News & Insights Archives - Page 8 of 22

Value factor rally a boon for risk premium strategies

The performance of the Lonsec Alternatives universe generally performed well in the December 2020 quarter and into January 2021. The vaccine breakthroughs played a significant role in buoying investor sentiment, and while there have been logistical hiccups in some countries that have delayed the rollout, overall developments are positive for markets.

A key catalyst for stronger performance outcomes has been the return of the value risk premia after a long period of headwinds. Value has benefited from the vaccine narrative and the return to more normal operating conditions, while fiscal and monetary measures helped to plug the liquidity gap, patch up balance sheets, and prevent a complete collapse in confidence.

Risk premia strategies have benefitted from the factor rotation in the market, with risk premia such as value, carry, trend and volatility becoming more favourable, and to a lesser extent equity long/short.

Private equity and debt markets were up in the December quarter, underpinned by the risk-on mood, strong returns, excess liquidity and the chase for yield. However, given the strong rally and sentiment in public markets, stress and forced selling hasn’t yet materialised across the sectors, with the exception being real estate. Managers with excess capital are well placed to buy attractively priced businesses if forced selling becomes more widespread.

Managed Futures strategies performed relatively well over the December quarter as buoyant market conditions and improving market sentiment reversed trends seen in the previous quarter. US dollar weakness trends underpinned the advance, with continued strength in all major currencies against the US dollar, and a continuation of the upwards momentum in stock markets. Additionally, strong trends across agricultural and energy markets aided commodities indices.

Equity market neutral strategies have been mixed. Factor rotation leadership and the buoyant sentiment driven by vaccine developments, political changes, and fiscal stimulus led to a decrease in stock dispersion, which tends to be unfavourable for these strategies. Notably, factor correlations have risen to the highest level in two decades, and equity issuance slowed further within the Australian market over the quarter. Equity issuance had allowed for strong alpha capture in previous quarters as many offers were priced at attractive discounts to market prices.

Global macro strategies performed well through the quarter, buoyed by the positive market sentiment, with discretionary managers finding attractive trading opportunities around political events, as well as significant policy changes being made by monetary and fiscal authorities. Lonsec continues to believe the qualitatively driven strategies appear better placed to adapt and react to changing market conditions and significant central bank intervention compared to their systematic global macro peers.

These strategies tend to be better placed to balance the portfolio across asset classes using a combination of directional and spread trades in addition to dedicated hedges. Nonetheless, quantitative macro strategies were favourably positioned for the December quarter, most notably benefiting from a return to fundamentals and the value risk premia.

Within private debt, despite risk appetite continuing to return, the market is still less favourable for debt exposed to leisure, retail and energy sectors. Nonetheless, newly priced issues tend to require a greater level of asset security and financial covenants, which are favourable for the lender.

February 24, 2021/by James Kirk

News & Insights

Australian shares stand to benefit from reflation trade

The Australian equity market experienced a very strong end to 2020, delivering an outsized 13.8% return as measured by the S&P/ASX 300 Accumulation Index in the December quarter. The recent advances contributed to the 2020 calendar year generating a surprising positive absolute return of 1.7% despite heightened volatility.

The impressive quarterly return was led by the largest index weighted sector financials with increasing optimism of a broad economic recovery predicated on recent positive developments from some of the front-running Covid-19 vaccine candidates, particularly Pfizer/BionTech and Moderna. Additional tailwinds were the federal government’s decision to ease lending restrictions, APRA’s removing a cap on listed companies paying out dividends, and an uptick in long-term bond yields, which in aggregate should lift profitability for the sector.

Over the December quarter, the four major banks recovered well from their lows earlier in the year, with ANZ gaining 32%, CBA jumping 29%, NAB up 27%, and Westpac rising 15%. The energy sector produced the largest sector gain of 26% supported by a stronger oil price and depreciating US dollar, while being highly leveraged to the re-opening of the economy.

A significant jump in the iron ore price was the principal catalyst for a re-rating of the three largest local miners, with Fortescue surging 44% higher, Rio Tinto climbing 21% and BHP rising 19%. The price of the key steel-making ingredient hit multi-year highs amid Brazilian miner Vale cutting production guidance and improved demand conditions in China as the government has undertaken a substantial infrastructure spending program to reignite their economy.

Some of the less economically sensitive sectors (i.e. Health Care and Utilities) delivered negative returns for the quarter. Key utility companies announced earnings downgrades (e.g. AGL, dragged down by lower wholesale electricity prices). Large index weight CSL led the healthcare sector down, with the company announcing the cessation of its Covid-19 vaccine, which was triggering false positives for HIV.

Value outperformed growth stocks by a staggering 18% in the December quarter

A rotation out of some expensive growth pockets into value sectors was clearly evident over the December quarter with further RBA stimulatory measures, including the cutting the official cash rate by 15 basis points in November and an additional $100 billion of bond purchases as part of its QE program. On top of the vaccine breakthroughs, additional stimulus was a trigger for a rally in many beaten-up cyclical-oriented sectors.

The small cap segment of the market experienced an almost identical return in the December quarter compared to its broad cap counterparts, returning 13.8% as measured by the S&P/ASX Small Ordinaries Index, with the small resources index delivering an even stronger return of 20.3%. The performance of the broad commodities complex—principally iron ore, copper and oil—all rallied strongly.

Presently, the Australian equity market is profoundly influenced by macro factors surrounding the management of Covid-19, with company specific fundamentals taking some form of a back seat. The unprecedented fiscal and monetary stimulus measures implemented over the past 12 months should continue over the medium term but gradually taper off on the basis that Covid-19 is well contained, and economic re-opening becomes a sustainable state of affairs.

While it is not expected to be smooth sailing, as the economy moves towards a solid recovery phase, the reflation trade is likely to occur with cyclicals benefitting on a relative basis over long-duration growth companies.

The Australian equity market is trading on a one-year P/E ratio of nearly 20 times, which is circa 30% above the long-term average of 14.5 times and prima facie looks stretched relative to history. However, based on the current environment, with policy and liquidity support underwriting economic activity for the foreseeable future, the market appears to be moderately expensive.

January 28, 2021/by Peter Green

Portfolio Update – Lonsec Sustainable Managed Portfolios, December 2020

The Lonsec Sustainable Managed Portfolios were launched on HUB24 on 8 December 2020 and investor capital was put to work immediately in improving societal and environmental outcomes. The Sustainable portfolios have been well supported to date, with an increasing number of investors looking to invest in not only a way that delivers solid returns, but also aligns to their values.

While we don’t yet have a full month of performance to report on, the portfolios have performed in line with our expectations over the first few weeks, generating positive returns for investors.

And looking forward, there couldn’t be a better time to invest sustainably.

Momentum on climate action is gathering pace as governments, companies and communities seek to move out of this COVID-19 induced haze and look towards a greener and more equitable recovery. Europe and the UK have committed billions towards what some are terming a ‘Green Industrial Revolution’, encouraging innovation and private investment in clean technologies, creating hundreds of thousands of jobs, while at the same time protecting the environment. China too, has backed a ‘green recovery’, setting ambitious targets for reducing carbon emissions, re-forestation and increasing renewable energy sources including wind and solar. With the US re-joining the Paris agreement on 20 January 2021, two thirds of global polluters have now committed to carbon neutrality, or net-zero emissions by 2060 at the latest. These recent developments provide strong regulatory tailwinds for those wanting to invest sustainably.

And while some governments have been dragging their heels on the climate action front (Australia is looking increasingly isolated in its stance), locally companies are forging ahead with their own commitments to reaching net zero. According to Climate Action 100+, 43% of the world’s largest emitters (including Qantas, BHP and Woodside Energy) have now adopted some form of net zero emissions target. While the nature of those targets varies, we view this as an important step and highlights the positive impact capital owners can have through direct shareholder engagement.

Shareholders are voicing their concerns on a range of ESG issues from modern slavery to gender diversity as well as climate related issues. Public awareness of sustainability issues has never been higher. As the Boards of AMP and Rio Tinto are now acutely aware, listening to and responding to broader stakeholder concerns is becoming increasingly important.

But for all this optimism, there is still much work to do, not only on the climate front, but across a range of other Sustainable Development Goals (SDGs) to which these portfolios aim to align themselves. COVID-19 has exacerbated inequality around the world, health outcomes have diverged significantly, and poverty is on the rise particularly in some of the hardest hit developing nations. It is important that as we move into 2021, governments, companies and investment managers alike look to maintain that positive momentum and ensure no-one gets left behind as we build back better.

Now, let’s get to work!

Portfolio update

From a portfolio perspective, one of the ways we work to align the portfolio with SDG 13: Climate Action is through our investment in BNP Paribas Environmental Equity Trust. The strategy is managed by Impax Asset Management, a London based manager who invests globally in companies that are active in the resource efficiency and environmental markets. The top holding in the Trust is Linde Plc, a global leader in industrial gases. In January 2021, Linde announced it would build and operate the world’s largest PEM Electrolyzer for Green Hydrogen. Once built the total green hydrogen being produced will be able to fuel approximately six hundred fuel cell buses, driving 40 million kilometres and saving up to 40,000 tons of carbon dioxide tailpipe emissions per year. This investment also aligns well to SDG 7: Affordable and Clean Energy.

On the fixed income side, the Pendal Sustainable Australian Fixed Interest Fund invested in the Australian dollar KfW Green Bond. KfW is a development bank owned by the German government Projects supported by this bond include the construction of a wind park, solar farm and energy efficient housing in Germany. This bond aligns well to a number of SDGs including SDG 7: Affordable and Clean Energy, SDG 11: Sustainable Cities and Communities and SDG 13: Climate Action.

With initiatives such as the Net Zero Asset Managers initiative, launched in December 2020, global fund managers are also committing to net zero. This initiative aims to secure further backing among asset managers to eliminate greenhouse gas (GHG) emissions from their portfolios. Three managers we are invested with have joined as founding members of this initiative; AXA Investment Management, Wheb and Atlas Infrastructure.

From 1 January 2021, Ausbil announced that it was removing fossil fuel exposure from the investment universe for the Ausbil Active Sustainable Fund. This includes the exploration, mining and/or distribution of fossil fuels, such as oil, gas, oil sands and coal. 70% of the equity managers in the Lonsec Sustainable portfolios now exclude all forms of fossil fuel investments, the remaining 30% exclude at least thermal coal.

	Role		Role
Australian Equities		Real Assets
Australian Ethical Australian Shares Fund	ESG / Sustainable / Impact	Resolution Global Property (Hdgd)	ESG
Alphinity Sustainable Share Fund	ESG / Sustainable	ATLAS Infrastructure Australian Feeder Fund AUD Heged	ESG
Ausbil Active Sustainable Equity	ESG / Sustainable	VanEck Vectors Australian Property ETF	Passive
BetaShares Australian Sustainability Leaders ETF	ESG / Sustainable

Global Equities		Fixed Income
AXA IM Sustainable Equity Fund	ESG / Sustainable	Pendal Sustainable Australian Fixed Interest Fund	ESG / Sustainable / Impact
BNP Paribas Environmental Equity Trust	ESG / Sustainable / Impact	Altius Sustainable Bond Fund	ESG / Sustainable / Impact
Pengana WHEB Sustainable Impact Fund	ESG / Sustainable / Impact	PIMCO ESG Global Bond Fund	ESG / Sustainable / Impact
BetaShares Global Sustainability Leaders ETF	ESG / Sustainable	Vanguard International Fixed Interest Index ETF Heged	Passive

Outlook

The last quarter has seen a sharp rotation into some of the more cyclical and value orientated sectors of the market. We expect this rotation to be relatively short lived. Longer term, we see the thematics that have underpinned the strong performance of the ESG/Sustainability sector over the last 18 months to remain intact. Companies that are focused on delivering solutions to the challenges facing society and the environment are particularly well placed in a low-growth world and one boosted by a green recovery. Regulatory tailwinds and green fiscal policy initiatives are now providing good support. Companies that perform well on ESG metrics, that is companies that understand and factor in the risk of climate change, companies that are well-governed and maintain their social license to operate by meeting stakeholder expectations, should also outperform. Opportunities abound as we emerge from COVID-19 pandemic with the chance to ‘rebuild better’.

January 26, 2021/by Deanne Baker

News & Insights

Market Update – December 2020

Watch the video.

Markets seem to have taken a sigh of relief post the US election result with risk assets seemingly returning to their upward trajectory. Lukasz de Pourbaix ED, CIO Lonsec Investment Solutions will discuss the latest insights for our recently held asset allocation investment committee. Specifically, Lukasz will discuss the rotation into value style stocks, a discussion of the key economic and market indicators and risks investors should look out for.

This information is provided by Lonsec Investment Solutions as a corporate authorised representative of Lonsec Research Pty Ltd who hold an AFSL number 421445. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. You can access a copy of our financial services guide at lonsec.com.au

This video is provided 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. Past performance is not a reliable indicator of future performance. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. While care has been taken to prepare the content of this video, LIS makes no representation or warranty to the accuracy or completeness of the information presented, which is drawn from public information not verified by LIS. The information contained in this video is current as at the date of publication. Copyright © 2020 Lonsec Investment Solutions Pty Ltd ACN 608 837 583

December 9, 2020/by Lonsec

News & Insights

Research House of the Year 2020

Lonsec is very pleased to be able to announce that, for the 5th year running, we have once again been declared the overall winner of Research House of the Year. The award is the result of an annual questionnaire carried out by Money Management magazine.

Lonsec is continuing to invest in its infrastructure, systems and team, to ensure that we stay in this position going forward. Some exciting developments are planned for next year and we look forward to sharing them with you in due course.

In particular we would like thank our many thousands of clients for continuing to use our services and telling us and the wider industry how you value what we do.

Thank you,
The Lonsec Team

November 19, 2020/by Lorraine Robinson

Lonsec Sustainability Insights, News & Insights, Video

Introducing Lonsec Sustainable Managed Portfolios

Watch the recording.

Many of you will be aware that your clients are increasingly seeking out investments that align with their personal values.

Further to the launch of the Lonsec Sustainability Score, the Lonsec Sustainable Managed Portfolios will utilise Lonsec’s extensive portfolio construction experience, together with detailed sustainable investing (and ESG) research, to provide a solution that genuinely caters to the needs of investors.

Listen to the key members of the Lonsec investment team to find out more about how the portfolios are formulated and how they can help deliver what your clients really need.

November 6, 2020/by Lonsec

News & Insights

Weighing COVID-19’s mixed impact on global infrastructure securities

During the September 2020 quarter global infrastructure securities (+0.8% in AUD hedged terms) saw early gains almost negated and again underperformed the broader global equities index (+6.3% AUD hedged) for the fourth successive quarter. Unhedged infrastructure returns (-2.0%) were again held back by a stronger Australian dollar. For the calendar year to date, the returns from global infrastructure securities (-12.3% AUD hedged and -13.2% unhedged) underperformed global equities (-1.3% AUD hedged).

The near-term cash flow outlook for most user-pays infrastructure is negative relative to 2019, but the outlook varies greatly by sub-sector. Transport infrastructure has calendar 2020 earnings per share changes of -70% to -90% for airports and -40% to -60% for toll roads due to travel restrictions. While road traffic has bounced back in North America and Europe, air travel internationally is more problematic as cross-border restrictions have been re-imposed to various degrees as COVID-19 has resurged in Europe. In Australia, the expected recovery to 2019 levels continues to be pushed out for domestic (2023) and international (2026) travel.

The share prices of Oil & Gas Pipeline stocks have been hard hit from a combination of concerns over the direct and indirect impact of lower crude prices, counter-party risks, and the deferral of capital expenditure. However, there is little exposure for pipeline operators to direct oil and gas price changes. Similarly, most pipeline companies are not significantly exposed to poor credit quality companies. Most pipeline volumes are supported by take or pay contracted terms. As a result, calendar 2020 earnings are only expected to decline -10 to -20%.

While COVID-19 has resulted in a decline in activity in the physical world, there has been a resulting increase in activity online. This has benefited the Communications Sector with 2020 earnings of cell tower stocks expected to increase between 10% and 15%. Earnings for Water and Electric Utilities have remained resilient, reflecting their essential nature, with 2020 earnings expected to remain flat or increase marginally.

Emerging Markets have been hit particularly hard by COVID-19, with the S&P Emerging Markets Index (Unhedged) returning -34% over the nine months to 30 September 2020. Many of these countries do not have the government resources to mitigate the negative economic effects of COVID-19 for sustained periods. However, the two Australian-based Emerging Markets Managers in the sector, RARE and 4D, both see significant long-term opportunities with earnings multiples at historically low levels. They also note that unlike prior crises, the balance sheets of most emerging market companies have held up relatively well.

Fire season began early in California this year. While there has been some legal complexity in past seasons, generally Californian utilities (PG&E, Sempra and Edison) are liable if their equipment has contributed to starting a fire. To date, this season’s fires are believed to have been caused by lightning strikes and the share prices of these utilities have not been greatly impacted. Furthermore, there are very few Managers with any remaining exposure to PG&E, which has most of its assets in Northern California. Sempra and Edison have their assets in the southern part of California, where there have been fewer fires.

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t 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 document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited.

November 5, 2020/by Kevin Prosser

News & Insights, Retirement Insights

Media Release: Lonsec Managed Accounts add over $100M in October

Lonsec’s managed accounts have posted the fourth consecutive month of record growth in October, adding $100m in net inflows across its broad suite of diversified, retirement and listed portfolios.

The results highlight the success of Lonsec’s research-backed managed account model, which combines Lonsec’s portfolio construction expertise with Australia’s largest investment product research team.

Lonsec CEO Charlie Haynes said more advisers were turning to Lonsec for a professional, actively managed investment solution, whether off-the-shelf or tailored to a licensee or practice’s needs.

“The success of our managed portfolios comes down to three things: our investment philosophy, the diversity of expertise on our investment committees, and our research capabilities,” said Mr Haynes.

“Our active approach to asset allocation and asset selection, coupled with our ability to identify high-quality investments based on our extensive research coverage is proving attractive to advisers.”

The growth in Lonsec’s managed accounts reaffirms the importance of knowledge as well as execution, positioning the company as a major provider of investment solutions, along with its traditional research offering.

Part of the appeal is the breadth of Lonsec’s solutions, including diversified multi-asset portfolios, objectives-based retirement portfolios, listed portfolios, and direct equity SMAs. All are underpinned by the same proven philosophy and dynamic approach to portfolio management.

“Lonsec is known for its research and investment insights advisers and investors can trust, but more and more advisers are approaching Lonsec as a one-stop-shop for their investment solution needs,” said Mr Haynes.

Lonsec will add to its suite of investment solutions with the imminent launch of its Sustainable Managed Portfolios. These draw on Lonsec’s latest sustainability research to construct high-quality, risk-managed portfolios that target sustainable themes.

“The Sustainable Managed Portfolios are a great example of how Lonsec continues to develop its offering to meet a wide range of investment needs,” said Mr Haynes.

“We want to help advisers provide a genuinely sustainable investment solution that aligns to their clients’ values and investment objectives.”

Release ends

November 4, 2020/by Gordon Toy

Media releases, News & Insights

Media Release: QSuper named Fund of the Year 2021

SuperRatings and Lonsec have announced the winners of this year’s Fund of the Year Awards, which was held virtually for the first time in the event’s 18-year history.

The Fund of the Year Award went to QSuper, which also took home the Pension of the Year Award and the Smooth Ride Award. UniSuper claimed the MySuper of the Year Award, and Sunsuper clinched the MyChoice Super of the Year Award.

The winners were announced at a virtual awards event on 29 October, broadcast live from the Museum of Contemporary Art, Sydney.

“It’s important to recognise the significant work that all funds have done to support their members through a very challenging year,” said SuperRatings Executive Director Kirby Rappell.
“In a highly competitive field, we decided that QSuper was the fund that performed most strongly across the key criteria of investment performance, fees, member services, financial advice and insurance, and fund governance.”

“Congratulations to the team at QSuper on a fantastic effort. It was a strong field this year and we note the high calibre of all award winners, with the quality of their offerings shining through the pandemic.”

“A lot has changed in super, and there are even more changes to come. We should always be focused on improvement, but we shouldn’t lose sight of the incredible outcomes being produced by a large number of funds, both for their members and the retirement system as a whole. Despite the uncertainty, there is every reason to be positive about super.”

Congratulations to all of the finalists for this year’s SuperRatings and Lonsec Fund of the Year Awards Dinner. A full list of the awards is available below.

SuperRatings Fund of the Year Award

Winner

QSuper

SuperRatings MySuper of the Year Award

Awarded to the fund that has provided the Best Value for Money Default Offering.

Winner
UniSuper

Finalists
AustralianSuper
BUSSQ
CareSuper
Cbus
Equip
HESTA
QSuper
Sunsuper
TelstraSuper
UniSuper

SuperRatings MyChoice Super of the Year Award

Awarded to the fund with the Best Value for Money Offering for Engaged Members.

Winner
Sunsuper

Finalists
AustralianSuper
Aware Super
Hostplus
Mercer Super Trust
NGS Super
QSuper
Statewide Super
Sunsuper
Tasplan
UniSuper

SuperRatings Pension of the Year Award

Awarded to the fund with the Best Value for Money Pension Offering.

Winner
QSuper

Finalists
AustralianSuper
Aware Super
BUSSQ
Cbus
HESTA
Hostplus
QSuper
Sunsuper
TelstraSuper
UniSuper

SuperRatings Career Fund of the Year Award

Awarded to the fund with the offering that is best tailored to its industry sector.

Winner
Cbus

Finalists
BUSSQ
Cbus
HESTA
Mercy Super
TelstraSuper
Hostplus

SuperRatings Momentum Award

Awarded to the fund that has demonstrated significant progress in executing key projects that will enhance its strategic positioning in coming years.

Winner
Aware Super

Finalists
Aware Super
Cbus
Equip
HESTA
Mercer Super Trust
Sunsuper

SuperRatings Net Benefit Award

Awarded to the fund with the best Net Benefit outcomes delivered to members over the short and long term.

Winner
AustralianSuper & HESTA

Finalists
AustralianSuper
Cbus
HESTA
Hostplus
QSuper
UniSuper

SuperRatings Smooth Ride Award

Awarded to the fund that has best weathered the ups and downs of the market, while also delivering strong outcomes.

Winner
QSuper

Finalists
AustralianSuper
Aware Super
BUSSQ
CareSuper
Cbus
QSuper

Infinity Award

Awarded to the fund most committed to addressing its environmental and ethical responsibilities.

Winner
Local Government Super

Finalists
Australian Ethical Super
CareSuper
Christian Super
Future Super
HESTA
Local Government Super

Lonsec Investment Option Award

Seeks to recognise and highlight the work of asset managers and key players incorporating ESG.

Winner
CareSuper – Sustainable Balanced

Finalists
CareSuper – Sustainable Balanced
Cbus – Growth (Cbus MySuper)
Suncorp Multi-Manager Growth
Sunsuper for Life – Balanced

Release ends

October 29, 2020/by Gordon Toy

News & Insights

The Alternatives strategies that paid off in Q3 2020

The performance of the Alternatives universe in the September 2020 quarter was again widely dispersed albeit sector performance was skewed to the upside.

After eight months of the global pandemic, many nations still struggle to control the virus and have expended all ordinary policy responses to prop up the global economy. Volatility in security prices remain, with added geo-political uncertainty and the US presidential election further clouding the global market outlook. Despite these uncertainties, the market has been largely unwavering in its ‘risk-on’ stance albeit retreating somewhat in September.

Managed future strategies were largely unfavourable over the quarter as choppy market conditions and shifting market sentiment hampered trends previously established. While stimulus led trends were evident early in the quarter, simmering geopolitical concerns and fears of a potentially more disruptive second wave weighed on markets late in the quarter. Credit exposure, notably high yield, was a reasonably strong performer through the September quarter. Additionally, risk appetite was also evident for less defensive areas of the fixed income securities such as emerging markets given the yield control measures in place within many developed markets. Commodities, as measured by the S&P GSCI Index, delivered a positive return in the third quarter, aided in part by US dollar weakness with oil the key laggard during the quarter.

As occurred in the previous quarter, the equity market neutral sub-sector continued its strong performance during the quarter. Stock dispersion continues to be elevated, which is highly favourable for the strategies. The market continues to punish companies operating in industries adversely exposed to the virus, while paying a significant premium for those with strong growth prospects or higher quality balance sheets that can survive the continued drop off in economic growth. Equity issuance slowed within the Australian market over the quarter. Equity issuance had allowed for strong alpha capture in the previous quarter as many offers were priced at attractive discounts to market prices.

Discretionary global macro strategies continued to post positive returns through the quarter benefitting from favourable cross-asset and inter-sector dispersion. The qualitatively driven strategies appear better placed to adapt and react to changing market conditions and significant central bank intervention compared to their systematic global macro peers. These tend to be better placed to balance the portfolio across asset classes using a combination of directional and spread trades in addition to dedicated hedges.

Private equity and debt markets were up through July and August, while those funds with exposure to real estate assets weighed on returns. Deal flow and activity is making a return, albeit not within the secondary market as might be expected. Given the strong rally and sentiment in public markets, stress and forced selling hasn’t yet materialised across the sectors, with the exception being real estate.

The focus of Managers largely remains on managing the current pool of assets and seeking opportunistic bolt-on acquisitions with controlling interest. Managers with excess capital are well placed to buy attractively priced business if forced selling becomes more widespread. Within private debt, the market has largely normalised, with risk appetite returning albeit the market less favourable for debt exposed to leisure, retail and energy sectors. Nonetheless, newly priced issues tend to require greater level of asset security and financial covenants which is favourable for the lender.

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t 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 document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited.

October 22, 2020/by James Kirk