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Cautionary flags usually go up when somebody in the investment industry says, ‘This time is different.’ The late 1990s internet bubble was probably the last time those four words were enthusiastically thrown around, and we know how that ended. But just maybe, ‘this time is different’ has some credibility these days. Even the most experienced investors will have found the economic and market conditions of the past decade a novelty.
Inflation, long the enemy of central banks, is not the danger today. Instead, unusually low inflation is. High interest rates the norm in the 1970s and 1980s have been overtaken by ultra-low interest rates. Central banks have proven they know how to ‘snuff out’ inflation. Now, they’re battling to revive inflation.
The US-China trade wars and the US administration’s broader America First policies are rocking the global trading and economic system. Through it all, investors have enjoyed strong returns from almost every asset class, except cash, thanks to falling interest rates. However, it would be a mistake to expect future returns to be like recent returns.
Rather than assuming the future as a straight-line extrapolation of the past, we prefer to focus on understanding the different futures that could happen. Imagining the future as multiple possible scenarios guides our thinking and portfolio positioning.
Markets are currently confident that central bankers can and will come to the rescue when things go wrong. The ‘Powell put’ — thinking that the US Federal Reserve led by Chairman Jerome Powell will come to the market’s rescue with interest rate cuts and other supportive policies — seems to have succeeded the ‘Greenspan put.’ That kind of thinking is creating investor complacency.
In the current environment, assets are expensive, and diversification opportunities are limited. Consequently, risk control is as critical as ever, we’re leaning into efficient portfolio construction as the mainstay of investment returns. Our aim is to extract higher returns by taking greater advantage of market declines, and carefully reviewing manager allocations.
Consistent with this, our traditional portfolios — MLC Horizon and Index Plus — are positioned relatively defensively. We recognise that the current low interest rate and high bond price environment could be prolonged. So, we’ve been increasing our fixed income investments’ sensitivity to movements in market interest rates, which means they will be able to benefit more from any future bond rallies that might eventuate.
We’ve continued to hold a small underweight to Australian shares and overweight to real return focused strategies; that is, investment strategies aimed at producing returns above certain targets, such as a margin over inflation, for example. In the MLC Horizon portfolios, that’s through allocations to the MLC Inflation Plus portfolios.
We are actively creating strategies aligned with our funds’ objectives where we can’t find them elsewhere in the market. For example, the MLC Inflation Plus portfolios have a unique exposure to our own Australian shares strategy, which is managed in-house and isn’t focused on beating the benchmark. It’s just hit its 3-year anniversary and is meeting its objectives to deliver share-like returns, while reducing the risk of negative returns.
We’re using more derivative strategies, as they provide efficient and flexible ways of managing risk as well as sourcing asset class returns, managed by our in-house team. The Inflation Plus portfolios, in particular, are using derivative strategies to enhance shares exposures and manage exchange rate risk.
Being overweight foreign currencies has been positive for our higher risk traditional portfolios. However, the Australian dollar’s current level has caused us to pull back this exposure.
Finally, the Inflation Plus portfolios have been positioned for capital preservation. Even though we think future return potential is unusually low, low interest rates could enable share markets to move higher. We need to be prepared for all possible futures and are.
This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLC), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230 686) group of companies (NAB Group), 105–153 Miller Street, North Sydney 2060.
This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.
You should obtain a Product Disclosure Statement (PDS) relating to the financial product mentioned in this communication issued by MLC Investments Limited, and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the PDS is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au.
An investment in any product referred to in this communication is not a deposit with or liability of, and is not guaranteed by NAB or any of its subsidiaries.
Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. The returns specified in this communication are reported before management fees and taxes.
Any opinions expressed in this communication constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this communication.
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