Portfolio Construction Forum: Recent Episodes
Portfolio Construction Forum
Portfolio Construction Forum is the specialist, independent, investment continuing education, accreditation and certification service, providing a curriculum that is curated for the community of Australian and NZ practitioners and advocates. The Forum enables their better quality portfolio construction knowledge, skill and expertise, to improve the financial well-being of individuals.
The top 20 stocks comprise 63% of the ASX200, and the index is heavily skewed towards banks (20.9%) and iron ore miners (14.8%). Given the expected negative growth in the banking sector and the vulnerability of iron ore prices due to a weak demand outlook, Australian equity markets could well be anchored by the 'dinosaur seven'. With inflation at a two-year low but still well above the RBA’s target rate of 2% to 3% and rate cuts still uncertain, the outlook for Australian equity markets continues to look volatile. Investors seeking diversification, reduced volatility, and higher unique alpha over the long term should explore opportunities beyond the ASX20, focusing instead on the Ex-20 index. This index provides exposure to Australia's future rather than its past and is forecast to have 7.8% EPS growth pa over the next three years. - Dion Hershan, Yarra Capital Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
With Australia's residential vacancy rate at a record low and net overseas migration at a record high, it has never been more apparent that Australia needs a long-term housing solution to help expand supply. With rigorous capital provisioning models placed upon major banks following the GFC, the banks can no longer participate in the market like they used to, providing greater opportunity for real estate private credit lenders to fill the gap. This all combines to help generate attractive risk-adjusted returns for investors in the asset class. - Mark Power, Qualitas. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The bulls are back in charge of markets, as investors dream of a happy ending to the seismic dislocation following the global pandemic. Yet, for those willing to look beyond the headline economic data, a more uncertain outlook emerges. In the US, the disconnect between real GDI and real GDP rhymes with the period preceding the Global Financial Crisis. And, there’s the very real chance that history will in fact repeat and deliver a second Trump presidency later this year. Along with heightened global geopolitical risks, the Axis of Autocracy, reduced fiscal support from governments, a deflating Chinese property bubble, and an ongoing US commercial real estate crisis, 2024 is a year for investors to be nimble and tactical. There will be sensational trading opportunities for those able to navigate the risks hiding in plain sight. - Jonathan Pain, The Pain Report. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
There's no such thing as "normal" for supply chains. The challenges for 2024 and 2025 that have echoes in the past include logistics network disruptions, geopolitical risks and the cash costs of environmental policies. That makes investing in supply chain security more important than ever. However, there's evidence that firms are scaling back spending on two of the three most important resilience-building measures. Companies' under-investment in supply chain resilience doom them to repeat past disruption failings. - Chris Rogers, S&P Global Market Intelligence. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Second term presidents tend to be more ideologically aggressive, since they are freed from the need to face voters again. At a minimum, a Trump 2.0 administration would likely boost traditional energy, defence, and financial services, among other sectors which would benefit from lighter regulation. Meanwhile, Trump's "America First" trade policies could be inflationary and further increase US tensions with China, given Trump's promise to revoke China's Most Favored Nation trade status it has enjoyed since 2001. Investors globally need to think through the implications of a second term for either candidate. - Libby Cantrill, PIMCO. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
There's much to learn from history, but every time is different when it comes to markets. Inflation in the 2020s has been very unlike that of the 1970s. The inevitable recession that did not occur was likely prevented by unprecedented fiscal stimulus. Going forward, short-term interest rates will likely fall, but long-term rates might rise. Equities are unlikely to revisit the frothy heights of 2021 and market breadth should widen. As cyclical inflation subsides, structural price pressures driven by reglobalisation and the energy transition will collide with the deflationary force of AI. The backdrop for investing will require investors to identify how the outlook today intersects with our experiences of the past and where it differs. This time is different because every time is different. - Ronald Temple, Lazard. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
What a difference a year makes. In February 2023, investors were preoccupied by the risks of rising inflation, monetary tightening and recession. This year, the focus is on disinflation, monetary easing and economic growth. The US economy remains resilient, and the Federal Reserve will likely ease policy in 2024 as inflation declines. The European Central Bank will also cut rates, boosting eurozone growth in the second half of the year. The outlook is more challenging in China, where the economy remains hindered by structural problems in the property sector. However, the generally bullish macro backdrop favours equities over fixed income. Portfolio construction practitioners should not let heightened geopolitical risks cloud what is otherwise a positive outlook for markets. - Ronald Temple, Lazard on Portfolio Construction Forum
Investors spend too much time trying to predict the future, using history as their guide. Instead, they should focus on what is actually happening in the world, and think differently about portfolio construction. Much of current economic and markets thinking is rooted in the post-Global Financial Crisis era. Practitioners need to let go of that history and instead embrace the fact that four trends – weak population growth, deglobalisation, the end of "free money", and the decoupling of asset prices from economies – are fundamentally changing the long-term outlook for markets. - Wayne Fitzgibbon, CAS Market Insights on Portfolio Construction Forum
Changes in central bank thinking, higher inflation volatility, and a reversal of the global savings glut are creating an investment environment like that of the pre-Global Financial Crisis period – in which interest rates remain higher for longer and central banks make more frequent policy adjustments, to keep inflation under control. In such an environment, bonds will offer higher levels of both income and diversification, within a multi-asset portfolio. - Chris Iggo, AXA Investment Managers. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Contrary to wide opinion, globalisation is not "history" but is being reinvented. Since 2010, rising Chinese nationalism, the Covid pandemic, and Russia’s invasion of Ukraine helped bring an end to 30 years of hyper-globalisation. Weaponised interdependence and the derisking of global supply chains mean location matters again. Rather than relying on highly-efficient global supply chains, governments and firms must now carefully consider how they source resources and goods – whether it’s energy, semiconductors or electric vehicles – as well as risks and vulnerabilities in the US dollar financial system. For investors, a less interconnected world has significant implications for corporate capital expenditure and country allocation. - Kevin Hebner, Epoch Investment Partners. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
When seeking exposure to the energy transition, investors typically think of wind and solar farms, and hydrogen and battery production. However, elevated interest rates increase the costs of such projects, reducing their future investment returns. By looking more deeply down the value chain, with a focus on earnings and value, the best risk/reward energy transition opportunities can be found in sectors which at first seem counterintuitive, including fossil fuel production and mining. - Brian Arcese, Foord Asset Management on Portfolio Construction Forum
As risks related to over-indebted governments, the Russia-Ukraine war and Brexit fuel instability in Europe, the opportunity set for private credit investors is growing. While many people think that investing in challenging deals, complex capital structures and distressed situations is too difficult or too risky, unravelling the complexity of European private credit can unlock attractive risk-adjusted returns. - Fabian Chrobog, NorthWall Capital on Portfolio Construction Forum
In most cases of macro forecasting, historical evidence (data) is and must be the starting point for arriving at a forecast. The fundamental problem with contemporary economics is that historical evidence is not only its starting point, but also its terminus. Why has economics become so data-driven? Underlying today's historicist bias was a very important theory that permeated economics in the 1970-2000 period. This was the theory of Rational Expectations developed largely at the University of Chicago under the influence of Professors Sargent and Lucas. They wanted an absolutely rigorous (mathematical) theory on which market analysis could be based. Given the mathematical difficulties in creating their theory, they had to introduce an innocent-sounding axiom widely known as "Rational Expectations". This assumption was tantamount to saying that the dynamics of the economy were "stationary". This is the statistical term for saying that its dynamics and underlying relationships do not change over time. This in turn says that the correlations unearthed via data analysis will never change. All this implied that there was absolutely no reason for investors to doubt the conclusions based upon historical data for the best theory available said that structural changes in effect did not exist. But the fact that structural changes do exist and that historical data are often of limited relevance presents a major opportunity for investors seeking to outperform others. We can develop superior inferences about the future by using historical data as a starting point, and then incorporating new theories as to how ongoing structural changes will alter forecasts based upon historical data. To arrive at superior macro forecasts, these theories must be causal in nature. Unless they are causal, they cannot explain why historically-based theories will fall short. Another way of saying this is that investors seeking higher returns from better forecasts must think their way to such forecasts. - Dr Woody Brock, SED on Portfolio Construction Forum
The Investing Roundtable explored key challenges and opportunities in multi-asset, multi-manager portfolio construction that practitioners should be thinking about, given they can do anything, but not everything! Our research analysts each articulated a challenge or opportunity related to researching and identifying quality investment management solutions that they believe portfolio construction practitioners should be thinking about when building quality multi-asset, multi-manager portfolios: If you do anything, consider an allocation to global small cap equities; If you do anything, use returns-based style analysis; and, Don't generalise, it's time to optimise portfolios. - Bronwen Moncrieff, John Laver, Michael Furey and Naomi Finnigan. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
Why does our industry exist, why do we as industry professionals get up in the morning, how often do you speak with your clients, what about the actual end-client? As professionals we need to stand with our clients and share our voice to ensure risk-aware approaches – and the ability to provide security to our clients' investment journeys – remains part of our investment landscape. We must whole-heartedly embrace risk AND return multi-asset portfolio construction. - Anthony Golowenko, MLC Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Private Equity funds are impressive and have great marketing. It would be great if we could "invest in everything", but that is not feasible. Fund selection has massive alpha potential, but it is hard, and only ever investing in top quartile funds over time is virtually impossible. Private Equity pooled returns (weighted average) have historically been attractive, while also less volatile than investing in a single fund or fund-of-funds. A lower cost, efficient and scalable approach to investing, effectively allowing investors to "buy the private market" would be easier and better. An investible index of private market funds would deliver this and complement investors' portfolios in many ways, just like in public markets. - Edward Talmor-Gera, NewVest. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Anyone prognosticating on the future has likely heard the cliches "even a broken clock is right twice a day" and "every now and then a blind squirrel will find a nut". The primary criticism directed at those who think about the future is that it's an act of futility. The blunt reality is that accuracy cannot and should not be the criterion upon which to evaluate thinking about the future. Usefulness is a far better standard. Mechanical as it may be, thinking about various scenarios of how the future may unfold has proven to be among the most useful ways to make decisions amidst radical uncertainty. - Vikram Mansharamani. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
The unique characteristics of private debt make it ideal for any portfolio. It is a versatile asset class that fits in either the defensive or growth component of an investment strategy – or even both at the same time. It can provide a strong hedge against inflation, increase a portfolio’s total return and decrease overall risk. Funds that hold lower risk positions in senior secured or investment grade debt may be a suitable alternative to traditional bonds. Alternatively, funds with exposure to sub-investment grade debt or alternative parts of the capital structure can replace part of an allocation to equities. Either way, private debt's low correlation with other asset classes means it really can give investors just about everything across a full economic cycle. - Andrew Lockhart, Metrics Credit Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The median Australian small cap manager has outperformed the ASX Small Ordinaries consistently over the long term. Persistent operational and valuation leverage along with differentiated investment approaches creates this ongoing alpha opportunity. Small Caps have underperformed large cap peers in recent times however cyclical factors today and a rebound in domestic risk sets up for the reemergence in Australian Smalls. - David Aylward, Tribeca Investment Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
While global markets in 2023 have been led by a narrow group of mega-cap stocks, global small caps may be rewarded by the markets going forward supported by faster expected earnings growth and compelling valuations relative to large cap equities. The size and dynamism of the universe allows managers to identify a broad array of small cap companies across geographies and industries with improving company fundamentals and scope for multiple expansion. Stock selection and prudent portfolio diversification, however, are critical as investing in small caps translates to both greater opportunity and risk. - Trevor Gurwich, American Century Investments. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Every day, every one of us is touched by infrastructure and, the longer we live, the more billions of us there are, and the more we need infrastructure. Driven by a number of macro themes, over the next 17 years to 2040, experts predict we need to invest US$94 trillion in infrastructure just to keep pace with our human needs. This investment has benefits to people and communities everywhere. Demand for essential infrastructure offers opportunities for investors to generate a steady reliable income with inflation protection built in and includes mitigants to a rising interest rate environment. In today’s world of uncertainty and volatility, one thing that is certain is the ‘essential’ role infrastructure plays in investment portfolios. If you do anything, include infrastructure in portfolios. - Michael Bessell, Dexus. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The transition a net zero emission economy offers risks and opportunities for investors. Investors are increasingly seeking to invest in the resource companies and manufacturers whose products are required to enable the world to transition to cleaner energy sources while avoiding businesses with high emissions, due to concerns about asset stranding risk. Infrastructure companies provide access to energy, water and transport - as they always have done - and are generally not viewed as exciting energy transition opportunities. Furthermore, infrastructure screens as high emissions. However, infrastructure sectors are major beneficiaries of the transition and concerns about asset stranding risk are misplaced. Infrastructure is a simple way to benefit from the transition to a net zero emission economy and represents a multi-decade growth opportunity.
- Gerald Stack, Magellan Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
AI has been described as a lever for detaching economic growth from population growth – as important as the steam engine. AI is the latest tool in a wave of disruption that is rolling through all global industries, at a pace that is quickening. Companies that don’t use the cutting-edge tools – like AI - to remake their business, as did Amazon, Netflix and eventually Disney, simply don’t have a place in today’s portfolios, whether index or not, because technology is slashing their useful lives, causing them to derate and increasing their cost of capital. - Alex Pollak, Loftus Peak. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
We are living in the middle of a major societal shift towards not just the usage of, but the reliance, dependence and advancement of our lives being built on technology that seeks to emulate us, mimic us and envelope us. We often talk about human invention through the lens of the industrial revolutions - the first, mechanisation through steam and coal; the second, automation and mass production through electricity; and, the third, computer, automation and systems of record/engagement. We are in a new revolution, the fourth age, systems of intelligence and the AI revolution. - Tidal Ventures' Grant McCarthy and Microsoft's Shane Baldacchino. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Emerging Market (EM) equities continue to trade at significant discounts to those in Developed Markets (DM). With structural demographic tailwinds, years of relatively progressive interest rate policies and major progress on the ESG front, most EM economies (at least those with a reliable rule of law) are well placed to deliver positive outcomes for investors. Today, many of the leading companies servicing those economies have superior earnings growth to their DM peers with many trading even cheaper than at the height of the Covid market turmoil. Are valuation driven investors breaching their own defensible investment philosophy by not holding a standalone exposure to EM equities? - Ross Cameron, Northcape Capital. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The market and economic backdrop is making diversification in a global equity allocation difficult. Market cap indices are narrower than any time in history, as the market and active managers flock to the mega caps perceived as logical winners from the AI revolution. As markets become narrow and expensive, core, growth and quality portfolios are converging. This presents risks for many portfolios but a great opportunity for valuation-focused investors. While headline multiples are demanding, there remains opportunities in predictable earnings and forecastable cashflow generators that are being overlooked. As valuation and concentration risks rise, doing nothing is no longer an option, particularly when not everything carries the same risks. - Warryn Robertson, Lazard Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Warren Buffett famously said, "in the short run the stock market is a voting machine but in the long run it is a weighing machine" - what gets weighed are fundamentals, specifically earnings. Brokers hire a great many analysts to write and publish detailed analysis on corporate earnings forecasts. These individual forecasts are combined to create consensus median estimates on what a company is expected to earn in 12 months' time. It's right to focus on earnings, but the level of delivered growth is less important than the surprise in growth, the amount by which a company beats or disappoints relative to expectations. Equity factors focused on fundamentals deliver better outcomes - and given the uncertainty in the current environment, the Quality and Low Volatility factors can capture better earnings surprise when the overall market disappoints, providing protection in an equity allocation. - Ram Rasaratnam, AXA Investment Managers. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Further weakening of the global economy continues to be likely with geopolitical, policy and banking sector pressures and the elevated probability of recession in coming quarters. Sitting on the sidelines with cash, however, comes at opportunity costs to investors with current yields at a decade high. The role of bonds in a portfolio can aid in pursuing investor goals or stabilising a portfolio to be more resilient when economic shocks hit markets, however, many investors would benefit from evaluating whether their bond holdings are meeting these goals. Investment-grade corporate bonds offers an important ballast towards overall asset allocation and can improve portfolio risk-adjusted returns. A focus on the highest quality securities will provide opportunities for investors to capture future income, as well as add a defensive anchor within portfolios. - Jeremy Cunningham, Capital Group. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Many financial commentators have suggested that the strong growth of the non‐bank corporate lending market is a short‐term, cyclical trend that could threaten the stability of our financial system. The growth of the non‐bank market can be explained by a long‐term structural shift toward private capital as banks and public markets have transitioned from serving small and medium‐sized companies to larger companies over the past several decades. For investors, private credit presents an attractive opportunity to add diversification and attractive risk-adjusted returns to portfolios. Characteristics such as yield premium over comparable liquid markets, control, upfront economics and low historical volatility and default rates all make this asset class one to consider for a core allocation in investors' portfolios. - Teiki Benveniste, Ares Australia Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Private markets have long been shrouded in mystery. Many people hold strong opinions about them, but these opinions are often not rooted in facts - due in part to the fact that data on private markets has been scarce, making it difficult to assess true performance. But data is available - and it debunks some of the most common misconceptions about private markets. In fact, the data shows that private markets not only demonstrate more resilience than traded assets during downturns, private equity has also historically beaten public markets, besting liquid equities over most 10-year time periods. Private equity can represent a target-rich environment, the market potential of which studies show is larger compared to publicly traded companies. In all, private markets should not be overlooked by investors. - Hamilton Lane's Mario Giannini. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Traditional performance attribution helps explain past fund performance but is not predictive of future success. In the same way that Moneyball has swept every professional sport, data science is bringing greater transparency into portfolio managers’ decision-making skill. Decision attribution, which analyses the buy and sell decisions of individual portfolio managers, helps identify patterns of demonstrated skill - and specific areas for improvement. For portfolio construction practitioners seeking to select managers capable of outperforming, behavioural analysis of fund managers is crucial. - Essentia Analytics' Clare Flynn Levy and Langdon Equity Partners' Greg Dean. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Three gigantic, global, interconnected risks have the potential to upend the world as we know it. The rapid acceleration of artificial intelligence, the escalating US-China war and the ways in which it has the potential to catalyse massively disruptive developments in the weeks and months ahead, creating ripples that will impact our world for decades, and challenges to the US dollar's reserve currency status will define the geopolitical, technological, and economic landscape in coming decades. Yet each risk is accompanied by tremendous opportunity. Investors who understand a wide range of potential outcomes for ambiguous developments will be better positioned to successfully navigate the uncertainty plaguing our world. - Vikram Mansharamani, Visiting Fellow at Portfolio Construction Forum. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
The young are better able to navigate volatility, uncertainty, complexity and ambiguity, owing to their natural growth and learning mindset. In an environment where investors can do anything, just not everything, we can all benefit from adopting a youth mindset. Young people own their values, are passionate in their activism, use empathy to understand the world, and seek clarity and choices that allow them to be agile and adaptable. Practitioners can incorporate these lessons to successfully navigate a VUCA world, and build better quality multi-asset, multi-manager portfolios for their clients. - Tassos Stassopoulos, Trinetra Investment Management. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Artificial intelligence will revolutionise our lives, in positive and negative ways. Yet the current generation of large language models suffers many of the long-standing problems associated with AI, while “general” artificial intelligence remains a distant prospect. As such, investors should beware the lofty multiples assigned to AI-related stocks. We are in a replay of the dotcom bubble, with a blend of loose financial conditions and hype surrounding a new technology. The AI mania has further to run but it will be ended by additional Federal Reserve tightening, in response to stickier-than-expected US inflation. - Dominique Dwor-Frecaut, Macro Hive s on Portfolio Construction Forum
The world has undergone a structural shift from the prior lower for longer regime to an environment of higher (but falling) inflation, higher volatility, and significantly higher interest rates. A shift of this magnitude demands an asset allocation response from investors, and looking in the rear-view mirror for directions is misguided. Instead, investors must consider which assets repriced first to reflect this new regime and which are still playing catch up. At a time when "you can do anything", there are meaningful implications and opportunities for portfolio rebalancing and those investors still structurally underweight bonds need to put aside recency bias and "do something" now. - Rob Mead, PIMCO. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Markets have undergone a regime shift - and practitioners and investors must change the way they think. To prosper in this regime, we need to embrace the Quantity Theory of Money, appreciate that the US and China are engaged in an economic war, and recognise changes that are occurring in national economies – all of which affect global currencies. Understanding these factors will be crucial to building multi-asset portfolios capable of delivering financial wellbeing in the years ahead. - Professor Steve Hanke, Johns Hopkins University. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Since central banks abandoned their ultra-loose monetary policies, the macro landscape has become increasingly divergent, with greater dispersion across interest rates, economic growth, and inflation. As a result, currencies once again offer a source of investment returns, as well as portfolio diversification. Managed futures strategies allow practitioners to exploit tactical opportunities in this highly liquid asset class, in a systematic way. - Razvan Remsing, Aspect Capital. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
Beyond a near-term sluggish outlook for global growth, practitioners should think about three key forces which will drive long-term market risks and opportunities. The energy transition will disrupt economies for decades, while generative AI will affect businesses ranging from fast food chains to healthcare providers. Meanwhile, geopolitical tensions have significant implications for the profitability of multinationals. Shorter term, practitioners should prepare for sluggish global growth in 2024, driven by weak US and European consumer sentiment, and by real estate and youth unemployment challenges in China. - Ronald Temple, Lazard on Portfolio Construction Forum
Not all "quality" is the same. Being narrowly focused on either Growth or Value styles can lead to a volatile return profile. Quality can be found in both cyclical and defensive companies. ESG is a key component of quality and a material contributor to client outcomes. Company engagement is a superior approach than divestment when considering ESG in an Australian equities portfolio. Where there is no clear path to a satisfactory ESG profile, excluding a company for investment is the only way to ensure responsible capital allocation. Protecting capital in down markets is the foundation for superior returns – and quality investing, with a long-term investment horizon, protects shareholder wealth on the downside, while capturing steady capital growth. - Craig McCourtie, Northcape Capital on Portfolio Construction Forum
Since the end of the Second World War, the US dollar’s reserve currency status has supported liquidity and efficiency in the global financial system. From a US perspective, dollar dominance brings additional benefits, reducing borrowing costs and import prices, allowing domestic consumers to enhance their living standards. While the US dollar’s share of global foreign exchange reserves is in long-term decline, governments around the world continue to view America as reliable and stable, ensuring that the currency’s dominance will continue. - Dr Woody Brock. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
Aggressive central bank tightening raised bond yields and increased the risk of recession in 2023. As economies slow, fixed income will once again provide portfolio diversification, allowing practitioners to focus on capturing long-term trends such as climate change and artificial intelligence. Renewable energy, electric vehicles, hydrogen fuel and carbon capture offer attractive ways to play the theme of climate change. And while technology stocks may be overpriced, AI promises significant long-term productivity benefits across a range of sectors, including healthcare, marketing, and finance. - Chris Iggo, AXA Investment Managers. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Regime identification is critical to successful portfolio construction strategy. The asset management industry has operated in a disinflationary world for 40 years - a world where capital takes the spoils. If labour is to become more dominant, what does that mean for asset allocation? As we move into an era which is both more inflationary and more volatile, asset allocators will need to adapt in order to deliver returns. There will be significant opportunities to do so - but a different set of tools will be required. Correlations that have held firm in a low inflation, falling interest rate environment will become unstable, testing traditional portfolio theory. A dynamic and unconstrained approach to asset allocation will become essential. - Fiona Ker, Ruffer. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Not all "quality" is the same. Being narrowly focused on either Growth or Value styles can lead to a volatile return profile. Quality can be found in both cyclical and defensive companies. ESG is a key component of quality and a material contributor to client outcomes. Company engagement is a superior approach than divestment when considering ESG in an Australian equities portfolio. Where there is no clear path to a satisfactory ESG profile, excluding a company for investment is the only way to ensure responsible capital allocation. Protecting capital in down markets is the foundation for superior returns – and quality investing, with a long-term investment horizon, protects shareholder wealth on the downside, while capturing steady capital growth. - Craig McCourtie, Northcape Capital on Portfolio Construction Forum
...though not unconditionally. Behavioural scientists have long embraced the view that emotions are not only unnecessary but disruptive. Yet the nascent field of Neurofinance, which studies how the brain perceives and reacts to financial risks, suggests that emotion is central to rational decision-making, and investors attuned to their emotions can make better decisions during critical market events. At the same time, 'too much' emotion can lead to financial mistakes caused by panic and irrational exuberance. The challenge, therefore, is for investors to learn how to be attuned to their emotional brain without being overwhelmed by it. - Associate Professor Elise Payzan-Le Nestour, UNSW Business School. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
All relationships are built on trust, which requires integrity, competence and doing the right thing. But to earn justified trust from clients and deliver consistently good outcomes for them, year after year, requires practices and procedures that go beyond compliance obligations to globally recognised fiduciary standards of care. - Aaron Drew, MyFiduciary. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
ESG is no longer enjoying its honeymoon. ESG strategies – whatever that means – have underperformed in 2022 and ESG investment is coming under increasing criticism from politicians, regulators, investors and even practitioners. Some of this criticism is valid but at the heart of the problem is uncertainty arising from the widespread use of an acronym with no – or rather many - common meanings. It is right to question ESG practices, but they have merit and will continue to be increasingly important to investors and by extension, the investments and wealth industry. The real problem is the ill-defined use of the acronym itself and we will all be better off if we stop using it. - Tom King, OAM, Nanuk Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Alternatives should be in every diversified portfolio. Private Equity delivers unmistakable benefits and growth potential, especially in uncertain markets. Unlisted assets, with their proven long-term performance, provide access to a bigger opportunity set that reflects active management in its truest form. Investment into private markets gives managers greater control and influence to transform underperforming businesses. Possibly also influenced by market uncertainty, many businesses are staying private for longer, opening great opportunity for investment managers to continue to diversify their multi asset portfolios with rich investments across many diverse industries. - Dan Farmer, Insignia Financial. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
In research undertaken in partnership with National Seniors Australia, Australian seniors told us that they were feeling the impact of inflation on their lifestyle in retirement. They were concerned about the cost of living and outliving their savings. They want regular income that increases with the cost of living and lasts a lifetime, with access to capital when required. I believe that a partial allocation of retirement savings to a contemporary lifetime income stream can help increase the certainty of delivering what clients want. Such an allocation can deliver more income and with increased certainty. And, contrary to common opinion, such an allocation can help clients preserve assets. - Andrew Lowe, Challenger. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
One of the main goals of investing is to provide for income in retirement – spending! A critical part of any retirement plan is a spending plan (which is not the same as a budget!), that sets out how much money can be safely spent each year, and how this amount may vary depending on changing circumstances and changing market returns. Ultimately, a good spending plan helps keep clients’ investments on track. - Tim Farrelly, farrelly's Investment Strategy. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
As Australians approach retirement, there can often be a sense of trepidation about what lies ahead. And, for a significant proportion of Australians, retirement comes unexpectedly early which can be a cause of considerable angst. Our research shows that those who plan ahead and expect the unexpected retain a greater sense of control and have much less of an emotional roller coaster as they move through their retirement journey. We can help retirees build and retain their sense of control by keeping on building trust and educating them, modelling possible outcomes and demonstrating a planned approach – including providing a Plan B. - Richard Dinham, Fidelity International. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Constructing a retirement portfolio can be complex – how important is it to maximise the client's retirement income while managing the risks to the sustainability of their income and the need for flexibility as their circumstances change? The future is now and the ability to create certainty and confidence via easy access to new and innovative retirement solutions will be critical. I believe retirement strategies must adapt in line with markets and demographics trends and the additional risks that are relevant for investors in decumulation. Retirement income products of the future must be relevant to an ageing population that is living longer and who need certainty and confidence. - Mark Lapedus, Allianz Retire+. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The best investment opportunities exploit uncertainty. These are found by exploring setbacks and change. However, conventional investment training is number-centric, while I argue investing is all about people. Investors must understand companies and their customers and competitors, the motivations of other investors and, importantly, themselves. Empathy is key, yet industry convention emphasises modelling skills and cultivates auras of certainty. To better develop the skills required to analyse corporates, one can start with individuals as case studies and scale from there. If analysts can't do that, it's unlikely they can address more complex situations. - Douglas Isles, Platinum Asset Management. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Investors today have more knowledge than any prior generation, however there remains a chasm between knowing and doing. Our behavioural biases hold us back. Thanks to 50 years of research, we also know in theory how to control our biases. Yet still we fail. No matter how much economies, markets and technologies change, human biases and the difficulty overcoming them remain. Acknowledging we are all biased, because we are all human, is the first step to better decisions. Being mindful of uncertainty, over-confidence, incorrect beliefs, unchecked errors, and the personal risk we face when trying to differ from the crowd are just a few of many steps we can take on the path to more sustainable behavioural alpha. - Longwave Capital's David Wanis. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
It stands to reason that an investor who makes profitable (relative or absolute) decisions more than 50% of the time, and whose profitable decisions typically add more value than their unprofitable ones destroy, will outperform an investor who does not. Decision attribution analysis provides a crucial lens on equity manager skill, benefiting asset owners and fund buyers as they select and monitor managers. In addition, fund managers increasingly use such analysis to identify and overcome their own behavioural biases, producing better outcomes for investors. - Watch Essentia Analytics' Clare Flynn Levy and earn 0.50 CE/CPD hrs on Portfolio Construction Forum
As the world gets increasingly complex and uncertain, creating a sense of confidence in a sea of confusion is key to success. By taking three tools of persuasion – act, think big and symbols – and turning them on ourselves, we can create a sense of certainty, even when who knows what is just around the corner. - Watch Thinkerbell's Adam Ferrier and earn 0.50 CE/CPD hrs on Portfolio Construction Forum
After a lost decade, cyclical and structural headwinds are abating for emerging market equities, while profound secular changes are becoming tailwinds. But the path ahead will look very different to the past, as emerging markets undergo rapid social and structural transformation, accelerated by the Covid-19 pandemic. In times of complexity and ambiguity, investors should avoid the risk of betting on yesterday's winners. The real opportunity lies in taking a fresh approach to identifying, understanding and investing in upcoming trends that will shape emerging markets, some of which will even influence the developed world. - Watch Tassos Stassopoulos, Trinetra Investment Management and earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Disinflation has begun in the United States and will soon in Europe, but cutting inflation from 4% to 2% will be tougher than from 6% to 4%. Even after the near-term battle has been won, the probability of structurally higher inflation across developed economies has increased, and monetary policy responses are likely to diverge meaningfully. To navigate this transition’s VUCA, investors will need to leverage the experience of past decades while also humbly contemplating an uncertain outlook. The winning investment playbook will no longer depend solely on macro factors and asset allocation but will also require fundamentally driven security selection to drive returns. Compared to any post-WWII period, this time really is different! - Listen to Lazard's Ronald Temple and earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The pre-pandemic New Normal decade of subpar-but-stable economic growth, below-target inflation, subdued volatility, and juicy asset returns has faded in the rear view mirror. That environment introduced investors to TINA - there is no alternative. They were forced out the risk spectrum from government bonds, to corporate credit, to equities and beyond, while bonds’ diversifying characteristics came into question But after facing difficulties on all fronts in 2022, investors should be rewarded with more opportunities ahead, even as the global economy confronts headwinds. With interest rates and bond yields having moved higher, every VUCA cloud has a silver lining! It's time to say goodbye to TINA because bonds are back. - Watch PIMCO's Daniel Ivascyn and earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Our diverse panel of experts debated which of the high conviction propositions they heard during Markets Summit 2023 they most strongly agreed with and why, including identifying "silver linings" (investment opportunities not yet fully priced into the market) and which they disagreed with most and why - and the portfolio construction implications of both. - Watch the Markets Summit 2023 Key Takeouts Panel and earn 0.75 CE/CPD hrs on Portfolio Construction Forum
There was plenty of food for thought and grist for the investment portfolio mill, coming out of the recent Markets Summit 2023 "Every VUCA cloud has a silver lining!". - Jonathan Ramsay, InvestSense on Portfolio Construction Forum.
As the clouds of Volatility, Uncertainty, Complexity and Ambiguity continue to swirl, the silver lining is that we are on the road back to normal monetary policy settings, from abnormal, and a return to more rational asset prices. But we must be patient. - Jonathan Pain, The Pain Report. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum.
It's well known that we're experiencing an inflation paradigm shift - but investors underestimate the inflationary effects of high shelter and labour costs in the short run, and of supply chain reconfiguration and climate change mitigation in the long run. Portfolio construction practitioners should brace for more market volatility in 2023 and orient portfolios to resilient fixed income and equity securities. Within alternatives, private equity faces a period of lower returns and increased macro dispersion, however inflation will benefit hedge fund and infrastructure managers. - Lazard's Ron Temple on Portfolio Construction Forum.
A disciplined, scenarios-based approach to determining your views on the outlook for markets is essential to building portfolios capable of achieving client goals when the future ain't what it used to be. In this third step of our hypothetical Investment Committee meeting, a diverse panel of asset class experts debates the implications of the three economic scenarios outlined in the Economic Scenarios Roundtable for the medium-term (three years) for asset class returns. At the end of the panel discussion, the Investment Committee (Strategies Conference 2022 delegates) votes on the likelihood of each of the three scenarios to determine which is most likely, next most likely and least likely. The outcomes are then inputs to the Asset Allocation Roundtable. - Watch Rob Mead, Joseph Lai, Jacob Mitchell and Isaac Poole on Portfolio Construction Forum and earn 0.75 CE/CPD hrs
A disciplined, scenarios-based approach to determining your views on the outlook for markets is essential to building portfolios capable of achieving client goals when the future ain't what it used to be. In this second stage of our hypothetical Investment Committee meeting, three economists describe and debate three plausible, forward-looking economic and market scenarios that have a reasonable probability of occurring during the next two to three years. These are then inputs to the Asset Class Outlook Roundtable. - Watch Dominique Dwor-Frecaut, Andrew Hunt, John McDermott and Jonathan Ramsay on Portfolio Construction Forum and earn 0.75 CE/CPD hrs
The wealth management industry underwent a major transformation during the past decade, including increased scepticism from investors, the growth of robo-advisers, product evolution, and an evolving value proposition - alongside heightened geopolitical risks, increased correlation across asset classes, changing demographics, and rising social tensions. There is increasing traction for the idea that, to succeed in today's complex, uncertain world of investing, practitioners must go beyond plain vanilla stocks, bonds and funds, and embrace alternative investment strategies. But are alternatives the multi-asset portfolio solution they're made out to be? - Watch Tony Davidow, Angela Ashton, Piers Bolger and Razvan Remsing on Portfolio Construction Forum and earn 0.75 CE hrs
Over the past decade, few asset classes have consistently delivered attractive returns with investors capital exposed to significant volatility. As markets change, investors have had an uphill battle keeping up and positioning their portfolios to protect and grow their capital. Over time, private debt has consistently demonstrated a low correlation to public markets and is an attractive alternative source of income in a portfolio. Due to its position in the capital structure and ability to price at a floating rate, private debt, managed by an experienced manager, has and will continue to provide capital protection, stable returns and increasing income against the effects of rising inflation and interest rates. If the question is how to achieve an attractive risk-adjusted return through all economic environments, then private debt is the answer. The future ain’t what it used to be - except for private debt. - Watch Metrics Credit Partners' Andrew Lockhart on Portfolio Construction Forum and earn 0.50 CE/CPD hrs
Infrastructure’s inflation hedge mechanisms are unique amongst real asset options but misunderstood by generalist investors. Investors grappling with allocation decisions for a future that ain’t what it used to be must understand how infrastructure’s unique inflation hedge characteristics protect companies and investors while allowing a tailwind of asset base growth to drive long-term total returns. - Watch ClearBridge Investments' Shane Hurst on Portfolio Construction Forum and earn 0.50 CE/CPD hrs
Portfolio construction practitioners have access to an ever-expanding array of investment research, strategies and tools. Yet the obstacles to meeting clients' long-term financial goals are equally numerous and challenging, especially when the future ain't what it used to be! In an environment of high inflation, tightening monetary policy and heightened economic uncertainty, practitioners must remain open-minded and continuously challenge their portfolio construction beliefs, techniques and tools. This session addressed three contemporary portfolio construction issues: We must use a risk-based framework for portfolio design; The value rotation has just begun; and, ESG ratings undervalue climate solutions. - Watch Philipp Hofflin, Michael Furey, Michael Salvatico and David Wright on Portfolio Construction Forum and earn 0.75 CE/CPD hrs
A disciplined, scenarios-based approach to determining your views on the outlook for markets is essential to building portfolios capable of achieving client goals when the future ain’t what it used to be. In the final step of our hypothetical Investment Committee meeting, our asset allocation consultants use the inputs from the Asset Class Outlook Roundtable to explain the asset allocation implications of each of the three Economic Scenarios, and a portfolio that blends all three scenarios using the Investment Committee’s votes on the likelihood of each scenario from the prior session. The panel will then debate how best to implement those asset allocations across sub asset classes and types of investments. - Watch Sébastien Page, Tim Farrelly, Lydia Kav, Jonathan Ramsay and David Wright on Portfolio Construction Forum and earn 0.75 CE/CPD hrs
Private equity as an asset class is one of the longest-term strategies. Setting up a solid top-down framework, resilient to market evolutions, is key to successful private equity portfolio construction. Building a proven private equity portfolio is not about timing markets, but about identifying the best ideas within that framework - at any point in time. It should be bottom up in approach, while following the course set by the long-term strategy. Surely, one wants to be nimble within continuously evolving market conditions. Yet remaining steady and within the overall long-term objective is key to deliver the best risk-adjusted returns for private equity portfolios. - Watch Pauline Wetter, LGT Capital Partners on Portfolio Construction Forum and earn 0.50 CE/CPD hrs
Climate change is one of the most critical issues facing society – it brings damaging impacts for people, communities, and the natural world, as well as disrupting national economies. Climate action is critical for human progress. Investing and engaging for change, committing to tackling the climate-related risks that threaten the future of the planet is our duty or our future ain't what it used to be! Green bonds are a $1trn market that has burst into the investment world as we all seek to build sustainable future economies. Green bonds channel investments in companies with sustainable practices, allowing investors to seize opportunities in transitioning economy. Coupled with doing good, the well-balanced and transparent universe, with compelling yield and attractive current valuations, make green bonds a meaningful long-term portfolio allocation. - Watch Ecaterina Bigos, AXA Investment Managers on Portfolio Construction Forum and earn 0.50 CE/CPD hrs
With the US Federal Reserve engaged in the most aggressive tightening cycle in 40 years, and many other central banks following suit, the outlook for stocks, bonds and other financial assets is highly uncertain. More than ever, practitioners need to understand the drivers of and the outlook for markets. This session - the first stage of our hypothetical Investment Committee meeting - highlights the key secular and structural forces impacting on markets and the portfolio construction implications. - Watch Jonathan Pain, Marc Seidner, Andrew Clifford and Nikki Thomas on Portfolio Construction Forum and earn 1.00 CE/CPD hrs
Sustainable investing is booming. But today's mainstream sustainable investing strategies aim to avoid financial risks stemming from ESG issues, rather than promoting positive societal and environmental impact. The future ain’t what it used to be! In a context of rising temperatures, collapsing biodiversity, and pressing social challenges, there is a need for sustainable investors to align their strategies with sustainable development ambitions. The Sustainable Development Goals, adopted by the United Nations, provide a valuable blueprint for creating sustainable investing strategies that invest in companies that contribute to a better world. - Watch Robeco's Jan Anton van Zanten on Portfolio Construction Forum and earn 0.50 CE/CPD hrs
The regime has changed. We know diversified portfolios are robust in a disinflationary world, as that is the regime that has prevailed for the past few decades. The recent poor performance of global equities (-14%) and bonds (-10%) in the year to June 2022 has highlighted that some portfolios may not be so robust in an inflationary world. Identifying assets with real cash flows that are resilient to inflation can help restore balance in a diversified portfolio, should the inflation environment remain volatile. The key is being able to access these asset classes in an innovative and flexible manner to deliver a more consistent return profile to clients. The future is definitely not what it used to be. - Watch Al Clark, MLC Asset Management on Portfolio Construction Forum and earn 0.50 CE/CPD hrs
There is an opportunity to capture value in global small cap equities through the identification of attractive long-term themes that are created by the interaction between the secular trends of population growth, aging and urbanisation, and the disruptive forces of technology, society, and resource constraints. Proper theme identification is key to curating an investment universe of companies that are likely to grow sales and earnings in excess of the broader market over time. The future ain't what it used to be, so capital allocators should look beyond arbitrary benchmarks and combine a thematic universe with the structural benefits of small cap investing - including informational inefficiencies, heightened growth, and high active share – to potentially further enhance returns. - Watch UBS Asset Management's David Sullivan on Portfolio Construction Forum and earn 0.50 CE/CPD hrs
Now more than ever, worrying about the downside is going to be key for driving returns for investment portfolios. We stand today in a period of significant regime change with a series of drivers of further inflationary pressures, including structural labour shortages, increasing geopolitical tensions, and an energy crisis. Putting all of these things together, it seems very hard to make the case for returning to the deflationary dynamic that has supported asset markets over the past four decades. The key risk to protect against is inflation, which means that you must hold real assets and seek inflation protection where you can. There will be a need to be more active in your asset allocation, both in terms of the asset classes you consider, but also within asset classes. The future is going to look very different from the past that many of us have lived through in our investment careers. And that is going to require a very different set of skills and assets in order to protect client portfolios. - Alex Lennard, Fiona Ker, Ruffer on Portfolio Construction Forum
Inflation will not fall back to the 2% level that the US Federal Reserve wants, and that we had pre-Covid. Two underlying structural changes that have nothing to do with today's shortage-based inflation will keep US inflation at about 4% in the future:
1. The long-overdue rise in the cost of labour; and,
2. A permanent doubling of the size of the US fiscal deficit as a percentage of GDP.
But the news is not all bad. The IT-based technology revolution is continuing, and as we have argued for at least 10 years, this revolution has been the most important reason why inflation has been dropping for decades – a story completely ignored by the Fed in the 1980-2020 period. I expect the technology story to continue to be disinflationary. Just consider the disinflationary impact of Zooming. - Watch Dr Woody Brock on Portfolio Construction Forum
With rising global anxiety and shifting geopolitical, economic, environmental, and social bedrocks, portfolio construction requires precarious navigation in an ever-changing world. When doing nothing is not an option, how do you avoid curveballs coming at you from all directions? Without a straight path ahead, every investment or allocation needs to be viewed from the bottom up to understand its trendline and the wider dynamics. Only when we adapt our skillsets and reframe our perspectives can we understand why things are happening and capture upcoming opportunities. - Watch Tassos Stassopoulos, Trinetra Investment Management on Portfolio Construction Forum and earn 0.50 CE/CPD hrs.
Here be dragons! Having been used by early mapmakers to symbolise uncharted and yet-to-be discovered territory, the phrase "Here be Dragons" has entered the lexicon in reference to the basic human fear of the unknown. The seismic shift in economic, social and political themes means the future ain't what it used to be! This has made the macro investment landscape feel like uncharted waters. Several significant macro forces have gone into reverse: globalisation to nationalism and reshoring; deflation to inflation; quantitative easing to quantitative tightening – rendering the 60/40 portfolio inadequate. Where portfolio stresses have gone 'off-the-charts', the new economic paradigm requires trend following strategies to navigate uncertainty owing to their directional agnosticism, liquid, adaptive, systematic and broad market coverage. - Watch Razvan Remsing, Aspect Capital on Portfolio Construction Forum and earn 0.50 CE/CPD hrs
Investors should ignore media-hyped narratives, insights from "smoke-filled rooms" and political consultants and, instead, focus exclusively on the measurable, material constraints facing policymakers. In the tug-of-war between policymaker preferences and their constraints, the latter always win out in the end. With geopolitical tensions on the rise, portfolio construction practitioners need a framework for making sense of the cacophony of geopolitical risks with the eye towards generating investment-relevant insights. - Watch Marko Papic and Mathew Jeremy on Portfolio Construction Forum and earn 0.75 CE/CPD hrs
The future ain't what it used to be – that's just noise. Listed Global REITs provide investors with a competitive return profile and diversification from equities which provides a compelling reason for allocations to the sector in portfolios. Underpinned by the physical real estate and listed on stock markets, REITs may appeal to a broad range of investors including those seeking exposure to the underlying returns of the real estate in a tax efficient structure and a more balanced composition of income and capital. Given the exposure to hard assets, REITs also offer the potential to provide an inflation hedge as values track replacement costs. Furthermore, if market conditions deteriorate, REITs are able to provide liquidity when unlisted real estate alternatives often seize up, resulting in lengthy cues for redemptions and untold anxiety for investors. Global REITs have also adapted well to the new way real estate is being utilised and provide exposure to sectors increasingly relevant to the economy, particularly to healthcare, digitisation, ecommerce and housing affordability. What's more they come with best-in-class property management teams that have developed superior technology platforms to better manage the assets and have shown leadership in sustainability. This makes them an attractive target for Private Equity seeking to deploy large amounts of capital efficiently. Hence, GREITs are the investment for all seasons. - Watch Andrew Parsons, Resolution Capital on Portfolio Construction Forum and earn 0.50 CE/CPD hrs
Post Covid, the inflation equation has changed between the East and the West, from high to low beta. An abundance of labour in Asia vs labour scarcity in developed markets is making the relative inflation case for Asia much more attractive. Diverging monetary policy settings and subsequent future economic growth favour the East in a world where the future ain't what it used to be. - Watch Andrew Swan, MAN GLG and earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Rich Pickings explores the investment beliefs and philosophies of prominent professional investors, to enable you to decide whether you agree or disagree with them, so you can better articulate your own investment philosophy. In this episode, I'm in conversation with Alex Lennard, investment director at Ruffer in London. Founded in 1994, and with offices in London, Edinburgh, Paris and Guernsey, Ruffer has more than £25 billion in assets under management. Alex sits on the senior asset allocation committee and co–manages two of the firm's flagship funds.- Graham Rich, on Portfolio Construction Forum
A whole-brain approach to portfolio construction encompasses the complete ecosystem for quality investment outcomes. The heart of portfolio construction is technical, analytical and practical, with practitioners determining the drivers of and outlook for the markets, establishing client objectives and constraints, and designing, implementing and monitoring portfolios to achieve agreed objectives. But, knowledge, skill and expertise in these fundamental topics, while necessary, are not sufficient. Incorporating the human-factors - philosophy and finology - into portfolio construction ensures that practitioners understand and manage their own biases, beliefs and behaviours so that a portfolio is more likely to meet the desired investment objectives. A combination of knowledge, skill and expertise across the fundamental topics AND the human factors is essential for better quality portfolios. - Graham Rich and Rob Hamshar, Portfolio Construction Forum. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
The theory of cognitive dissonance was proposed in the 1930s by psychologist Leon Festinger. His argument was that the human mind is only very rarely in a state of cognitive equilibrium because we are constantly exposed to beliefs, information, ideas, judgments - things he called our cognitions - that contradict our existing ones. This causes us psychological discomfort, which he labeled dissonance. It won't stop us in our tracks, but we don't like it. Like a headache or toothache, it's annoying and so we're motivated to try and get rid of it. Simplifying a great deal, there are essentially two ways to do that - elimination or the use of information. We can either reject the cause of the dissonance ("I don't believe it, it's fake news") or we are motivated to seek information that justifies our investment decision. Understanding how cognitive dissonance can bias our investment decision making, and recognising when our behaviour is being driven by it, is vital. - Herman Brodie, Prospecta. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum https://portfolioconstructionforum.edu.au/article/4088/investors-are-blind-to-what-they-do-not-want-to-see
The latest national census reveals that Australia is a nation determined to change direction. Generational control is shifting, there is a greater sense of Indigenous identity, and core beliefs that once bound our nation tightly are loosening. China is being usurped by India as our primary source of immigrants, foreign students and overseas workers. There is even evidence of the return of the suburban home. Collectively, such trends will re-shape Australia's economic and cultural landscape and influence the way that practitioners build multi-asset portfolios capable of meeting the long-term financial goals of Australians. - Bernard Salt, Allegra Spender, and Tassos Stassopoulos. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum.
Over the last couple of years, the value and growth styles in equity markets have traded dominance, with value recently gaining the upper hand as inflation and bond yields have increased sharply. But looking at funds through a simple value/growth style lens is not enough. We must take a multi-factor approach to analysing funds – including ESG, Quality, Size, amongst others – to reveal the full picture and ensure equity portfolios reflect the investor's longer-term philosophy and/or shorter term views. - Michael Furey, Delta Research & Advisory. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
During the bull market from 2009-2020, investors did well with large allocations to global equity markets, and a modest fixed income allocation to buffer volatility. However, the next 10 years are likely to be dramatically different than the last 10 years, and investors will need allocations to investments that can deliver enhanced returns, increased income, dampen volatility, and hedge inflation. A diversified alternative portfolio can help meet your client needs in this challenging environment. - Tony Davidow, CIMA. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
After the Second World War, western policymakers established the Bretton Woods system to protect capitalism from the forces of fascism and socialism. For a long time, this idea worked, in part because the balance between national interests and the global economy did not get too far out of whack. However, over the past 20 years, global capitalism ran ahead of domestic concerns in individual nation states, while some countries failed to observe the international rules. As policymakers begin the process of crafting a new Bretton Woods, and seek to embed the values that liberal democracies want to uphold, practitioners must understand the implications for asset classes and portfolio construction. - Rana Foroohar, Financial Times & CNN. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Building on evidence from neuroscience and psychology, prolonged exposure to high volatility causes market participants to subsequently underestimate volatility (and vice versa), leading to predictability in stock returns. Distortions in the CBOE Volatility Index (VIX) are consistent with this finding, and investors can construct a trading strategy which exploits the effect. Applied to S&P 500 exchange-traded funds and VIX futures contracts, such a strategy significantly outperforms a buy-and-hold index portfolio, with higher annualised performance, lower volatility, and alphas exceeding 4%. - Elise Payzan-LeNestour and James Doran, UNSW. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
With stock market valuations close to record highs, and interest rates beginning to rise from all-time lows, traditional portfolios are likely to disappoint in the years ahead. In contrast, endowment-style models - which include significant allocations to non-traditional strategies including private equity and debt, liquid alternatives, and real assets - offer an attractive combination of growth and low volatility. By allocating to high-performing external fund managers, such an approach can be implemented efficiently and cost-effectively. - watch Thomas Weber, PhD, LGT Capital Partners, and earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Since I addressed Markets Summit 2022 back on 23 February, arguing "The days of abnormal monetary policy are over", Russia's invasion of Ukraine has triggered a food and energy crisis, further fuelling inflationary pressures in the global economy, at the same time that declining consumer sentiment and Chinese lockdowns are headwinds to growth. The stagflation threat is growing. Such an environment poses significant difficulty for central banks as they try to curb inflation without over-tightening and tipping their economies into recession. If stagflation takes hold, equities are likely to perform poorly but allocations to fixed income and commodities make sense. - Jonathan Pain, The Pain Report on Portfolio Construction Forum.
Since I addressed Markets Summit 2022 back on 23 February, arguing "It's time for a new investing playbook", there has been a major repricing in financial assets. Rising wages and rents signal that an extended period of higher inflation lies ahead, and bond yields are starting to reflect this reality. However, the adjustment has further to run, and speculative growth stocks remain vulnerable. Quality stocks, emerging market debt and convertible bonds offer attractive opportunities when construction quality investor portfolios. - Ronald Temple, Lazard Asset Management on Portfolio Construction Forum
In times of rapid change, the temptation is to grasp the familiar, seek certainty and hunker down until 'normality' returns. But the question should be, 'is there such a thing as normal?' Short-term regularities are often dominated by long-term trends, such that short-term theory is often unhelpful for navigating uncertainty. Steady states are becoming increasingly rare, the belief in 'reversion to the mean' is less relevant than ever and, ultimately, investors are better placed focusing on the main game – long-term change driven by the real economy and real innovation, rather than being distracted by patterns emergent in financial markets or even economic policy response. - Robert Wilson, Baillie Gifford. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Rising inflation, the end of a 30-year interest rate super cycle, quantitative tightening, and continued uncertainty around Covid make for turbulent times ahead. Private Equity (PE) has historically outperformed listed indices, and current macro settings will provide a further wedge of alpha for PE's active hands-on approach. Although traditional barriers to participation in PE are fading, PE remains on the bench for many individual investors. With an end to easy value creation and challenging conditions ahead, don't miss out on PE outperformance in 2022. - Martin Cox, Milford Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Over the long-term, dividend growth and dividend yield are the dominant sources of long-term return. Valuation's importance recedes over time. Therefore, one of the most important decisions taken around the boardroom table is the annual dividend declaration. This is where the board link past success with optimism for the future. Re-investing too much can lead to sub-optimal capital allocation whereas paying out too much can impact upon long-term business growth. Sustainable dividend growth companies appear to play defence well, as this cohort provides the best returns with lowest volatility over long-periods of time. These businesses can be characterised as having consistent pay-out ratios that allow for sufficient re-investment in the business to drive long-term growth and therefore shareholder returns. - David Keir, Dundas Global Investors. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
A great attack scores points, but defence wins premierships. The same principal applies to investment portfolios where, by attacking with allocations to growth stocks, investors can run into problems when equity markets fall. But by making private debt the centre of a defensive strategy, investors can win in all conditions. Private debt protects investors via its position in the capital structure, contractual obligations and the close relationship between borrower and lender. It also shields investors' income against inflation and interest rates by pricing at a margin above official rates. So, as central banks signal rate rises this year to combat inflation, the price and earnings of equities may fall, but private debt investors' income should rise. Those who understand these advantages know that private debt is the best defensive strategy for all market conditions. - Andrew Lockhart, Metrics Credit Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The next decade of decarbonisation is the decade of opportunity to de-risk portfolios and identify green investments. Many regulators, exchanges and clients throughout the value chain expect sustainability to be a strategic focus. Climate change risk factors are changing asset valuations. Key to success is the need for portfolios to account for climate change risk or risk being obsolete. Today's company models and quantitative strategies must incorporate the financial impacts of a carbon price, climate-related physical risks and Paris-aligned trajectories in order to be resilient for future climate change events. Global standards such as IISB, NGFS and PCAF are evolving to ensure a consistent standardised approach. In the transition to a net zero world, there will be those that lead the game and those that are led. - Michael Salvatico, S&P Global Sustainable 1. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Cracks seem to be appearing in Covid winners, as the sensitivity to earnings/guidance misses has grown, as exhibited by strong price declines for more "innovative" market darlings. These companies have a high likelihood of falling into the "overearning" camp, where expectations may be far too high, thus pull forward risk is underappreciated for the quality and durability of earnings growth in the future. They appear all offence and no defence! Investors shouldn't overlook the potential benefits of focusing on the "underearning" camp, particularly companies in the energy sector, where earnings are likely to be far higher and of better quality than market participants may be giving them credit for. It looks like what's "old" will be "new" again, and those investors and managers that are lacking energy may find themselves left out in the cold. - Rajiv Jain, GQG Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Inflection points in inflation, interest rates and the large-scale monetary distortion of recent decades suggest the future will not repeat the same playbook as recent decades. Theoretical, mathematical and backward-looking approaches to portfolio construction risk exactly the same errors as those befalling central banks at present - errors which have significantly distorted economies. In reality, investment and economics incorporate significant elements of human behaviour and luck. Understanding the payoff profile of investments is crucial to portfolio construction with current market valuations looking remarkably distorted. - Martin Conlon, Schroders. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Rising interest rates will create casualties and collateral damage in asset prices, but will bring back market discipline. Post pandemic, the global economy is re-opening and so are markets, resulting in excess demand, price increases and what seems to be full employment. QE is in reverse. Central banks are beginning their run to raise interest rates from historically low levels, after using Quantitative Easing programs to provide demand to suppress bond yields. Markets have not gone through such a large transition before and therefore there will be uncertainty. A return of market discipline will require a rethink of what "defensive" even means, and a very different playbook for active management. - Richard Quin, Bentham Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Record low interest rates have fundamentally changed the playbook for income investors. The traditional havens of stocks and bonds are out of reach with compressed yields and stretched valuations. This has made the search for reliable and attractive risk-adjusted sources of income a dominant narrative for investors, who may often resort to an undesirable move up the risk curve to maintain returns. For institutional and wholesale investors, CRE debt is widely accepted as an asset class, providing diversification and strong, risk-adjusted returns. Australia has a relatively under-developed private debt market, with big banks historically dominating. With banks withdrawing, alternative lenders have greater opportunity. Coupled with rates likely to rise in 2022, it may be a good time to consider CRE debt. - Nick Bullick, Qualitas. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
The extraordinary increase in equity markets and home prices since 2019 and the tightening of financial conditions leave investors exposed to a major correction. This is the time for caution and prudence. Excessive market values of equities and rampant speculative excesses are at levels not seen in modern times. Many expect that the end of the pandemic, reopening of economies, tight labour markets and excess consumer savings will push markets higher, but the warning signs are hiding in plain sight. Proceed with caution, the best offence is a great defence. - Arvid Streimann, Magellan Financial Group. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Regulation and policy to achieve global net zero targets will drive profound changes in the global economy in coming decades. The impacts are predictable and likely to be negative for equities markets over the medium to long term, driving long term returns below historical levels. In the long term, the beneficiaries of climate change action are likely to outperform and provide significant but sporadic opportunities but, in the short term, that is not the case – inflated expectations and poor industry economics have driven predictable underperformance that is likely to continue. In achieving longer term objectives, climate change demands both a defensive strategy to mitigate longer term risks and an offensive, tactical, approach to capitalising on opportunities. - Tom King, Nanuk Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The correlation benefits of traditional 'balanced' portfolios have been central to their success in delivering strong risk-adjusted returns since the 1980s. Central banks created an environment of falling interest rates and low inflation. Bonds acted as effective offsets in falling equity markets. But the game has changed. A new market regime demands a change to the art of portfolio construction. The return of inflation volatility represents the most challenging and significant paradigm shift in decades. Portfolio construction practitioners are going to have to look much harder to find protection, as the last 20 years of optimisation gives way to resilience. - Alex Lennard on Portfolio Construction Forum
Historically, sitting on the fence has implied indecisiveness. But can a high conviction view be a lack of conviction? Investors may be facing a regime shift in markets that changes the traditional relationship between growth and defensive allocations. In a low conviction world, an allocation to a blend of public and private credit makes sense. It allows investors to sit on the fence, retaining flexibility through a period of heightened uncertainty while still generating an acceptable return. - Pete Robinson, CIP Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The game has changed - the 2010s is the wrong analogue for the 2020s, a time when major transformations will lead to more investment in technology, broader sharing of income, and greater greening of the world economy than we have ever seen. It will likely lead to higher growth potential, supporting investments in equities, credit, private assets, and real estate. At the same time, core bonds in many areas have already significantly repriced and are set to play an important defensive role in what is a fast-moving cycle. So, DIG in for an important era, when stakeholder capitalism displaces shareholder capitalism and becomes the main route to boosting shareholder value. - Tony Crescenzi, PIMCO. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
In a world of rising yields, finding value in bond markets is as challenging as it's ever been. Fixed income investors must know that what's worked in the past might not work going forward. Duration is a key consideration to delivering meaningful bond returns, however its role in offering investors a safety net in times of stress is going to be severely tested over the next few years as central banks tighten monetary policy. It is during these times when a braver and broader approach is required, by going on the offensive in fixed income. By taking on more risk (relative to benchmark), and adopting a truly global fixed income opportunity set, investors are giving themselves tools that can help mitigate duration-led losses in their fixed income portfolios. - Joran Laird, T. Rowe Price. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The US outperformance of other equity markets, fuelled by the rise of passive funds, has stretched the earnings multiples for US large cap stocks. Global microcaps offer investors an unparalleled opportunity to invest in economic or market recoveries. They led markets out of the dot-com crash, the GFC, and Covid. This is a segment of the market with its own unique cycle. Marching to the beat of its own drum, the global microcaps sector lowers systematic portfolio risk. Their asymmetry around large market events provides investors with a powerful offence that is a great portfolio defence. - Gino Rossi, Spheria Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Investing over the next several years is going to be unlike anything we've experienced in decades. The pandemic triggered a paradigm shift in the economy, politics, and markets that stimulated a rapid economic recovery. This recovery, however, also added fuel to the fire of inflation resulting from a surge in demand for goods whose supply was constrained. As central banks pivot from QE to QT and rate hikes to dampen price pressures, investors should re-evaluate the post-GFC era playbook that might no longer work amidst structurally higher inflation and rising discount rates. Undoubtedly, it's time to go back to the drawing board to reassess the best approach to both defence and offence in a more volatile, changing market. - Ronald Temple, Lazard Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Our diverse panel of experts debated which of the high conviction propositions they heard during Markets Summit 2022 resonated most strongly, and which they disagreed with most - and the portfolio construction implications. - Markets Summit 2022 Expert Panel. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Complacency reigns after 40 years of falling interest rates and inflation, with soaring asset prices. The wounds of prior cycle-ending events have healed, their lessons forgotten. The post GFC period has seen a "collateral spiral", central bank bond buying forcing asset prices to ever higher levels – yes, quantitative easing matters. But retail investors and the emotion of a genuine bubble were missing. No longer. All the indicia of a colossal equities bubble are in place. If you are not thinking along the lines of 1929, the late 1960s, 1989 Japan, 1999 – you should be. A reckoning approaches. But genuine asset price bubbles draw energy from "anti-bubbles" and there is a lot to own for the next five years if you are prepared to go where the crowd is thinnest, allowing you to be on offense as you defend your clients' portfolios. - Julian McCormack, Platinum Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Real US Treasury yields collapsed from 7% to -6% between 1981 and 2021, yet most economic commentators fail to understand why. Using supply/demand analysis, it can be seen that the decline in US real rates was driven by an increased supply of and reduced demand for investment capital. Inflows from offshore bank accounts, rising household wealth, and soaring corporate profits contributed to greater supply of investment capital. Meanwhile, the shift to a services-based economy and falling birth rates weighed on the demand for investment capital. For practitioners, understanding changes in real rates is crucial to forecasting nominal interest rates, and the outlook for asset prices. - Dr Woody Brock, SED on Portfolio Construction Forum
Rich Pickings explores the investment beliefs and philosophies of prominent professional investors, to enable you to decide whether you agree or disagree with them, so you can better articulate your own investment philosophy. In this episode, I'm in conversation with Hari Balkrishna, portfolio manager at T. Rowe Price, in London. Founded in 1937, T. Rowe Price has more than US$1.6 trillion in assets under management and has operations in 16 countries, around the world. Hari is the portfolio manager for the firm's Global Impact Equity Strategy. - Graham Rich, Portfolio Construction Forum
In today's world, a dedicated allocation to EM Debt is even more important
Episode Description = The Russian invasion of Ukraine is rattling global financial markets. Part of Russia’s capital structure has become uninvestable and Eastern European assets have had significant sell offs despite their balance sheet fundamentals being significantly better. The outlook is positive for many emerging market economies, as growth continues to rebound. Indeed, in 2022, emerging markets are poised to outperform the developed world, as Western policymakers tighten monetary policy and withdraw fiscal stimulus. From an investment perspective, emerging market debt is under-owned, and portfolios should be reallocated to those parts of the world that are beneficiaries of this type of macroeconomic backdrop. - Arif Joshi, Lazard Asset Management on Portfolio Construction Forum
The past half-century brought about a world that's globalised, centralised, and stratified. Now, it's swinging the other way. As we shift to a bipolar or tripolar world, in which the US and China decouple more rapidly, and Europe lives somewhere in the middle, practitioners should seek to understand the implications for different asset classes, sectors and geographies.- John Mearsheimer, University of Chicago on Portfolio Construction Forum
Since the Asian and Long-Term Capital Management crisis of 1998, when Federal Reserve chair Alan Greenspan rescued the markets, Wall Street has called the shots, forcing the US central bank into spectacular interventions and U-turns. Asset prices in general have been pumped full of unprecedented monetary and fiscal stimulus. With US inflation at a 40-year high, and the housing and labour markets red hot, the US Fed has finally taken a distinct and meaningful step forward on the path back to normal. Central banks around the world have begun to follow suit and we’ve now seen a volcanic eruption in short term interest rates in Europe. The game has changed. Investors need to accept that the days of abnormal monetary policy are over. - Jonathan Pain, The Pain Report. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
he past four decades were marked by disinflation as new technologies cut production costs, pushing out the supply curve, and low levels of government spending weighed on demand. Robert Huebscher of Advisor Perspectives speaks with renowned economist, Dr Horace "Woody" Brock, about why short-term inflationary pressures attributed to Covid-19 will bleed into a longer period of higher inflation, with demand rising in the years ahead, as governments become accustomed to spending vast sums of money and workers regain their bargaining power. - Woody Brock, SED on Portfolio Construction Forum
Rich Pickings explores the investment beliefs and philosophies of prominent professional investors, to enable you to decide whether you agree or disagree with them, so you can better articulate your own investment philosophy. In this episode, I'm in conversation with Andrew Clifford, co-founder, co-Chief Investment Officer and Chief Executive Officer of international equities manager, Platinum Asset Management. Founded in 1994, Platinum has more than A$20 billion in assets under management and Andrew co-manages the firm's flagship global and Asia equities strategies.- Graham Rich on Portfolio Construction Forum
Scientific studies suggest the world is still on track to exceed the 1.5 degrees Celsius increase in temperature relative to pre-industrial times, by 2050. We collectively need to do more - and the power of private capital has a key role to play. - Chris Iggo, AXA Investment Managers on Portfolio Construction Forum
Despite the emergence of the Omicron variant, vaccines and antiviral drugs ensure we're seeing the beginning of the end of the Covid-19 pandemic. Fiscal stimulus will help boost US growth to its strongest levels in decades in 2022 and European economies are poised to rebound. However, inflationary pressures will persist. Practitioners must identify assets that will provide downside protection, as well as strategies to capitalise on the growth ahead. - Ron Temple, Lazard Asset Management on Portfolio Construction Forum
SDGs are the framework for holistic sustainable investing
Episode Description = The 17 Sustainable Development Goals (SDGs) lie at the heart of the 2030 Agenda for Sustainable Development, adopted by all United Nations Member States in 2015, and are vitally important to building a better world for all humanity. It is clear that everyone needs to play their part in achieving these 17 goals – including the investment community which has a huge opportunity to influence businesses, by first directing capital to the businesses that are advancing the goals and also by the power of engagement by educating business industry best practice to achieve these goals by 2030. Using an SDG framework, portfolio risk is reduced whist having a positive SDG impact. By using an SDG screen, a portfolio’s downside risks are reduced as it prevents investment in companies with challenged business models in a world seeking a more sustainable future. Furthermore, the portfolio creates positive SDG impact by investing in companies that provide products and solutions that contribute towards achieving the 17 SDGs and excludes companies that have a negative impact. This is the Decade of Action for portfolios. - Erik Keller, Robeco on Portfolio Construction Forum
Many assume there are two kinds of business decision makers - those who are ethical and those who are not. However, most of us are both. Recognising when a business decision has an ethical component, understanding how decision-making biases can lead to ethical pitfalls, as well as when your decisions are not aligned with your own values, enables principled business decision-making and human interaction. - Dafna Eylon. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
Australian cash rates will stay low until the mountain of home loan debt is repaid - and that will take decades. Low cash rates mean low bond rates. Low interest rates mean high asset prices, which means much lower returns lie ahead for all asset classes. Low future returns have many implications - not the least of which are finology-related. Should we warn our investor clients of what lies ahead? How do we keep them engaged? How do we keep them from chasing rainbows? Our communications strategy must be in tune with this new environment. - Tim Farrelly, farrelly’s Investment Strategy. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Trust is the product of two judgements clients make about us - one is about our ability to make good things happen (competence), the other is about our motivation to make those things happen for them (benevolence). The latter also explains the bulk of their overall impression of us. So, we must never neglect demonstrations of benevolent intentions if we want to win and keep clients. And, while the signals that convey competence (e.g., certification, track record, experience) must be earned, those that convey benevolence (e.g., communication style and interpersonal skills) are within almost everyone’s reach. This means that trust could, at least partly, be won without being earned. So is it ethical to try? - Herman Brodie. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
A recent independent research study looking into retirement from the perspectives of over 1,500 older Australians found that finances are at the fulcrum of their happiness and well-being. But it's complicated. There is a paradox in that while the absence of financial stress is a major driver of well-being, increasing wealth is not. And, the study found that financial advisers are the keystone to retirees' well-being: relieving retirees of their short-term stressors; providing retirees with a sense of control in their lives; providing confidence that they can deal with the unexpected; enabling retirees to nurture relationships; and, helping retirees live consistent with their values. - Jason Andriessen, MYMAVINS for Fidelity International. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The finology domain has been the focus of considerable research and innovation in the past decade. Investigations into investor biases, beliefs, and behaviours - and the implications for investor portfolios and the adviser-client relationship - continue to evolve and yield important insights. Moreover, expectations related to "know your client" and "know yourself" have risen considerably in recent years, with many new possible skills, techniques, and strategies with which investment advisers can (or should) be proficient. The Forum created the Finology Benchmarking Indices (FBI) as a critical input into continuing professional and practice development. The FBI encourages reflection on your mastery of the finology domain and how well you are integrating finology concepts, techniques, and self-awareness, into your practice. It also provides meaningful points of comparison with peers. The FBI benchmark dataset as a whole, representing more than 450 investment advisers from Australia and New Zealand, offers an intriguing snapshot into finology proficiency and practice that may challenge your assumptions. Knowledge and proficiency in finology is essential to knowing yourself and your clients – and to developing ever better relationships with clients to help them achieve their goals. Finology benchmarking matters! - Rob Hamshar, Portfolio Construction Forum. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
People love money, and all the things it can do for them and their loved ones. Money is sexy, liberating, and fun. However, the financial services industry has disconnected people from their money. They’ve done the impossible and made it boring, opaque and difficult to understand. If we better understand the psychology of money, we can better help our clients. - Adam Ferrier, Thinkerbell. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The same mind-set that works so well when people are building their nest egg for retirement can damage their quality of life in retirement. Many retirees have a difficult time changing their mindset from a saver to a spender. Even people who want to "smooth" spending during their entire life cycle find it difficult to estimate their life-cycle wealth. Moreover, people find it difficult to resolve conflicts between wants for spending and wants for saving - and we reconcile conflicts between these wants using framing, mental accounting, and self-control rules. You help your clients accumulate responsibly - you can help your clients decumulate responsibly, too. - Meir Statman, Santa Clara University. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
Clients and investors are concerned about investing in assets like utilities with exposure to carbon emissions due to climate change concerns, and fears over asset stranding risks. However, regulated electric utilities – even those burning coal and gas today to keep the lights on – are well positioned to navigate this. Despite concerns, these high-quality businesses should not only face very little asset stranding risk over coming decade but will be a significant beneficiary in a greener world. - Ben McVicar, Magellan Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
As investors themselves, advisers can suffer from the very biases they attempt to combat within their clients. However, these traditional behavioural finance biases manifest in ways unique to advisers. By failing to account for those biases in the design and implementation of investment solutions, advisers risk the delivery of optimal client outcomes and deepening relationships.- Jason Komadina, MLC Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Regulation states that fund managers must not mislead clients. However, subtle nuances around word choice, connotations and links to performance can distort framing. While prescribed scales exist for risk, analysis shows inconsistent application. Gradable adjectives (e.g. strong) can be subjective. Examples like the Beaufort Wind Scale assign words to speeds. Analysis of market data shows the distribution of outcomes. The "Isles Scale" maps asset class returns to pre-defined words for given time periods for the purpose of investment communication. Prescribing universal implementation of this approach would remove a dangerous loophole in the regulation. - Douglas Isles, Platinum Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Managing risk and preserving capital are too important to be left to the trading strategies used for many financial products. From the first approach through to final approval, private debt requires a lender to have strong relationships with borrowers, a deep understanding of their businesses, informed risk assessments, and legally binding contracts with terms and conditions that protect investor capital and generate income. These same mechanisms help the borrower and lender weather storms to their mutual advantage. Few of these steps are present in public market trading strategies, leaving investors exposed at a time when quantitative easing has inflated the price and risk of other asset classes. Private debt prices in this risk and allows you to offer investors the capital protection they deserve. - Andrew Lockhart, Metrics Credit Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
It is possible to generate both financial returns and positive environmental and social impact from fixed income portfolios. Positive selection creates a broader universe of sustainable companies, and therefore a greater opportunity set than negative or exclusionary policies. The in-depth analysis involved in a positive selection approach provides confidence in the sustainable practices of these business – and companies with sustainable business practices are likely to be better credits in the long term, providing a degree of downside protection. As a result, positive selection delivers more sustainable risk-adjusted returns than a stand-alone exclusionary approach. - Stephen Fitzgerald, AO, Affirmative Investment Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
There are strong behavioural biases that attract investors to complex strategies. We know that outperforming the market is hard, so it makes sense that it takes a complex approach to do so. It's difficult to separate skill from luck, so complexity serves as a mental shortcut to help identify competence. Complex approaches to investing include thematic investing, market timing and hedge funds, all of which carry an air of sophistication. However, introducing complexity will, on average, diminish the odds of success and detract from returns. To make better financial decisions, eschew complexity and embrace simplicity. - Stephen Arnold, Aoris Investment Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Under our current defined contribution system, the retiree bears all the risks - longevity risk, inflation risk and investment/sequencing risk. Empirical evidence shows that retirees have a bias against drawing down on capital, and this preservation of capital is likely explained by the need to insure against these risks. A high equity income strategy tailored for retirees is a core solution for providing better retirement outcomes, maximising income while leaving capital intact. - Don Hamson, Plato Investment Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Heuristics such as availability bias, herd instincts and extrapolation that get in the way of making the right decision at the right time are the most prevalent at the extremes. When markets are exuberant it is difficult to see - let alone act - against the hubris. When markets are down in the dumps, it is difficult to see past the misery. An example is Covid. Initially, it was a common cold (complacency), then it became a never-ending lockdown and recession (doom and gloom). Now, there is optimism after the stimulus fuelled recovery. Managing these heuristics is even more important when investing in emerging markets, where so many of our impressions of what is happening on the ground are coloured by opinions of different media outlets with their own respective filters. So why is it so hard to manage our behaviour biases? It may be because heuristics are so genetically programmed into us as humans that none of us can quite pull ourselves free from the gravity. In the age of rising geopolitical tension, fake news and social media silos that reinforce our base instincts at every turn, this can move us away from the true north. How do we centre ourselves in reality? A reductive macro-economic framework may be the answer, helping centre our qualitative assessment and decision-making using high "signal-to-noise" ratio data that tell us what is really happening in economies and market sentiment. - Joseph Lai, Ox Capital Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
We all agree that, sadly, there is no such thing as the perfect company. This presents a great challenge for responsible investors. The companies that are solving the world’s greatest challenges - be they environmental or humanitarian – often have near term imperfections that see them starved of capital. A pragmatic approach is what's required, one that embraces company imperfections and focusses on the big picture – the potential for positive societal impact. Thoughtful and constructive company engagement can help bridge the gap from good to great. But the term engagement has been caught up in the jargon and acronyms that increasingly pervade responsible investing. Ultimately, engagement is as much about support as it is challenge – a collaborative partnership where the end really can justify the means. This case study illustrates the point. - Iain McCombie, Baillie Gifford and David Richardson, Just Group. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Active long biased, long short equity is optimal for meeting client goals. It combines equity market beta with absolute return thinking, stock picking skill, and flexible exposure. Market neutral investors forgo desirable long-term beta; long only investors forgo flexibility; behavioural biases risk passive investors panicking in bear markets and locking in losses. Investors should view long biased, long short equity as a core solution, dedicating a meaningful slice of portfolios to this strategy, rather than being constrained by traditional equity/debt buckets. The long-term alignment of the strategy (“means”) with client goals (“end”) is demonstrable and paramount. - Andrew Clifford, Platinum Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Many retirees are focused on the income return from their investment portfolios as the foundation for what they have available to spend in retirement. The flaws of income-oriented strategies have always been present, though the implications are now becoming more apparent, and the consequences could be about to bite. As the yields for most investments are historically low, and likely to remain low for several years, retirees may be tempted to reallocate to higher yielding investments, such as high yield bonds or equity-income strategies. This has led to some commentators to call the death of the traditional 60:40 portfolio. A total return approach presents a compelling alternative as it can support retiree spending strategies while removing the temptation to increase risk. So, in the end, total-return portfolios could mean better outcomes for retirees. - Aidan Geysen, Vanguard Investments. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
A disciplined, scenarios-based approach to determining your views on the outlook for markets and then the asset allocation implications is a vital means to the end – building portfolios capable of achieving client goals out into the future. This hypothetical Investment Committee meeting picks up from the Economists Roundtable earlier in the day. First, an Asset Class Expert Panel debates the three forward-looking economic and market scenarios presented by the Economists Roundtable. The Investment Committee (Strategies Conference 2021 delegates) then votes to determine which of the three scenarios is most likely. Finally, our asset allocation consultants explain the asset allocation implications of each scenario. - Anne Anderson, Jacob Mitchell, Julian McCormack, Rob Mead, Tim Farrelly, Angela Ashton. Earn 1.25 CE/CPD hrs on Portfolio Construction Forum
Infrastructure has a key role to play in the world's move towards decarbonisation and goal to reach net-zero emission targets by 2050. Government policy support and the unprecedented amount of capital required to achieve these targets should change how you think about investing in infrastructure assets. Global listed infrastructure is a means for investors to access this accelerating investment trend, through high-quality and geographically diverse liquid assets, but an active approach is critical to building out infrastructure investment opportunities. This multi-decade initiative is happening today. Now is the time to ensure portfolios are exposed to the net-zero investment opportunity infrastructure offers. - Nick Langley, ClearBridge Investments. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
A disciplined, scenarios-based approach to determining your views on the outlook for markets is a vital means to the end – building portfolios capable of achieving client goals out into the future. Three economists describe and debate three plausible, forward-looking economic and market scenarios that have a reasonable probability of occurring during the next two to three years. - Andrew Hunt, Dominique Dwor-Frecaut, John McDermott. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
Building quality investment portfolios is not simple, yet portfolios are simply a means to an end – achieving client goals. Practitioner education, however, focuses heavily on developing technical investment skills, often to the detriment of time learning the knowledge and skills that enable better engagement and understanding of the most important aspect of any portfolio – the client! Finology is the unique mix of behavioural finance ("fin") and investor psychology ("ology") as it relates to understanding the investor mindset and giving investment advice. It focuses on identifying our own and our clients' investing biases, beliefs and behaviours and the investment implications, as a means to a better end for clients. - Rob Hamshar, Paul Moran, Pauline Ramsay. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
Portfolio construction practitioners have access to a broader array of investment research, strategies and tools than ever before. Yet the obstacles to meeting clients' long-term financial goals are equally numerous, in an environment of record-high asset prices, massive fiscal and monetary stimulus, and heightened economic uncertainty. To assist individuals in achieving the ultimate goal of financial independence, practitioners must remain open-minded and continuously challenge their portfolio construction beliefs, techniques and tools. - David Wright, Kyle Lidbury, Michael Furey, Sonia Bluzmanis. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
For decades, investors used the 60/40 portfolio as the default market proxy. The expectation was the 60% allocated to global equities would provide the growth, the 40% allocated to fixed income would generate sufficient income, and the relatively low correlation between the two provide diversification. Unfortunately, capital market assumptions are projecting a substantial reduction in global equity returns over the next 10 to 20 years, fixed income yields are near generationally low levels, and correlations among most traditional investments have been rising. In other words, the maths just doesn’t add up. Practitioners need to continuously upgrade their toolbox to achieve portfolio goals. We need to identify alternative sources of returns and income to help investors achieve their goals and objectives, and investments that can help buffer the inherent volatility of the global markets. Asset allocation and portfolio construction needs to consider an expanded set of solutions including hedge funds and private markets (private equity, private credit & real assets) so that portfolios are truly the ends to the means. - Tony Davidow, CIMA®, T. Davidow Consulting. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
Capital markets will be shaped profoundly as the economy transitions from a depletive economic model to a more sustainable one. Such transitions will inevitably create winners and losers. Within Environmental Markets, a host of macroeconomic factors is driving growth for energy efficiency, renewable energy, water, waste/resource recovery, food, and agriculture related markets. For asset allocators, recognizing such opportunities and seeking higher quality companies with strong business models is key to delivering excess risk-adjusted returns. The next economy is sustainable. In the end, a portfolio that is able to capture emerging alpha opportunities will be the means to long term success. - David Li, Impax Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Australia faces significant challenges ahead - including navigating the health and economic impacts of Covid, responding to emerging issues around the future of work and new technologies, preparing for an increasingly risky geo-political environment, and addressing longstanding challenges such as climate change and reconciliation with Indigenous Australians. Addressing these requires leadership of a quality that enables society to cohere in the face of pressures that would otherwise create divisions. Trust will be at a premium - in turn, this will depend on the quality of ethical decision making by individuals, groups and organisations. A more ethical Australia would achieve an economic improvement about half as big as the nation’s economic reform priority list outlined by the Productivity Commission in 2017 (which would lift the economy by some $80 billion over time). But improving ethics cannot be achieved with a single initiative; it requires improvements in five key areas. With the individual, business and economic benefits on offer from a more ethical Australia, the business case for change is a sound one. In the face of the challenges ahead for Australia, strengthening ethics is simply a must for a better future. - Deen Sanders, OAM, and John O'Mahony. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
With more than A$3 trillion in assets under management, Australia's superannuation system is one of the best-resourced retirement systems in the world. But for individual Australians, a reasonable standard of living in retirement can only be achieved with appropriate accumulation and decumulation solutions. As the Baby Boomer generation continues its transition into retirement and life expectancies rise, portfolio construction practitioners must be open-minded to ensure they have the retirement solutions needed to meet client goals right to the end of their days. - Adrian Stewart, David Richardson, Iain McCombie, Richard Dinham, and Professor Susan Thorp. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
The UN Sustainable Development Goals (SDGs) are 17 objectives for promoting ecological sustainability, social well-being, and economic development, providing governments, companies, and investors with a global blueprint to sustainable investing. For fund managers, investing will no longer be just about increasing financial value. The fund manager of tomorrow understands that the real-world impact of investments to society and the environment is equally important to generating alpha. Integrating SDGs in the investment process provide a means to understanding the real-world impact of companies. When building sustainable portfolios, investors should consider the real-world impact of their investments and build portfolios aligned with the SDGs as a means to building clients' wealth, as well as improving well-being. Aligning investments with the SDGs justifies the means. - Erik Keller, Robeco. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Will current elevated levels be sustained? Not likely. Post Covid-19, secular factors such as debt levels and demographics provide even stronger headwinds against inflation than the preceding decade ever did. In developed economies such as the United States and Australia, Consumer Prices averaged circa 2.00-2.25% this century. Current market inflation expectations for the next 10 years suggest CPI of 2.5%. That’s price stability, not inflation. Central Banks have created some room to allow inflation to run a little higher than traditional targets, but their aims are the same. In the end, it is prudent to consider the risks of persistent high inflation, but the means is not to flip portfolio asset allocations in response to the recent euphoria. Rather, asset allocators need to focus on and set their portfolios for the underlying regime of price stability. - Chris Siniakov, Franklin Templeton. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
There are now a plethora of funds that aim to account for environmental, social and governance issues based on different philosophies and processes. Passive screening and divestment approaches are inefficient ways of bringing about real change. To achieve the ultimate end - the preservation of our planet - practitioners should instead use active, fundamental strategies, capable of identifying companies that are helping the world adapt to, or mitigate, climate change. The top-line revenues of such portfolios will handsomely outperform GDP in the years ahead. - Kimball Mayer, GMO. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Markets and economies have benefitted from more than three decades of declining interest rates, as central bank inflation-targeting regimes, globalisation and new technologies helped keep goods and services prices in check. It is unlikely that this “great moderation” can continue throughout the 2020s. Stimulatory fiscal and monetary policies remain in place, despite rising inflationary pressures - in the US, at least. Meanwhile, a potential combination of Chinese deleveraging and tighter Federal Reserve policy raises the risk of deflation. Uncertainty around the inflation outlook is at an extreme – yet a view on inflation is a critical input to building portfolios capable of achieving client goals out into the future. - Hayden Briscoe, Joachim Fels, Jonathan Pain. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
Alignment of portfolios to meet non-financial objectives is an increasingly important consideration in portfolio construction. Investors still need to focus on income, growth or capital preservation – but a second layer of objectives is the ambition to enjoy those financial rewards in a world that can physically sustain the standards of living we demand. There are a growing number of techniques available to do that. Exclusion is one means to the end, but this can be sector/industry based or use a best-in-class approach. Engagement is important as investors put more pressure on companies to commit to a net-zero aligned path for emissions using Science Based Targets. There is no point in building wealth for the future if that future is one of frequent and catastrophic climate events that undermine our way of life. - Chris Iggo, AXA Investment Managers. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
When accumulating assets, investors typically seek to maximise their account balance around the time they retire, while managing the associated risks. This leads to a focus on the risk-return ratio and mean-variance optimisation. But in retirement these goals shift, and investors seek to convert their savings into a sustainable salary replacement with access to growing capital. The metric for success must also shift to accommodate these trade-offs. Retirement Utility, which generalises the Members Default Utility Function, provides such a metric, reflecting investors’ risk averse preference for higher income and higher liquid asset values. This lens enables us to determine optimal investment strategies through reserving, and casts light on finding an efficient and effective means to the end - delivering great investment outcomes in retirement. - Paddy McCrudden, Magellan Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Private debt has stepped out of the shadows of the banking system to become an important supporter of business activity. All of the elements that have attracted the banks to this market for centuries - security against the borrowers’ assets, attractive risk-adjusted returns, steady income - remain in place. But private debt delivers them without the baggage of regulation and high fixed costs that apply to banks. This, plus the diversification and protection against rising inflation and interest rates, makes private debt essential to modern portfolios. If the end objective is an attractive risk-adjusted return, then private debt is the means to get there. - Andrew Lockhart, Metrics Credit Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Style matters when constructing portfolios, but there are other characteristics in a manager that are as important, if not more important, in generating consistent returns over the long term. These include a high active share coupled with good risk management, high idiosyncratic risk and a proven track record of picking the right stocks. A manager selection framework based on academic research and historical analysis is the means to the end – finding such managers and building portfolios capable of generating consistent returns over the long term. - Myooran Mahalingam, MLC Investments. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The outlook for emerging markets debt is growing increasingly bullish. The global economy is transitioning from a V-shaped recovery led by parts of Asia and the United States, to one in which emerging markets will outperform. Bouts of heightened volatility are offering attractive entry points to an asset class that offers much sought-after yield. With attractive valuations and global investors underweight the asset class, the case for a dedicated EMD allocation is growing ever stronger. As a means to defend fixed income portfolios against rising interest rates, EMD needs to end up back on the asset allocation agenda. - Arif Joshi, Lazard Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
In the 1990s and 2000s, investors were largely able to ignore the "macro" picture, as geopolitical stability and benign inflation provided a supportive backdrop for portfolio returns. Even the Global Financial Crisis failed to end the party, as policymakers stepped in to cushion the blow. But in recent years, macro forces have reawakened. The world has returned to a heightened state of tension between two economic and military superpowers, technology is disrupting business and society at an ever-increasing pace, and “big government” is back, committed to creating a more secure, green and inclusive economic system, ending the Covid-19 pandemic, and unwinding the extraordinary global stimulus response to Covid-19 to allay inflation fears. Macro matters more than ever for portfolios to succeed in meeting client goals in the years ahead. - Pippa Malmgren, Alva Devoy, Magatte Wade, and Ruth Richardson. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
Economists all too often understand their field as the relationship between markets and the state, and they leave squishy social issues for other people. That’s not just myopic, it’s dangerous. All economics is actually socioeconomics - all markets are embedded in a web of human relations, values and norms. And, throughout history, technological phase shifts have ripped the market out of those old webs and led to violent backlashes, and to what we now call populism. Eventually, a new equilibrium is reached but it can be ugly and messy, especially if done wrong. Right now, we’re doing it wrong. We need to rethink the relationship between the market and civil society and return to strengthening and empowering local communities, both as an antidote to growing despair and unrest, and to return to a more secure and stable economic plane. - Professor Raghuram Rajan, University of Chicago Booth School of Business. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
Self-awareness has been hailed as one of the most important meta-skills of the 21st century. One's insight into personal strengths and weaknesses, beliefs, values, emotions, and their impact on others is associated with greater success and fulfillment in many life areas. In an investment advice context, both advisers and clients benefit from putting a spotlight on self-awareness and engaging in activities that promote its development. Advisers with greater self-awareness likely have greater listening and empathy skills, a more sophisticated "theory of mind" and exhibit less bias in how they interpret new information. Clients with greater self-awareness likely have a clearer understanding of their values, preferences, and behavioural patterns (and potential risk factors). Self-awareness is a blend of skill and will, and it can be surprisingly hard to develop in oneself or facilitate in others, as it is often undermined by our biases and habits. Yet new data from the Finology Benchmarking Indices (FBI) suggests that advisers vary significantly in how much effort they put into promoting self-awareness. - Rob Hamshar, Portfolio Construction Forum. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Just as there are many valid investment philosophies, there are multiple ways to implement those philosophies in the form of different portfolio construction approaches. Historically, the Australian market has seen a steady decline in the use of centrally developed multi-asset approaches, with practitioners taking a more active role in product selection, and preferring the transparency of, and client engagement resulting from, taking more control over constructing portfolios and using sector-based investment products. However, with several catalysts impacting on the Australian advice landscape, we are seeing a resurgence back to centrally developed solutions - but the approach differs to history, which affects practitioners’ roles (including researchers, consultants, and financial advisers) in different ways, and has a direct impact on the importance of different selection factors, support requirements, and engagement preferences for asset management product (as well as influencing other key areas such as retirement strategies and platform use). - David Hutchison, NMG Consulting. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
In every face-to-face information-gathering situation, we have the opportunity to manipulate others’ thoughts, beliefs and judgements to suit our ends - as does the person or people we are meeting! Many funds management professionals are typically quite skilled at manipulation, so those researching their investment funds need to protect themselves against manipulation as they conduct their due diligence. In the manipulation stakes, the old adage ‘forewarned is forearmed’ is hopelessly inadequate. Manipulation operates through system #1, the passive, involuntary, automatic part of the brain, i.e., at a subconscious level. Because we cannot turn system #1 off, it is always accessible to manipulators. It is like an open ‘portal’ to our neural network, through which hackers can enter to infect our thoughts and beliefs with their intentions. However, knowing the behavioural science behind some of the investment world’s most common manipulation technique s, you can use them on yourself to prevent others from using them on you. - Herman Brodie, Prospecta. Earn 1.00 CE/CPD hrs on Portfolio Construction Forum
Emotions generated in the media by way of the words used in turn influence investors decisions, providing the foundation for a highly profitable investment process. - Professor Ron Bird on Portfolio Construction Forum
With the official cash rate near zero, generating income from traditional fixed income investments is challenging. The low-rate environment and prolonged equity bull run pre-Covid drove many investors to overweight growth assets. However, the market volatility of 2020 highlighted the risks of this approach. It’s time to head back to the drawing board to find a more consistent source of income. Private Debt is a lesser-known sub sector of the fixed income market that has delivered attractive yields with high capital stability through market cycles. Debt ranks ahead of equity in a company’s capital structure, resulting in much-needed downside protection. With less volatility than equities, and low correlation to public markets, private debt provides a compelling alternative source of income in a portfolio. - Andrew Lockhart, Metrics Credit Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Information technology infrastructure used to be complex, cumbersome and expensive. Today, scale-as-a-service cloud computing platforms allow companies – both large and small – to get their IT infrastructure up and running in minutes. Over the next decade, the growing use of such platforms by innovative start-ups will have profound implications for the global economy. As a result, practitioners need to go back to the drawing board, to revisit their assumptions on which companies will thrive, in a highly disruptive environment. - Josie Bentley, Baillie Gifford on Portfolio Construction Forum
Pockets of froth in markets drive the narrative of an equity market top. However, the equity market in aggregate is not as concerning. Equities are underpinned by unprecedented fiscal and monetary policy - aimed at righting previous wrongs - coupled with economic re-opening. Earnings growth should result, amid abundant market liquidity, in a zero rate world. Markets remain supported - but divergence could increase within. Covid-accelerated trends include digitalisation, geopolitical tension and the impact of ESG on the cost of capital. These trends are structural and investors waiting for reversion to mean should beware. Going back to the drawing board, portfolio construction along with industry understanding remains the bedrock of investment success. - Crispin Murray, Pendal Group. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The energy transition has the potential to be as transformative for the world economy and geopolitical landscape as the digital revolution has been since the 1980s. Shifting from energy derived from fossil fuels to renewables opens up tremendous direct and indirect growth opportunities for investors. There will be increased focus on green bonds and low carbon equities. However, the implications of the energy transition go beyond that. There will be new growth opportunities as many parts of the world economy have the potential to shift from being fossil fuel poor to renewables rich. Standing on the verge of a new decade of transition, it’s time for investors to go back to the drawing board and embrace sustainability, not just in stock selection, risk management or asset allocation, but in every facet of their thinking. - Chris Iggo, AXA Investment Managers. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
As investors go ‘back to the drawing board’ amidst a changeable market outlook for 2021, private equity is an asset class to access now due to its bias for long duration assets with attractive growth profiles. As structural tailwinds for technology continue to accelerate, there is a dearth of listed options for Australian investors to hold; in contrast, private equity offers exposure to businesses with quality recurring revenues at discounts to listed peers. Often underrepresented in investor portfolios due to concerns around liquidity, private equity investing with a truly hands-on approach allows active investors to maximise their capital growth potential. - David Leslie, Ellerston Capital. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
March 2020 saw extreme intra-month volatility across all markets. Daily liquid funds exacerbated this volatility and failed to provide the liquidity promised to investors. In the subsequent recovery, these same funds are singularly focussed on truly daily liquid investments at the expense of returns. Rather than accepting lower returns for liquidity, investors should go back to the drawing board and re-assess their need for daily liquidity. In this low yield environment, there is a role for non-daily liquid strategies which allow investors to buy when liquid funds are selling, to invest outside of the shrinking universe of highly liquid investments and, ultimately, achieve consistent excess returns. - Peter Robinson, CIP Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Supply chain decision makers must continue to focus on mitigating risk in 2021, not maximising growth. Logistics disruptions, competition for components and viral mutations overshadow the first half. Further ahead, political risks outbalance opportunities as China flexes its power in Asia, the Biden administration applies what still amounts to an America-first approach, carbon- and digital-taxes abound and new trade deals lead to stronger competition across manufacturing industries. - Chris Rogers, Panjiva Research. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
After a decade of falling inflation and interest rates, investors must now go back to the drawing board as we look to a very different world in prospect. The aftermath of the GFC saw a series of discrete factors which crippled growth: fiscal austerity; EU intransigence; Chinese tightening and reform… then a global trade war and a global pandemic! The world has changed. Yet investors appear anchored to a narrative about growth and inflation that will prove supremely unhelpful as the global economy reopens amid vaccine distribution, sees the effective cessation of the “US-versus everyone” trade war and widespread, colossal, redistributive fiscal policy. Those who cling to yesterday’s narrative may forego one of the great trades of recent decades as the world shifts to a “global reopening” narrative and away from that of “secular stagnation”. - Julian McCormack, Platinum Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The resource sector is structured around cycle, earnings, capex and returns, but long- and short-term sentiment could be the real drivers. Commodity prices, capex and returns are not yet at peak cycle. De-carbonisation, company management and ESG scrutiny are all emerging themes, diminishing the favoured influence of commodity prices on sector alpha generation. Is this an evolution of value drivers for the resource sector, or are investors just a little late to the drawing board? If long term sentiment begins to turn, then there is significantly more value to be found in the resources sector. - Nick Pashias, Antares Capital. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Investors should reevaluate the role of bonds in a traditional 60/40 balanced portfolio. With today’s very low yields likely to persist, the 60/40 balanced portfolio needs to be “stretched” or redesigned, in order to mitigate the impact of low yields on overall portfolio risk and return. Investors need to make their equity allocation work harder through active management and consider new diversifiers such as long duration bonds or alternatives. - Thomas Poullaouec, T. Rowe Price. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Fiscal stimulus and the vaccine have fuelled an extraordinary rally in equities but ultimately stocks are at record highs because of extraordinarily low market interest rates. This means that for investors, the decision between cash and equities or between sectors hinges on the rates outlook. Even though there are forces keeping rates low, it would be complacent to assume away the risks of higher rates because the inflation outlook is more uncertain than usual at the moment. It would be back to the drawing board for investors if inflation pressures structurally rise, because the Federal Reserve put will be kaput and portfolios would need a radical overhaul. Investors should be wary of inflation - but also of being underweight equities. - Arvid Streimann, Magellan Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
During 2020, G-REITs experienced a once in a generation demand shock as many parts of the global economy were effectively shut down or endured severe restrictions on social mobility. Traditional property sectors such as office, discretionary retail and hotels faced significant challenges. But there were many winners - logistics property, data centres, cell towers, self-storage, and single-family rental actually saw demand and return profiles improve through the pandemic. With the vaccine roll-out progressing, G-REITs offer both cyclical and secular investment opportunities. The diversity within the G-REIT universe coupled with the liquidity of listed markets enables nimble investors to efficiently reallocate capital as risk/return outlooks change. Despite significant challenges during Covid, G-REIT earnings were more resilient than broader equities during the pandemic yet experienced some of their worst relative performance in decades. With new building supply and REIT balance sheets in good shape, G-REITs are well positioned as economies reopen and demand returns. Going back to the drawing board, now is the time for G-REITs. - Julian Campbell-Wood, Resolution Capital. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Structural factors will ensure that the cash rate cannot rise over the medium term. This will result in negligible cash returns over the foreseeable future, with only mild defensive properties. What is the best alternative in the defensive bucket? Going back to the drawing board, a core fixed income exposure consisting of Australian government bonds will outperform cash over the long term. - Chris Rands, Nikko Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
After being considered a cottage industry for nearly four decades and now increasingly demanded by investors across developed markets, Responsible Investing (RI) and the application of Environmental, Social and Governance (ESG) factors into the investment process remain misunderstood – and, too often, mischaracterised as style over financial “substance”. Secular, societal and increasingly standardised drivers behind the systemic adoption of RI across all asset classes – along with the ascendancy of shareholder alignment as a growing movement – is clearly evidenced through three issues: 1. the democratisation and development of data in financial markets; 2. ESG integration has been demonstrated to have a positive impact on portfolios; and, 3. the push for passive which misses the point that beyond lack of sovereignty, there is a collective responsibility to align portfolios with client values. It’s time to go back to the drawing board (for many) and construct portfolios with investment strategies designed to advance humankind towards a global sustainable economy, a just society, and a better world. - John Quealy, Trillium Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The Covid-19 pandemic has accelerated profound shifts in how economies and societies operate and is transforming macroeconomic policy, geopolitics and sustainability. The traditional business cycle playbook does not apply to the pandemic and as this new investment order evolves, investors are returning to the drawing board to identify the key drivers of change. Portfolios must now reflect the new role of developed market bonds given falls in real yields, the realities of an increasingly bipolar US-China world order and the growing investor appetite for sustainable assets. - Ben Powell, BlackRock. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Believe in sustainable investing or not, investors in today’s markets need to understand the impact it’s having on investment returns and portfolio construction. New opportunities abound and may drive macro economics, while access to early stage opportunities is driving investor demand, and markets are already trading on future outcomes. Going back to the drawing board, those that seize the initiative will thrive as the capital markets stand on the cusp of a transformation to an ESG world. - Suni Harford, UBS Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Investors cannot afford to be “lazy” and leave investable capital sitting idle. Expanding the investable universe can help meet the need for positive real returns while maintaining an appropriate level of insurance in portfolios. Going back to the drawing board, it is time to look closely at the illiquidity premium – the one risk premium that offers strong value over the cyclical horizon. A combination of interest rate, credit and illiquidity risks provide diversified fixed income exposures with attractive return potential. - Rob Mead, PIMCO. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The consensus view that US equities are in a bubble are overblown due to several dynamics: index composition; low interest rates; robust forward earnings expectations; and, economic cycle positioning. The biggest obstacle with current market expectations is a double-dip recession which remains a remote possibility based on the positive output of 12 economic indicators that have historically foreshadowed an economic downturn. In fact, economic growth in the US this year is posed to be the best in almost four decades as US consumers and corporations have fortified their balance sheets in the wake of recent lockdowns. Policymakers are suffering from recency bias by mistakenly treating this recovery like the Global Financial Crisis. However, the backdrops between the two could not be more different which sets up a scenario where US equites will continue their ascent higher in the coming year. Go back to the drawing board when it comes to your views on US valuations - because this time IS different. - Jeff Schulze, ClearBridge Investments. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Our diverse panel debated which of the high-conviction propositions they heard at Markets Summit 2021 resonated most strongly, which they disagreed with most - and the portfolio construction implications. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
The days when investors and corporate decision-makers could succeed without much understanding of geopolitics are over. Portfolio construction practitioners must stop relying on news flow for their political analysis, and instead go back to the drawing board and focus systematically on the constraints facing global policymakers, in order to successfully extract the implications for portfolios. - David Bridges & Marko Papic. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The US, Australia and their allies have long depended on global “rules of the game” (mostly set by the United States) for their major companies and sectors to flourish. In coming years, Australia and the US will have to accept that China will play an ever greater role shaping these rules. China has already become the 3rd largest shareholder of the IMF, a major player in the WTO and WHO, and competed for (and won) the headships of several UN’s agencies. But this should not alarm Australia, the US, and other allies. Instead, they must go back to the drawing board and focus on building the rules and institutions that they and China need to sustain trade, to ensure international financial stability, and for effective action on climate change. - Ngaire Woods, Oxford University. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
For the first time since the Cuban Missile Crisis in 1962, the world has fallen into a synchronised anxiety. But this time, the interconnectivity of information provided an even greater challenge. Finology teaches us to understand our biases, beliefs and behaviours in a way that helps us make sense of the markets, ourselves and our clients. During the Covid-19 crisis, anxiety about the virus and its impact took centre stage, creating new biases and driving behavioural changes among both consumers and investors. We have seen the birth of new habits and rituals, albeit not all of which will endure beyond the pandemic. Understanding what has really changed in people's values and the influence of their emotions will prepare us for the increasingly polarised economic, geopolitical, social and environmental new world order. - Tassos Stassopoulos & Jonathan Shapiro. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Pent up consumer demand, fiscal stimulus and accommodative monetary policy set the stage for a sharp global recovery. The Biden Administration’s planned COVID relief, infrastructure investment and ambitious climate policies could turbo charge growth. This will bring opportunities for many companies, yet rising discount rates and steepening yield curves pose challenges to investors. Stocks driven by speculative earnings may give way to companies delivering high returns on capital today, while fixed income investors will need to seek alternatives to long duration assets. Following a long period of secular stagnation, it is back to the drawing board in a high growth environment. - Ron Temple, Lazard Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Be optimistic, but beware - big risks lie ahead
Episode Description = The herculean tug of war between stronger economic growth and higher bond yields will be the defining battleground of 2021 and will be accompanied by violent and rapid-fire recalibrations of relative valuations. - Jonathan Pain, The Pain Report. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Rich Pickings explores the investment philosophy of senior, world-leading global investors. In this Rich Pickings, I sit down with London-based Keith Lloyd, CEO and Deputy CIO of global bond manager, Colchester Global Investors. - Graham Rich on Portfolio Construction Forum
The first generation of behavioural finance described people as "irrational", fooled into cognitive and emotional errors that diminish wealth. The second generation of behavioural finance describes people as "normal" - we use shortcuts and sometimes commit errors on the way to satisfying our wants. - Meir Statman, Santa Clara University. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The future is, by definition, uncertain – as is the nature of financial markets. This, along with the current Australian financial services environment, powerful secular and structural trends, and clients’ often conflicting goals, combine to create a high degree of ambiguity and complexity (often causing fear and stress) for practitioners and advocates as they strive to build quality investment portfolios. To cope and prosper in such an environment, we need to be emotionally agile, in order to align our values and actions and, in turn, help investors achieve their distant future financial goals. - Susan David, Harvard Medical School. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
Classical economists often incorporated human behaviour into their thinking. But in the 1960s and 1970s, homo economicus - the great rational agent of economic theory - was born. It was not until the 1990s that the link between human behaviour and economics began to be re-established. - Herman Brodie, Prospecta. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
Finology is the interesting and unique mix of behavioural finance ("fin") and investor psychology ("ology") as it relates to giving investment advice to individual investors. - Graham Rich. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum
In the industrial revolution, workers moved from farms to factories to receive wages for their labours… at least, as long as they were physically able. Eventually, though, all factory equipment must be ‘retired’ from use when it is too old to function properly - from machinery, to the workers themselves. In turn, retirement savings were born of the concept that workers needed a way to provide for themselves when their bodies were no longer physically capable of factory work. However, with the shift from factories to knowledge work, the reality is that not only can work continue as long as the mind is able – no longer dependent in the same way on the body – but as it turns out, ‘retiring’ and withdrawing from productive life actually conflicts with our own natural drivers of well-being, including purpose, community, and social connections. Ultimately, then, the real key to ‘retirement’ is not actually to retire, but simply to reach the point of ‘financial independence’ where how you spend your time is no longer reliant on the income it can generate. Whether you choose to still do work that generates a productive income is up to you – and, in fact, recognising that human well-being typically involves contributing to society in a way that is productive, and often income-producing, “financial independence” may actually be within closer reach than “retirement” ever was anyway. The concept of ‘retirement’ is an obsolescent by-product of the industrial era that needs to be retired. - Michael Kitces. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The world today is an acceleration and escalation of the world that existed before Covid-19, rather than a whole new world. Broad, multidisciplinary thinking is essential. China, energy, technology and demographics are driving the world towards two global economies, enhancing the investment opportunity set. - Vikram Mansharamani, Harvard University. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The Covid-19 pandemic has not so much catalysed a “whole new world,” as much as it has accelerated the trends that were already afoot over the past decade, specifically: multipolarity, deglobalisation, Sino-American conflict, the death of laissez-faire, and rise of tech. Some of these paradigms have been accelerated by the extraordinary events in 2020, but others will either dissipate or be moderated over the course of the next decade. The crucial regime shift that will dominate the coming decade is the transition from the Washington Consensus to the Buenos Aires Consensus. Meanwhile, ignore the bears. We are at the threshold of an epic bull market buoyed by the emerging Buenos Aires Consensus and desensitisation to Covid-19. But beware the long-term, as policymakers are sowing the seeds for a nominal rally, with inflation eventually re-emerging in the new decade. - Marko Papic, Clocktower Group. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The discovery of commonly recognised asset pricing anomalies such as value, momentum, low volatility and quality led to the establishment of the evidence-based approach that we know today as factor investing. Factor investing has led to Nobel prize laureates, trillions of invested dollars from sovereign wealth funds and retail investors – and, more recently, quite disappointing returns. Although heavily sought after, academics and practitioners are yet to find a way to effectively time these proven factors. In order to maximise the probability of outperformance in a whole new world, investors should not attempt to time, but rather allocate to well-diversified and balanced multi-factor portfolios that are based on thorough research and provide consistent exposure to the targeted factors. - Simon Lansdorp, Robeco. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
ESG fixed income investing is not enough - impact investing is far more compelling. The distinction between impact and ESG fixed income investing is important to understand fully. While ESG investing is the inclusion of environmental, social and governance considerations alongside traditional financial analysis, there is no guarantee that ESG funds have a positive environmental or social impact. Impact fixed income, on the other hand, requires investing in bonds that have a measurable, positive environmental and/or social outcome without compromising financial returns. Crucially, impact investing includes measurement and reporting that ensures investors fully understand not only the financial return from the projects invested in, but also their environmental and social metrics to which ensures an accurate representation of the overall fixed income portfolio’s impact. Unlike ESG investing, impact investing accelerates the allocation of capital to solve the world’s climate and social challenges, and tangibly quantifies the benefits provided from a single investor’s portfolio. - Stephen Fitzgerald, Affirmative Investment Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
While much has changed in a post Covid-19 world, much has stayed the same. Disruption continues and, if anything, has been accelerated by the crisis. More so than ever, investors are being challenged by the eternal 'Growth vs Value dynamic. The winners of tomorrow won’t be able to ‘cost cut’ their way to success - the extension of Moore’s Law means traditional business models will increasingly be challenged. To win, companies will need to spend for the future and investors will need to take a longer term view to define ‘value’. Put simply, short-term multiples won’t help you find long-term winners. The evidence is overwhelming. Investors will need to evolve or risk missing the excess returns of the next decade. - Nick Griffin, Munro Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Since the early 1980s, developed market government bond yields have broadly been falling, with investors voicing concerns that the asset class offered little or no value. Continually, they have been proven wrong. Government bonds have provided a defensive ballast in portfolios while generating a consistent income stream. Now, with developed market yields at new lows, the defensive nature of the asset class remains, but income generation is challenged. A whole new world or not, a blend of fixed income markets seems to be the answer to finding the optimal solution between risk and reward, with government bonds still at the core of a well diversified portfolio. - Martyn Simpson, Colchester Global Investors. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
In this new world, dividends are down - but they’re not out. While post Covid-19, dividends from Australian companies have been cut by 30% overall, dividend cuts are not evenly distributed across the board, and it is still possible to achieve 5% cash yields plus up to 2% franking credits from a well constructed Australian equities portfolio. This compares very favourably with other asset classes, and with cash rates that are expected to be around zero for the next two to three years. In a low return environment, the tax effectiveness of Australian shares, particularly for superannuation investors in both pension and accumulation mode, will be more important than ever. Historically, there have been varied ways to generate income from a portfolio of Australian shares but the Covid-19 pandemic has changed the ability of some traditional income stocks to generate income. The case for active management has never been stronger – avoiding dividend traps will be more important than ever. - Don Hamson, Plato Investment Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The tech-wreck of the early 2000s was a blip for the Australian economy as we entered the commodities super-cycle. It was, however ground zero for the birth of a succession of Australian technology companies that have disrupted markets and established themselves as global leaders. Economies, consumers and investors alike, are now reaping the rewards of the whole new world these companies are delivering - and yet we are mired in a two-decade old view that this is a mirage. The market weighting of the Australian tech sector has quadrupled in those two decades. Let an open mind and facts help you uncover the earnings power of these stocks and cast aside popular opinion. Our economy and your portfolio can’t afford to ignore it. - Dushko Bajic, First Sentier Investors. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Central banks have injected massive amounts of stimulus to address the economic crisis sparked by the global pandemic, and have signalled that yields are likely to be lower for longer, as they shift focus from containing inflation to reflating economies. Some may argue that it is rational to think that central banks will continue to bail out investors, as they have done for decades. In the post GFC world, inflation risk has been skewed to the downside with central banks fighting against disinflation and deflation – and the market is potentially under-pricing inflation risks going forward. But that comes at a price. Liquidity should always be a key consideration when building a portfolio. Keep it high and have some dry gunpowder, ready to take advantage of opportunities that lie ahead in a whole new world. - Mark Kiely, Antares Capital. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Anyone who takes a risk-based approach to investing will naturally investigate the risks involved. Some of these risks relate to environmental, social and governance issues. Even the Romans worked this out when they created the infrastructure to handle their water and waste. What changes over time is the nature of the risks. In today’s new world, many ESG risks relate to climate change and what’s beneficial to society. Businesses that consider such risks will thus be better investments on a risk-reward basis because they will be better quality businesses. While it may not be a new approach, ESG investing creates risk-aware portfolios that are more likely to outperform over the long term. - Dom Giuliano, Magellan Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The playbook hasn’t just been rewritten, it’s been thrown out! The Covid-19 crisis has triggered a step change in policy, accelerated trends and transformed investment frameworks. Government intervention, fiscal activism, corporate governance, sustainability and the continued Asian economic strength characterise this new world and new economic order. Opportunities will arise out of dislocation - but risk assessment and risk management are ever important and the impacts on asset allocation, security selection and portfolio construction mean a more regional view is required. - Paras Anand, Fidelity International. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Driven by Covid-19, 2020 saw economics 101 meet market psychology: losing factors of production (labour) impacts real economies; rapid money creation drives (asset) inflation; and, cognitive biases lead to over-extrapolation. “New normal” conversations are being driven by lockdown perspectives. Investors must focus on future earnings paths versus price paid today. While recent events shook markets, nothing invalidates this core belief set. It’s not a whole new world. Today, fear and greed set up a rich opportunity set on long and short sides. Investors must embrace a bear market in uncertainty while being wary of a mania in growth stocks and bonds. - Andrew Clifford, Platinum Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The economic growth bubble deflated and the value anomaly died with the GFC. A new economic framework then emerged which can be defined as a low growth, low inflation, internet-enabled, disrupted world. Incumbent investment frameworks such as Value, Shorting, Passive and Index Aware strategies are failing. In a whole new world, markets will be driven higher by a narrow number of emerging structural growth companies. In this new environment, most stocks and funds will not produce attractive returns and dispersion will increase. Going forward, successful investors will need to be extremely selective when allocating capital. - Mark Arnold & Jason Orthman, Hyperion Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
“There are decades where nothing happens, and there are weeks where decades happen.” - Vladimir Lenin. The events of 2020 have brought about significant societal change, leading to an acceleration of many of the trends firmly in place over the last decade. One of those trends is the rising importance of environmental, social, and governance issues in investing. While environmental aspects had received most of investors’ attention, issues like employee health and safety, corporate governance, diversity, and data privacy are just a few of the many factors brought to the forefront during these turbulent times. In the past, ESG considerations were seen as a choice or a preference, but going forward it has become clear that they are increasingly becoming a necessity in the evaluation of investment opportunities in a whole new world! - Michael LaBella, QS Investors. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Infrastructure is in a whole new world. Decarbonisation and data growth will dominate every aspect of our lives for decades to come. Critical societal infrastructure has never been more critical nor has the demand for a greener planet. Real assets focused on these structural thematics provide greater alignment between asset ownership and consistency of returns through time. Now more than ever, successful investment management requires agility to adapt in this rapidly changing world. This involves broader category definitions that align with the world’s leading private markets infrastructure investors as opposed to restrictive and arbitrary benchmarks. If your infrastructure manager isn’t leveraging off these themes then you need to find a new one. - Jeremy Anagnos, CBRE Clarion. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Heightened equity market risk and negative yielding fixed income securities leaves only hard asset allocation decisions. For investors needing more from their fixed income allocation, global convertible bonds can offer upside that is simply not available in developed sovereign or credit markets. Australian investors have historically underutilised this asset class that can optimise portfolio efficiency and bring powerful diversification benefits. As an instrument, global convertible bonds are balanced with both equity and bond characteristics, offer a specific risk/return profile thanks to their convexity and give an asymmetric pay-off. Global convertible bonds offer a whole new world of opportunity. - Arnaud Brillois, Lazard Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
The Covid-19 pandemic is accelerating pre-existing consumer trends and transforming the ways in which people behave across many spheres of live. Consumer goods companies are watching communities closely, and adjusting their medium-term strategies accordingly. Over the longer-term, the new world winners will be those businesses which focus on culture and purpose, and which aspire to make a positive difference. - Hamish Douglass & Laxman Narasimhan. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum
On 3 November, US voters go to the polls to decide whether or not Donald Trump will have another four years in the White House. Vice President Biden has been leading President Trump in most national polls since the start of 2020 – and while national polls are a good guide as to how popular a candidate is, what matters in the US presidential elections is not how many votes you win across the country, but where you win them. The presidency will be determined once again by 14 swing states and six of them really matter. - Libby Cantrill, PIMCO. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
In the US, a durable and economic bottom has formed, and global investors are well-served to re-frame their mindset towards the incipient economic expansion now underway. As recessions go, the anatomy and pace of this one has been unprecedented. Investors are questioning whether aggressive fiscal policy and central bank intervention justify one of the fastest V-shaped equity market recoveries on record. Nine economic indicators that fall into three key elements necessary for a lasting recovery have historically foreshadowed a durable recovery. This time is not different – it’s not a whole new world! - Jeff Schulze, ClearBridge Investments. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
This is not 1999, or at least not yet. The strong are getting stronger and new winners are entering a reshaped future. Covid has accelerated tech adoption on an unprecedented scale and while the winners have been broad, not all are equal. Obsessing over the short term is a fool’s game and this new world requires imagination and a deep understanding of the opportunity to assess future value. Short-term investors with simple valuation techniques are missing the bigger picture. - Scott Berg, T. Rowe Price. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum
Market pricing goes to the heart of everything we do in constructing portfolios. But the risk-free rate is artificial as central bank manipulate interest rates to stimulate economies. The implications for asset allocation are significant. - John Coombe, Tim Farrelly, Joe Fernandes, Robert Prugue. Earn 1.00 CE/CPD hrs on-demand on Portfolio Construction Forum
Robert Huebscher of Advisor Perspectives speaks with economist, Dr Robert Gay, a 30-year veteran of equity, foreign exchange and fixed income markets. They discuss Dr Gay's views on the divergence between markets and fundamentals, what's driving that divergence, and what investors should be doing with their portfolios. - Dr Robert Gay, Fenwick Advisors on Portfolio Construction Forum
Many in the financial markets are expecting a V-shaped recovery starting in the fourth quarter of this year, possibly even in the third quarter. In this podcast, Robert Huebscher speaks with renowned economist, Dr Woody Brock, about why he disagrees, and foresees a slow and uneven recovery, with periodic slumps. - Dr Woody Brock, SED on Portfolio Construction Forum
A year ago, I showed it's possible to measure prediction accuracy for active managers, and that it influences optimal portfolio construction. How has it worked out during the Covid-19 pandemic? - Jim Creighton, CreightonAI on Portfolio Construction Forum
Practitioners are often reluctant to adopt new solutions because of high risk. "If it has never been done, how do you know it works?". But failure to try new approaches can mean missed opportunities. - Maroš Servátka, Macquarie University on Portfolio Construction Forum
With crisis comes opportunity. Much of the bad news is now reflected in stock prices and, while stock markets will re-test their lows in coming weeks, expect a rally during Q2 2020.
Practitioners should examine portfolios for slow or no growth equities, priced like bonds, whose attractions may be inundated by a wave of fiscal stimulus.