies when they deem it to be safe to do so.

Lonsec as part of our portfolio construction investment process monitors and actively manages the exposure to fixed interest assets taking into account the prevailing market conditions and risks. The current environment has been challenging for fixed interest managers; however, the market volatility will present investment opportunities and at some point, the yields offered from fixed income will warrant further investigation.

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.

May 10, 2022/by Ron Mehmet

Managed Accounts, Managed Accounts - Listed, News & Insights

Lonsec Listed Managed Portfolios Update

Quarterly Update – Q1 2022

Global equities were the Listed portfolios’ main detractor from returns over the quarter. Although the BetaShares NASDAQ 100 and VanEck MSCI International Quality ETFs bounced back in March, both finished the quarter 10% lower, while the defensive sector exposures in Healthcare and Consumer Staples outperformed the broader market benchmark year-to-date. A number of portfolio changes were implemented in March, adjusting our global equities exposures to be better positioned for the current market conditions.

Dan Moradi, Portfolio Manager for Listed Products, provides an update on how the portfolios performed during the quarter and the rationale for the recent positioning changes. Dan explains that the Listed portfolios remain well-diversified and we continue to assess the threats of rising inflation, tightening monetary policy and potential expansion of the Russia/Ukraine conflict 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.

April 27, 2022/by Lonsec