News & Insights Archives - Page 18 of 22

Lonsec Managed Accounts now available on Netwealth

Lonsec has seen significant growth in its Managed Accounts offering over the last 12 months, as financial advisers increasingly seek an efficient way to implement professionally managed portfolios.

This growth is set to be given a further boost with Lonsec’s Managed Account solutions to be made available via the Netwealth platform.

As managed accounts gain an increasing share of advisers’ allocations, Lonsec has sought to widen it’s service offering to accommodate this rapidly growing area.

“We are very pleased to offer Lonsec’s suite of multi-asset and retirement focused managed portfolios on Netwealth. We believe the breadth and depth of our research positions us uniquely in the marketplace to deliver exceptional outcomes for advisers and their clients,” said Lukasz de Pourbaix, Executive Director, Lonsec Investment Solutions.

Netwealth Joint Managing Director, Matt Heine said, ”Our partnership with Lonsec further increases the wide range of options available on our platform, and allows our growing adviser network and their clients access to one of Australia’s leading investment managers”.

Release ends

February 17, 2019/by Lukasz de Pourbaix

News & Insights

RBA reassesses its outlook for the Australian economy

Earlier this month, at his first public speech for 2019, RBA Governor Phil Lowe conceded the rate outlook is now “evenly balanced”, dropping the rate tightening bias present in RBA communications throughout 2018. In its latest forecasts contained in the Statement of Monetary Policy, the RBA has also revised lower its GDP and inflation forecasts.

So what has caused this change in outlook?

Weaker global outlook
Overall, global growth was strong in 2018 with falling unemployment and above-trend economic growth in the advanced economies. In Q4 2018, a few factors weighed on the growth outlook and the financial markets, including trade tensions between the US and its trading partners, slower growth in Europe and Asia, and political risks including Brexit and rising global populism. A greater-than-expected slowdown in China especially weighs on the outlook for Australia.

Stubbornly low inflation
With an improving domestic economy and tightening labour market, the RBA had been expecting inflation to move higher to its target band of 2–3%. That has not eventuated, and underlying inflation has been around 1.75% for some time. While there has been some pickup in wages growth, it remains subdued. In addition, rent inflation and the cost of new dwelling construction have remained soft given a weaker housing market.

Falling dwelling prices and a constrained household sector
Despite an improving labour market and falling unemployment rate, Australian households remain under considerable pressure, and household consumption growth has been weaker than expected. Factors weighing on household spending include subdued wages growth, rising cost of living (utility prices and mortgage interest rates), the high rate of part-time employment and underemployment, high household indebtedness, falling consumer sentiment in recent months, and also the declining wealth effects from falling house prices and weaker equities markets.

Tighter credit conditions
While domestic financial conditions remain accommodative overall, credit conditions for housing and small business have been tighter. Banks are facing higher funding costs as well as tightening lending standards as a result of the Royal Commission.

What’s ahead?

This change in rhetoric has seen financial markets pricing in a 60% chance of a rate cut by 2019, but in our opinion the RBA is likely to remain in wait-and-see mode. While it was forced to revise down its growth forecast, GDP is still expected to grow by 2.5% in 2018-19 and 2.75% in 2019-20, which is around the long-term trend level, while the unemployment rate is expected to stabilise around 5.0%. In addition to inflation, the RBA is likely to watch:

The business sector
As mining investment and exports return to more normal levels, non-mining business sector is expected to drive growth forward. However, business conditions and confidence have been trending lower, as measured in the NAB Business Survey. There are a few headwinds facing Australian businesses, including policy uncertainties associated with the federal election, slowing growth in China, tighter lending standards, falling building approvals and peaking mining exports. Retail conditions especially have been weak for quite some time—another reflection of a constrained household sector. The upcoming federal election is likely to contain business friendly policies to stimulate the economy and investment, while large infrastructure spending is also expected to drive investment growth in the medium term.

Household sector
The household sector remains constrained. As income growth has been weak, households have been saving less of their income to maintain consumption. Wages growth is therefore needed to maintain sustained consumption growth. The RBA will watch developments in the labour market closely. Leading indicators including the NAB survey employment index and SEEK job ads have pointed to a peak in employment growth. A marked slowdown in the labour market could see the RBA start cutting rates.

Dwelling investment
As the apartment building boom passes its peak, the fall in dwelling investment will be a drag on the economy and will likely see job losses in the construction sector and related industries. The RBA forecasts dwelling construction to decline by a cumulative 10% over the next two years. Given falling house prices, new approvals for houses and units are likely to be slow to come online. While infrastructure projects can absorb some construction employment, the overall drag on the economy would be significant over the near term.

Exports
The lower AUD will likely support export growth. While 2019 export growth will be driven by the completion of several large-scale LNG projects, once they reach full capacity their contribution to overall economic growth will be reduced. Rural exports this year are also expected to be lower due in large part to the severe drought.

February 12, 2019/by Amy Li

News & Insights

Winds of change came well before the Royal Commission

The financial services industry was collectively holding its breath on Monday as Commissioner Hayne delivered the final report into misconduct and the 76 recommendations for how the system can be redeemed. Already chastened by the interim report, and already responding to the increased public awareness, there was a palpable sense of standing outside the headmaster’s office waiting for the punishment to be meted out.

But it was a case of ‘sell the rumour, buy the fact’ as the market had clearly factored in more severe measures, particularly with respect to the vertical integration model. The share prices of the major banks and financial services institutions rose in the wake of the report’s release, but the sector as a whole took a beating through 2018, weighing down the index and contributing in part to the relative underperformance of Australian equities. Investors were reminded of the importance of a sustainable financial services industry given its predominant weighting in the ASX.

ASX index performance versus financials

Source: FE

While the Royal Commission has played an important role in highlighting specific instances of gross misconduct and brought to the public’s attention some of the key regulatory challenges facing the industry, the seeds of change had been laid much earlier. The shift in behaviour and the heightened focus on risk and the management of conflicts has already resulted in three of the major banks largely exiting the funds management business, which has kept the research team, and the fund managers we interact with, busy for almost two years. The Royal Commission may act as an important catalyst for further cultural change, but already self-interest and common sense have prevailed in setting the major institutions on the right course.

On a sector specific basis, Lonsec will be having further discussions in its upcoming income sector reviews with funds impacted – directly or indirectly – by the ban on trailing commissions and the heightened focus on responsible lending.

February 7, 2019/by Libby Newman

News & Insights

Managed accounts can’t fly under the regulatory radar

Vertical integration in the advice sector has been a point of discussion within the financial services industry for many years. There are obvious conflicts that can potentially arise when advice is owned by an investment product manufacturer, and these have already been the subject of extensive scrutiny. Despite attempts to manage conflicts under vertical integration, the issue is still a concern for the industry and a key topic of the Royal Commission’s report.

However, while everyone would agree that conflicts can be better managed, government and regulators have stopped short of full structural separation between the provision of advice and the manufacture of investment products. The Royal Commission report, while highlighting the tendency of advisers among the ‘big five’ financial institution advice businesses to recommend in-house products, nonetheless baulks at the idea of forcing a separation of advice.

The Royal Commission’s view is that structural separation would be a “very large step to take” and that it is unclear whether the benefits of separation outweigh the costs. Ultimately, the issue comes down to how conflicts are managed and how a vertically integrated model aligns to the client’s best interest duties.

Vertical integration has become increasingly topical in the area of managed accounts. In recent years we have witnessed significant growth in managed accounts as a means of implementing holistic investment solutions. A catalyst to this growth was the Future of Financial Advice (FOFA) reforms, which took effect in 2013 and led to many financial advice groups seeking greater efficiencies in their businesses, and in some cases alternative sources of revenue, by creating their own in-house managed account portfolios.

While the Royal Commission has not mandated separation between product and advice, best interest obligations and conflicted remuneration are certainly areas of focus. There will be increased scrutiny on the governance structures overseeing in-house managed portfolios, including the composition of the investment committees and the range of qualified and experienced professionals involved in investment decisions. There will also undoubtedly be increased focus on remuneration structures within managed accounts (e.g. margin that financial advice groups might receive on fee rebates from the underlying fund managers, as well as model management fees and how these are used).

Finally, where financial advice groups are building internal managed portfolios and recommending them to their clients, the client’s best interest will need to be considered. This means advisers will need to ask themselves if an in-house solution is truly in the client’s best interest, and under what circumstances an alternative solution would be more appropriate.

Ultimately, a strong governance framework, careful management of any potential conflicted remuneration and a focus on the client’s best interests fall well within the spirit of the Royal Commission’s findings and are certainly relevant to the sphere of managed accounts. For advisers implementing managed account solutions, this is a topic that will continue to be raised as government, regulators and industry participants work to improve the quality of advice and bring it in line with community expectations.

As platform technology leads to further growth in the popularity of managed accounts, don’t be surprised if the vertical integration debate quickly changes to how advisers are using managed accounts and how conflicts are being managed.

February 6, 2019/by Lukasz de Pourbaix

News & Insights

Japan’s output gap is narrowing, but price pressures are still non-existent

Despite the longest economic expansion in the country’s post-war history, few at the Bank of Japan would be celebrating. While official statistics indicate that the output gap is improving, inflation remains stubbornly low, forcing the Bank to maintain its stimulus program for longer than expected. Members voted in January to maintain the short-term interest rate target at 0.1% and lowered its inflation forecast for the fiscal year ending March 2019 from 1.4% to 0.9%.

Underlying price pressure is still weak despite an improving output gap

Source: Bank of Japan, Lonsec

Japan’s September quarter GDP growth was revised down to a contraction of 2.5% annualised from an initially reported fall of 1.2%. The downturn has been linked to a string of natural disasters, including flooding in July, a typhoon in September, and an earthquake in Hokkaido, all of which has affected exports and tourism.

The rise in the sales tax from 8% to 10% is due to come into effect in October 2019, and while it might provide an initial boost in consumption it is likely to prove crippling to consumer demand in the medium term and risks pushing the economy into recession (which is exactly what previous increases achieved). If there is any good news, it is that a rebound in business investment is likely to contribute to a recovery in the March quarter of 2019, but even a recovery could be vulnerable to the global slowdown.

February 4, 2019/by Lukasz de Pourbaix

News & Insights

How new technology is facilitating the implementation of more advanced portfolios

In the not-to-distant past, managed accounts were seen as a single cog in a client’s overall investment solution. While offering advantages for certain clients seeking a more personalized approach, advisers and model managers were limited in their ability to provide diversified, multi-asset model portfolios using a managed account structure.

Fast forward to today and the situation is very different. Developments in platform technology have meant that managed account solutions encompass a variety of portfolio structures, from single sector equities to holistic multi-asset portfolios. This has made managed accounts far more relevant to financial advisers as they seek portfolio solutions that can meet different client objectives and risk characteristics. Instead of offering an alternative for clients with sufficient knowledge of how managed accounts work, advisers can now use managed accounts to provide a full, actively managed investment solution that meets their clients’ needs.

This flexibility has led to improved implementation and greater efficiency compared to the traditional notional (paper-based) model portfolio structure. Today’s managed account structure enables effective implementation of a range of different investment philosophies and portfolio construction approaches. A good example of this is dynamic asset allocation, which under a notional model portfolio structure is impossible to implement responsively due to the administrative complexities involved.

There has also been an evolution in the composition of portfolios within managed accounts whereby multi-asset portfolios are becoming increasingly investment vehicle agnostic, with portfolios increasingly including a mix of Separately Managed Accounts (SMAs), Exchange Traded Funds (ETFs) and traditional managed funds. Greater flexibility and the ability to implement dynamic asset allocation views in a timely manner will become more important, especially as we move into a market environment characterized by increased volatility and potentially lower returns.

Along with this increased flexibility, there is of course a greater requirement for the model manager to be sufficiently equipped to manage, implement, monitor and report on the managed portfolios. As the managed account sector matures, with large institutions increasing their presence in the market, the barriers to entry from a platform, responsible entity, and superannuation trustee perspective have increased. This means that financial advisers need to conduct appropriate due diligence on their model managers to ensure they have not only the right research and investment expertise but also robust governance structures and reporting processes.

The trend towards multi-asset managed portfolios will only continue to grow as financial advisers recognise the efficiency that managed accounts can bring to their businesses. The ability to construct and implement dynamic, multi-asset portfolios has enabled advisers to enhance the value of their offering and provide clients with better portfolio communications and a superior advice experience. Technology platforms supporting managed accounts have already made significant advancements, and this will undoubtedly continue as model managers are able to access an ever-expanding range of investment products, allowing advisers to implement more sophisticated model portfolios.

As technological barriers are removed and managed accounts become more central to the way advice businesses operate, the challenge for advisers is to partner with the right model manager to ensure that solutions are aligned with their investment philosophy and that the manager is able to meet the needs of the adviser’s clients. For the model manager, the challenge is to offer the right mix of capabilities while remaining competitive. This inevitably requires both parties to adapt, but the reality of change is impossible to ignore. In this new world, success starts with acknowledging the change and creating a strategy that anticipates the growing power of managed accounts and their revolutionary impact on the advice industry.

January 29, 2019/by Lukasz de Pourbaix

News & Insights

Why following the winner might make you a loser

An all too common mistake in investing, is to simply back last year’s winner. On the face of it, it seems appropriate to follow what worked last time and all too often investors pile into the best performing asset class of the last year in the hope that success will be repeated. However, as the below table shows, very rarely do asset classes consistently outperform and backing last year’s winner could very easily end up making you a loser.

This table reveals the best performing asset classes for each financial year since 2008, and shows that, on a very regular basis, one year’s winner fails to repeat its outperformance in the following year.

Chasing last year’s winner (financial year returns)

Source: Lonsec, Bloomberg, FE

Conversely, the table reveals that avoiding asset classes that performed poorly in the previous year can cost investors in the following year. For example, if investors had reduced their exposure to Aussie shares following a negative return in 2012, they would have missed out on one of the better performing asset classes in the subsequent two years (+21.9% and +17.3% respectively).

It’s a reminder that a well researched, diversified portfolio is better over the long term than chasing last year’s winners. Identifying your long term goals and building a portfolio to achieve that aim, rather than just chasing an immediate performance ‘sugar hit’ is more likely to deliver the desired outcome.

Lonsec portfolios utilise our extensive manager and equity research knowledge to build portfolios that aim to perform over the medium and long term. Reducing the volatility of the portfolio is a key goal of our selection process and asset allocation decisions.

January 21, 2019/by Veronica Klaus

News & Insights

When to let it go

Thankfully my kids have moved on from their ‘Frozen’ phase and the tunes of ‘Let it go’ are well and truly buried away in the back of the DVD cabinet. As professional investors, one of the biggest challenges we face is when to ‘let it go’. When we make an investment into a stock or managed fund the investment rationale is clear, attractive valuations, positive earnings growth, solid investment team, appropriate investment style. However, what happens when our investments don’t follow the course we anticipated and perform poorly? An even more difficult decision is when to let go of a ‘winner’?

Behavioural factors play a big role in terms of how people react to events and the subsequent decisions they make. The belief that things will turnaround, the comfort of the pack (we all go down together), ‘falling in love’ with an investment. Such emotions impact all of us even the most experienced investor. The main line of defense to minimise the impact of behavioural factors in a decision making process is to always point back to your investment philosophy and the underlying process which underpins that philosophy. If your overall philosophy is one of generating returns with lower downside risk than the market do the underlying investment align to this philosophy? have they provided downside protection? if not, why? (are there cyclical reason for this or is there something structural impact the return profile). If an investment has provided this type of return profile what have been the factors contributing to this e.g. certain sector or country exposures, and do you expect these factors to work in the future? If we use a managed fund as an example it is important to look out for any changes to how the manager is managing money which may be reflected in a change in the risk and return profile of a fund. Is there a change in how the manager positions their investment approach to what they communicated a few years ago?

The main forum for our manager and stock decisions for our managed portfolio are our Manager and Security Selection Investment Committees. The committees are made up of senior members of our Research and Investment Consulting teams, our CIO as well as our external experts. Decisions to ‘let an investment go’ are made via the committee process. Investment recommendations are supported by qualitative and quantitative analysis. If we use managed funds for example this would include meeting with the manager (outside of the formal annual review process) focusing in on the issues at hand and targeted quantitative analysis which may provide a clue as to where the problem rests, an example being where a manager has taken stock-specific risk which is uncharacteristic of the manager.

January 16, 2019/by Lukasz de Pourbaix

News & Insights

Is the Australian small cap miracle an illusion?

Australia’s small cap shares have rarely failed to capture investors’ imaginations, not least for their ability to generate eye-watering returns when company narratives become reality. Since the start of 2016, sustained growth from small industrials combined with a rallying mining sector have produced remarkable performance for investors willing to move outside Australia’s biggest names.

Now, confronted with a rolling bear market, small cap managers are experiencing a period of pain and possibly some introspection. The past three years have taught us that dreams can be kept alive, even if they don’t always come true. Looking back, it’s fair to say that small cap outperformance was not a broad-based phenomenon. But even in an environment of elevated volatility and with market risks tilted to the downside, this does not necessarily mean that opportunities have dried up.

Taking a look at Lonsec’s peer group of small cap managers, past returns have shown significant dispersion due to a range of different sector and stock exposures. As we now know, the small cap rally was led by a narrow group of shares over the preceding six months to January 2018, and this trend continued through the second half of 2018, albeit with increased volatility.

The range of small cap fund manager returns has been wide
(returns to October 2018)

Returns based on Lonsec’s small cap fund manager peer group

Source: Lonsec

For the 2018 financial year the Small Ordinaries Index returned +24% (wouldn’t that be nice!) but this is not representative of the performance of the broad range of small cap stocks. Closer analysis reveals that 20 stocks delivered 60% of these gains, while the median stock in the index returned a more down-to-earth +9% for the year.

These top 20 hot stocks that drove the small cap index over the last 12 months are essentially companies with exposure to three themes which have dominated small cap strategies. That is, stocks exposed to the Chinese ‘Daigou’ distribution channel, resource stocks exposed to the emerging battery technology theme, and emerging technology companies.

Small cap darlings have been driving performance (FY19 P/E ratio)

Source: Lonsec, Bloomberg

Looking at the largest 20 shares in the small cap index, eleven had a P/E ratio of over 20x and the average P/E of this group was 30x. Among these were a number of market darlings which have delivered strong returns for investors but due to their popularity saw their valuations pushed ever higher. Prior to the start of Lonsec’s annual review of small cap managers, the FY19 P/E ratio of the ASX Small Ordinaries Index was in excess of 19x versus the historical average of around 13x, indicating a large part of the index gains have come from multiple expansion more so than earnings growth.

Small cap sectors have seen significant divergence
(period returns to end November 2018)

Source: Lonsec, FE

Most recently, those fund managers that have held up better than the peer group average (in the face of significant declines in share markets) have done so due to a significantly higher cash weighting in their portfolios. Managers generally anticipate volatility in equity markets will remain elevated in the medium term. As the price of risk is reassessed, valuations remain lofty and earnings growth remains elusive.

But all is not lost. Managers continue to see a broad range of attractive investments across the smaller company sector, with funds able to provide exposure to a number of niche opportunities and fast growing emerging trends, including the impact of growth in IT spending and the transition to cloud based computing, as well as quality domestic franchises expanding into larger global markets.

Add to this the disruption we have seen in financials as new business models compete with established players, along with the recovery in certain commodity markets from cyclically depressed levels, and there still plenty of themes to capture investors’ attention. The rally in small caps may be over for now, but opportunities remain for those managers who can identify the emerging trends.

To find out more about Lonsec’s Australian equities research, sign up for a free research trial or get in touch with our client services team.

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.

January 12, 2019/by Shailesh Jain

News & Insights

Are we late cycle?

2018 was marked by a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of the year. This has been reflected in a pull-back in most equity markets and an increase in expected volatility.

This article is intended for licensed financial advisers only and is not intended for use by retail investors.

Welcome back and we wish you all a healthy and prosperous 2019.

2018 was marked by a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of the year. This has been reflected in a pull-back in most equity markets and an increase in expected volatility.

The increase in volatility has been the culmination of a number of factors including:

increased geopolitical tensions, primarily in the form of protectionist measures by the US with its key economic partners China and Europe,
a normalisation of interest rates in the US,
tightening of liquidity, and
idiosyncratic issues impacting specific stocks and sectors such as the technology sector, which was a key growth engine of the US market.

On the home front we have seen house prices decline causing concerns on the possible impact on the broader economy.

The current environment comes off a period of extraordinary market returns supported by accommodative monetary policy, liquidity being pumped into global markets via quantitative easing as well as some sugar hits in the form of corporate tax cuts in the US. We believe that we are in the late stages of the cycle. However, late cycles can vary in their duration. According to analysis conducted by Heuristics Analytics, who input into our Lonsec investment committee process, late cycles have lasted as long as five years in the 1960s when productivity was strong and wages and inflation were low, and more than three years in the 1990s. Beyond these long late cycle environments typically late cycles have lasted for 12 to 18 months.

While we see economic and liquidity conditions becoming more challenging we do not think that we have reached the tipping point in terms of the economic cycle. We are also beginning to see some value appear in markets however we think it is too early to allocate to some of these areas at this point. From a portfolio perspective we have maintained our active tilt to alternative assets with a neutral allocation to equities. The exposure to alternative asset is intended to provide additional diversification where volatility has increased in traditional asset classes.

From an investment selection perspective we continue to look to further diversify our portfolios. Within our direct equity portfolios, we are seeking opportunities to diversify stock and sector exposure, recognising the concentrated nature of the Australian equity market. We have also taken advantage of the increased market volatility to invest in what we believe to be quality companies at attractive prices. An example of this has been the allocation to Costa Group, which we invested into after the stock retreated by approximately 30%. Within our multi-asset portfolios we have been focusing on fund managers with active strategies that we believe will be able to take advantage of the increased market dispersion.

By Lukasz de Pourbaix

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.

January 10, 2019/by Lukasz de Pourbaix