Skip to Content

There is no free lunch

July 2016

Antares Fixed Income

In the current investment environment investors should be wary of chasing unrealistically high return targets in a world awash with central bank intervention and near zero interest rates. This has resulted in a search for yield that has impacted all asset classes, driving valuations to arguably overvalued levels.

In May 2016, Peter Costello, Chairman of the A$120 billion Future Fund, publically stated that the Fund was in negotiations with the Federal Government to lower its long-term return target of inflation plus five per cent. At a

Women in Banking and Finance lunch in Sydney, he said, “Would the government rather us preserve what we’ve made, and reduce the target so that we stay where we are on the risk curve? That is a big issue. Does the government have an appetite for us to chase risk? I don’t think so...Our problem is we have been asked to get a five per cent real return… which is very, very difficult”.

This conundrum now faces the entire investment industry, across all asset classes. The Future Fund, like all investors, is faced with the cold hard truth that in today’s ‘low yield’ world, they can either lower their return target or increase the risk they are prepared to accept.

Risky business

While some investors have adjusted their return expectations or curtailed the risk in their investment portfolios, others have been pushed further out on the risk curve in search of returns. Many investors may now be invested outside of their risk ‘comfort zone’ as they attempt to boost their diminishing returns in the lower yield environment. This has resulted in heightened risks being borne by investors, and in turn has huge consequences for the liquidity and volatility of risk assets.

A volatile combination

Investor behaviour can contribute significantly to liquidity risk in markets, as investors outside their risk comfort zone are prone to cut their losses very quickly. At the same time, traditional liquidity providers such as investment banks have significantly curtailed their market-making activities in response to regulatory constraints. The combination of ‘knee-jerk’ investors and reduced market-making activities has resulted in reduced liquidity, and will continue to produce extreme volatility in most markets, particularly equities and credit.

The risk of reduced liquidity is a real concern for investors, with the spike in illiquidity and market volatility during January and February 2016 a clear warning. Reserve Bank of Australia Governor Glenn Stevens at a conference in New York on 19 April 2016 said, “We don’t know how liquidity will stand up under genuine stressed conditions. This is of increasing importance”.

Not the ‘new norm’

While some are referring to the current environment with its evolving risk-return dynamic and heightened liquidity fragility as the ‘new norm’, Antares believes it is just the latest evolution of a constantly changing market.

And while there is certainly no ‘free lunch’ available to investors, because returns do come with risks, opportunities exist for astute investors who understand the inherent risks. Investors should stay focused on their investment objectives and timeframes, and constantly review and evolve the way they construct their investment portfolios.

Find out more - Talk to us about our investment solutions


Important Information

This article is issued by nabInvest Capital Partners Pty Limited (ABN 44 106 427 472, AFSL 308953) (“NCP”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (“NAB”) group of companies (“NAB Group”). An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.

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.

MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”) is the issuer of the MLC Wholesale Inflation Plus – Conservative Portfolio, MLC Wholesale Inflation Plus – Moderate Portfolio and the MLC Wholesale Inflation Plus – Assertive Portfolio (collectively, the “MLC Inflation Plus portfolios”). The MLC Inflation Plus portfolios are also available via the MLC MasterKey Super & Pension Fundamentals and the MLC MasterKey Business Super products issued by NULIS Nominees (Australia) Limited (ABN 80 008 515 633, AFSL 236465) and the MasterKey Investment Service Fundamentals investor directed portfolio service operated by MLC . You should obtain the relevant Product Disclosure Statement (“PDS”) or Financial Services Guide (“FSG”) relating to the MLC Inflation Plus portfolios and consider them before making any decision about whether to acquire or continue to hold the product. A copy of the PDS and FSG is available upon request by contacting our call centre on 1300 738 355 or on our website at

Any references in this publication to specific companies are for illustrative purposes only and should not be taken as a recommendation to buy, sell or hold securities in these companies.

Any opinions expressed in this document constitute NCP’s judgement at the time of issue and are subject to change. NCP believes that the information contained in this publication is correct and that any estimates, opinions, forecasts, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice) and actual events may vary materially. NCP relies on third parties to provide certain information and is not responsible for its accuracy. NCP is not liable for any loss arising from any person relying on information provided by third parties.

Investment managers are current as at the date this communication was prepared. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you.

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. This information is directed to and prepared for Australian residents only. Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) do not approve or endorse any information included in this material and disclaim all liability for any loss or damage of any kind arising out of the use of all or any part of this material.

The funds referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds.