Coinciding with these market gyrations, we undertook our annual Strategic Asset Allocation review, which looked at the changing outlook for returns and resulted in several portfolio changes which are worth highlighting.
More challenging returns ahead
The overall theme from our Strategic Asset Allocation review was the lower long-term expected returns for almost all asset classes and consequently lower expected portfolio returns. Interestingly, bonds was the only asset class where return expectations increased, albeit marginally, due to the recent increase in yields.
While the outlook for global share market return expectations were lower, the outcome was for better prospects for Australian shares. This resulted in us increasing our bias to the domestic market, which contrasts with the industry trend observed in recent years of increasing allocations to global markets.
In the growth and high-growth portfolios, the allocation to listed property was reduced in recognition of the higher volatility of these markets. However, it is important to acknowledge that we still retain a healthy weight in our portfolios, partly in recognition that these markets may offer some inflation protection through rent pass-through.
Diversifying strategies gain increased relevance
As part of our ongoing work to make our portfolios more resilient, we also made other changes. Recognising that fixed income may not be as defensive as it has been historically, we made a noticeable change in this area. Wanting to add an additional lever, we substituted diversifying strategies from the alternatives sector for some traditional fixed income strategies in the lower risk profiles.
Within alternatives, the make-up of the allocations was examined to determine the optimal structure for each risk profile. In the lower risk profiles, it was decided that the optimal structure was to favour lower volatility strategies, namely global macro, and multi-strategy. This is in keeping with the more conservative nature of these portfolios.
In the higher risk profiles, we elected to favour higher volatility strategies, namely managed futures, and market neutral. This is in keeping with to the desire to add return levers or offer more protection.
The future is always uncertain but…
While past performance is not indicative of future performance, it is nevertheless worth examining the market reactions of previous months, as it can provide a good context for understanding what to look for in terms of outlook for markets in the future.
Despite a challenging first few months to the year – which has impacted the one-year managed accounts performance numbers – we nevertheless believed that the portfolios are set up well for the long term, albeit with the possibility of experiencing headwinds in the short term.
The implications for managed account portfolios
While rising interest rates, inflation and questions about the long-term relevance of some traditional assets form an uncomfortable backdrop for the global economy, we believe this uncertainty has only accentuated the relevance of alternative assets and portfolio diversification.
A multi-asset approach gives investors access to the risk and growth exposures offered by a broad suite of assets, benefitting from the full range of styles while avoiding unwanted concentrations or overlaps with other assets.
In an increasingly volatile economic and political environment, this strategy can provide precise visibility of risk and the flexibility to focus on the total portfolio, providing peace of mind for investors when it comes to long-term returns.
Steven Tang, head of consulting, Zenith Investment Partners
