As always there will be many different opinions on what might happen to markets in the coming year, but by and large most will agree it is unlikely to top the volatility and uncertainty of 2020. Amid the stimulus packages, lockdowns, PPE and politics, COVID-19 also brought to an end one long running market cycle and ushered in a new one, offering investors new opportunities with the potential for new risks and returns.

We believe understanding and navigating both will be more important than ever.

One of the main risks that still carries over from the last few years is the concentration of the index in just a few mega-capitalization companies. In fact, when considering the S&P 500, the top 10 companies still account for around 28% of the index, and as of late December 2020 the top 6 were worth more than the bottom 372 companies.



Why is this a problem?

Well if you’re buying the index you’re buying very expensive companies that have already grown substantially during 2020 such as Apple 86% and Amazon 76%. What’s riskier is Tesla (TLA) is nearly 2% of the index but only joined in late 2020, so index investors didn’t receive most of the benefit of its 700%+ growth, but bear all the downside if the stock were to fall.

Investors usually choose indices for their diversity – perhaps now they need to look again.

In addition, while global stimulus and support packages have helped economies from falling off a cliff, they have also pumped a lot more liquidity (cash) into the system. This, along with low interest rates may well support inflation for the first time in decades which even in small amounts can have a profound effect on stocks. Stocks with high valuations that are dominating the index (technology) are more susceptible to the increase in interest rates that usually accompanies inflation, meaning to get your money back you need to wait years if not decades. This is less the case with other sectors.

Is this likely?

While the potential for inflation is there, so too are signs of a rotation away from the tech stocks to those less highly valued sectors of the economy. From September to mid-December 2020, the S&P500 Value index outperformed Growth by around 8%, driven by more certainty about the real economy restarting on the back of a COVID-19 vaccine. While we can’t predict the future there is precedent here going back to the dotcom bust of 2000, where in the following 5 years Value had a resurgence to the point where it outperformed over the 10 years pre and post the bust.


To add to this are current data showing a significant increase in activity in the bellwether ISM New Orders Index which measures manufacturing activity, up 40% since the lows of 2020 and its highest level in over 3 years. The opportunity here lies in those sectors and regions that benefit from this new cycle economy, sectors that have been neglected, and so are cheap, but stand to benefit from the surge of global economic activity as populations slowly become vaccinated. The rewards here could be substantial.

Added benefit of options

Finally, the market is currently experiencing an unusual set of dynamics. Volatility (uncertainty) is higher than the long-term average, but so is the market. Usually the market is lower when volatility is higher.

This represents both heightened uncertainty alongside optimism, which has been fueled by some arguably unsophisticated market participants.

This creates unprecedented opportunity for professional investors, and especially for Talaria’s process of using put options to enter stock positions because:

  • There is a greater contracted rate of return on the put options we sell, which can generate 3-4% p.a. more option premium into the portfolio p.a. all else being equal.
  • The opportunity cost of not being fully invested is materially reduced given low expectations for equity market returns.
  • Heightened volatility allows us to widen our buffers against loss and maintain our risk credentials.

As we like to say, certainty empowers you.

It’s been nearly a year since the world changed as COVID-19 took hold. Of all that has been written
about and said so far, the word ‘uncertain’ seems to be the most enduring.

Uncertainty is not many people’s preferred state, but for retirees in particular, it’s even more
concerning, coming at a time when the juggle and stress of raising kids and building careers should be a
warm but more distant memory.

We spend 40+ years working to build an asset base to support us in retirement and we need that asset
base to deliver three key outcomes:

• Income generation – but not at the expense of capital loss,
• growth – of outcomes, and
• certainty – of outcomes…

…and do all this for an unknown number of years.

So how has the COVID-19 pandemic impacted these three retirement needs?

While stock markets globally have largely recovered since March, the underlying economy and outlook
for businesses hasn’t. This means dividends have been cut or reduced by many companies – impacting
income. Meanwhile, other asset classes such as Fixed Interest, Bonds, and Property are also delivering
substantially less returns.

Ranjit Das, Principal at Rahali Corporation believes this is a significant problem because of the over
reliance on income since the GFC. “Even over 10 years, traditional income sources like Banks, Telstra
have underperformed the ASX200, so non-traditional income sources are essential in client portfolios,”
Ranjit said.

At the same time, there has been a lot of volatility – a direct outcome of uncertainty – across asset
classes and currencies. This means it’s hard to predict when is a good time to either sell assets if
required or buy back into them.

“Retirees are very nervous in nature as they have no means to rebuild lost wealth. Any sharp spikes to
the downside creates a fear that capital will erode, income will reduce and they will ‘run out of money’.
Any sharp upticks don’t provide any joy as retirees are ‘buy and hold’ – much more than younger clients
who may be tempted to buy/sell and rejig allocations,” said Das.

In addition, the recovery of many markets at an index level has been driven by a few – namely
technology and consumer discretionary stocks – that have skewed the index. This means that those
following the index have a greater risk by being less diversified. If you’re starting out or still in the
accumulation phase of investing this might be ok, but not for retirees as they have additional risks

Sequencing – incurring large losses early in retirement, endangering a comfortable retirement
Longevity – ensuring your investments are there to support you for the full journey; and
Inflation – ensuring the purchasing power of your investments doesn’t erode.

The culmination of COVID-19 uncertainty, loss of business, and government stimulus that is currently at
play is creating all three of these.

There are solutions however that are genuinely uncorrelated sources of income – from shadow banking
to catastrophe insurance to selling equity insurance. However, the first two are very difficult to access as
a private investor, whereas equity insurance is more accessible and easily available.

So what is it?

In a nutshell equity insurance is really a metaphor for selling put options to enter stock positions that
you want to own rather than buying them directly. This then generates a premium which is treated as
income for the investor, regardless of whether the stock is ultimately bought or not. As a result, the
process creates:

• More consistent income;
• A diversified source of return;
• A downside buffer to first loss; and
• Reduces portfolio volatility.

This means that in periods such as now, investors have somewhere else to go for income. Further, as
option premium increases with volatility, an uncertain environment in most cases increases income
from this source.

Helping to create more certainty in an uncertain world.

Many retirees with investments in the sharemarket will have seen the recent momentum-driven obsession and hysteria with companies like Afterpay, whose share price has gone from $20 to $100 in the space of six months, despite the fact that the company has yet to make a profit. Afterpay’s market-cap has now surpassed some of Australia’s most successful global companies, such as Amcor, Brambles, and Orica. So what’s going on, and what are the implications for retirees?

Sharemarkets around the world, including Australia’s, have experienced very strong rallies since their March lows thanks in the main to interest rates being cut to record lows and large quantitative easing from central banks. It can be argued that this flood of cheap money has led many speculative-type growth stocks to trade well above their fundamental value, led by the NASDAQ in the US.

Consumer patterns changed markedly through the COVID-19 virus lockdowns, as consumers stayed at home and as volumes in many areas facilitated by the internet have all boomed such as online shopping, social media, online conferencing, online gambling, and streaming services such as Netflix and Stan here in Australia. This has led to a significant rise in almost any stock that is technology-related.

This phenomenon has driven the divergence between value and growth stocks to expand to levels which have now surpassed the ‘tech boom’ of 1999-2000, as Chart 1 below shows. With this momentum currently in full swing, many investors appear less concerned about the underlying fundamentals or valuations of many companies, and are instead focusing on anything with blue sky potential, particularly in the technology sector.

Chart 1: Average Price/Earnings of ASX200 Firms by Forward P/E Quintile

Source: Goldman Sachs Report 11 August 2020; chart range 30 June 1997 – 30 June 2020

‘Buy now pay later’ (BNPL) service provider Afterpay’s focus on reinvestment means that it is not yet profitable. Despite Afterpay’s first mover advantage and early success, competition in the sector is picking up quickly, which suggests that margins will come under pressure. As Table 1 shows, the sharemarket is assigning Afterpay an extraordinary valuation compared to well-established, profitable companies like Amcor, Brambles, or Orica. Given the global scale and profitability of these businesses, Afterpay’s valuation indicates that investors are taking an enormous leap of faith in Afterpay’s ability to reach sufficient scale and profitability to justify its nearly $30 billion market valuation.

Amcor is a global leader in consumer packaging products with US$12.5 billion in sales and US$1.03 billion underlying profit after tax in FY 2020, trading on around 16.3 times 2021 earnings, which looks reasonable for a global packaging leader which generates strong cashflows by servicing defensive end markets. Brambles is a global leader in pallet pooling solutions which earnt global revenues of US$4.7 billion and made an underlying profit after tax of US$504 million from continuing operations in FY 2020, and is trading on a P/E of around 21.6 times 2021 earnings and 19.4 times FY 2022 earnings.

Orica is the global leader in explosives and innovative blasting systems to the mining, quarrying and construction industries around the world. Orica is expected to earn global revenues of $5.6 billion in FY 2020 and make an underlying profit after tax of $320 million, and is trading on attractive multiples of around 18.2 times 2021 and 14.5 times 2022 earnings.

Table 1: Afterpay, Amcor, Brambles, Orica – Key Financial Metrics

Company ASX


FY21F Revenue


FY21 F Earnings




Afterpay APT 0.9 25.0 $29.7 billion
Amcor AMC 17.3 1,540 $25.9 billion
Brambles BXB 6.8 720 $15.9 billion
Orica ORI 6.0 370 $6.7 billion

Sources: Investors Mutual, Iress, FactSet. Data as at 10 November 2020

No matter how good Afterpay’s prospects are, to have it valued at more than one of the largest packaging companies in the world as well as higher than the largest pallet and explosive companies in the world combined seems to be an optimistic way of valuing the company. We prefer to back the proven fundamentals, management track records and steadily growing profitability of companies like Amcor, Brambles and Orica than to use what looks like excessively optimistic forecasts to try and justify Afterpay’s valuation and share price.

When markets are in an exuberant phase, it requires discipline and patience to avoid what look like excessively priced stocks and sectors. Our discipline back in 1999/2000 rewarded our investors with substantial subsequent outperformance. The conditions we see in sharemarkets today seem to echo the hype of that period. Our focus remains on companies that have recurring and predictable earnings, a strong competitive advantage, that are run by experienced and capable management teams, and that are trading at a reasonable valuation. We continue to believe that retirees will gain most benefit from owning a carefully selected collection of companies with these characteristics. This has proven over multiple market cycles to be more effective in delivery of tax-effective income and capital growth than chasing the latest exciting-sounding sector or fad.


While the information contained in this article has been prepared with all reasonable care, Investors Mutual Limited (AFSL 229988) accepts no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This advice is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company may have been mentioned should not be interpreted as a recommendation to buy, sell or hold that stock. Past performance is not a reliable indicator of future performance.

Examining some underappreciated benefits

Key Takeaways

• In order to fund liabilities, achieve retirement goals, or meet other investment objectives, many investors need the capital appreciation that equities can provide, but are concerned about downside risk.
• Despite the empirical history of low-volatility equity investing, many investors mistakenly equate low downside risk with low returns.
• By providing exposure to the potentially higher returns of the equity market, and at the same time mitigating downside risk, low-volatility investing addresses a significant obstacle to equity allocations.
• Low-volatility equity portfolios are typically constructed using historical data and can lack forward-looking estimates of risk and return, which fundamental research can provide.

Investors obligated to meet certain liabilities and investment objectives face a conundrum. While equities can provide the potential for capital appreciation that these investors need to help them meet their obligations, equities can also introduce volatility and downside risks. This combination is prompting investors to consider adding equities through an allocation to low-volatility (low-vol) equity investing— a strategy whose benefits some investors may not fully appreciate.

For many decades, investor unease with equity risk has not been addressed by investing strategies that have been more focused on following market benchmarks than managing return volatility. More recently, heightened global economic uncertainty—along with very low yields in the fixed income markets—has increased investor attention to capital preservation.

This, in turn, has highlighted the need for equity strategies that offer capital appreciation but also downside protection, to help manage equity risk via portfolio construction versus allocating to asset classes such as low-yielding bonds and/or cash equivalents.

In this paper, we demonstrate how managing portfolios that have lower volatility may enhance investment return potential, not diminish it. Moreover, its emphasis on capital preservation sets low-vol investing apart from other “smart beta” or “strategic beta” strategies that do not target downside protection.



COVID-19 has created one of the biggest drawdowns in Australian Equity earnings in history, even bigger than during the Global Great Financial Crisis. Income investors are thus understandably concerned about the impact the shutdowns and ongoing social distancing will have on the ability of Australian equities to pay dividends.

In this article we discuss our forecast of the near-term dividend outlook and examine how active managers can help investors navigate this unique moment with the objective of creating a sustainable income stream.

Throughout history, financial crises have been caused by an economic shock or a fundamental demand/supply imbalance. This crisis is different. When the pandemic hit, the global economy was in a growth cycle and share markets were performing reasonably well. Lockdowns put economies effectively into hibernation and triggered an immediate and profound market response. Although the limits on movement and restrictions on discretionary spending such as travel and entertainment are universal, the greatest financial jolt has been felt mostly by individuals who are at the beginning and at the end of their working lives. It is the young, due to the cascading impact on savings and jobs, and the elderly, due to falling investment yields that are most impacted.

With central bankers around the world committing to keep interest rates low for many years to come, this creates an issue for retirees looking for income. Traditional defensive assets such as cash and fixed income which typically form a large percentage of retiree portfolios are producing levels of income significantly below historical averages.

In Australia, the RBA is keeping the 3-year yield for government bonds at 0.25%, in what is known as yield curve control. Interest rates have been suppressed for the last decade, however what is unique about the current economic climate, is that with inflation yet to emerge and central bankers focused on generating growth and employment, their signalling to the market has moved further out. Lower for much longer!


SuperRatings Executive Director Kirby Rappell shares the latest performance results for superannuation funds and the future outlook for the industry.

Members should be prepared for more ups and downs. However, a patient approach has paid off for members over the long term with the median balanced style fund returning 7.0% per annum since the introduction of superannuation in 1992.




Any advice that SuperRatings provides is of a general nature and does not take into account an individual’s financial situation, objectives or needs. Because the information that SuperRatings receives about superannuation and pension financial products is from a number of sources, it is not guaranteed to be completely accurate. Because of this, individuals should, before acting on the information, consider its appropriateness having regard to their own financial objectives, situation and needs and if appropriate, obtain personal financial advice on the matter from a financial adviser. Before making a decision regarding any financial product, individuals should obtain and consider a copy of the relevant Product Disclosure Statement from the financial product issue.

Although the secrets of a long life remain a mystery, there are now over 300,000 centenarians across the globe and the numbers are rising. Most of us will not survive to 100 no matter how many green vegetables we eat, but there is no doubt life expectancy is increasing. In Japan, 2.5 times more adult than baby diapers are sold. Australian life expectancy from birth is among the highest in the world with the average man living to 80.7 and 84.9 for a woman. It assumes no improvement in healthcare which can increase life expectancy further.

The following lesson is one of IML’s ‘20 lessons for 20 years of quality and value investing’, which were recently published by Anton Tagliaferro and the IML investment team to mark 20 years since IML was founded.

We chose this lesson for Lonsec Retire, as it highlights the need for growth assets in retirement, particularly for early retirees who typically have investment timeframes of 20+ years.

The lesson illustrates the benefits of compounding by showing how companies that reinvest back into their businesses can reward investors with increasing dividends and appreciating share prices over the long-term. Increasing dividends is vital for retirees facing significantly lower returns from popular retirement income streams such as term deposits and traditional fixed income funds.

#6 The Power and Benefits of Compounding Over Time in Equity Portfolios

Most people are familiar with the concept of compound interest when it comes to term deposits, where one can earn interest on interest by continuing to roll over a term deposit. However, many investors do not relate the concept of compounding to their investments in the sharemarket.
Compounding occurs in the sharemarket when income from an investment is reinvested back into the business, and investors are rewarded with the benefits of increasing profits and appreciating share price growth over the long-term.
For investors in the sharemarket, there are two ways compounding can work in their favour to enhance their long-term returns.

These lessons are available both in hard copy and e-book format. For a copy of the book please register your interest here or email

**IML and Lonsec  Investment Consulting will be holding a webinar as part of Lonsec Retire Program on Wednesday, February 12th, find out more.

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.