As the biggest ETF provider in Australia, Vanguard has the right to crow about another knockout performance over active equity. But invective commentary is a red flag, especially when it’s based on something as changeable as recent market performance.
Despite its potential and the massive investment behind it, the Consumer Data Right has had little impact due to a host of factors. Frustrated with its low take-up, the government is making changes to put the framework on “more sustainable footing”.
‘Don’t leave gaps in the defence’ amidst simmering market uncertainty: Panel
The recent sharp, sudden fall in markets in August has been interpreted by some investors as a sign of things to come as the macro backdrop gradually darkens and disbelief about the long-term prospects of the Magnificent Seven grows.
But should allocators keep sitting on the sidelines, or it time to join the game? Perhaps not; the market has rebounded quickly and equities are back at or close to all-time highs, while volatility has come down again, and there’s no asset class caught in a crisis that’s creating great buying opportunities. In that sort of environment, it doesn’t pay to “push the macro or the tilts very hard”, according to Koda Capital CIO Norman Zhang.
“We like to broaden our portfolio, and be as unconstrained as we can – have more positions, be more diversified,” Zhang told The Inside Network’s Investment Leaders Forum in Queenstown, New Zealand. “Obviously there’s limits to that. If you’ve got an event where the correlation of everything goes to one you’re still going to get hurt in that environment. But generally speaking it’s more around the edges… And when we see opportunities to target specific parts of the market, the unbelievable opportunity to invest in a dislocation, you’ll see our portfolios narrow quite a bit.”
But while forward-looking indicators of volatility like the VIX remain stable, dispersion and volatility intra asset class are “super high at the moment”, according to Rousseau Lötter, head of portfolio analytics and asset allocation at Craigs Investment Partners, and it’s a good time to review portfolio structures.
“As you go through these growth cycles, it’s easy too (become) too quality focussed or growth focussed,” Lötter said. “You want to make sure that you don’t leave any gaps in the defence. When things are uncertain and unpredictable, you need to move back to basics. That’s where strategic asset allocation is a safe place to be, but it’s a really good time to make sure that you don’t have any style tilts or have inadvertently something into client portfolios that has run too much.
“Look out for opportunity, and I think it’s going to be really interesting to see how uncorrelated strategies perform over the next year or so. It’s easy to speak about that from an academic standpoint but to take it into a client account is different. We’ve got some really sophisticated investors in our client base and they’re open to these ideas, but it can be difficult to bring it into an older person’s portfolio.”
Markets might have rebounded, but they remain as polarised as ever. That polarisation, which has prevailed now for more than a decade, has resulted in plenty of uncomfortable conversations between allocators and their managers, who, in a market that seems to move relentlessly higher, are always under pressure to explain their underperformance against it.
“I’ve seen managers come and go; I know most of the managers. And you know when they’re falling off the cliff, whether they’re over the hill, whether they’ve lost it or lost interest, whether they made too much money,” said Jake Jodlowski, principal at Atchisons. “Because you know these guys, and you know how they operate.
“The way we advise our client portfolios has changed a lot over the last 10 years because it’s difficult to generate alpha, no doubt about it, especially in Aussie equities and international equities. Our default is that we start off with the index in every asset class. And then we have to justify why we’re going to move away from it. And if we’re going to move away from the index, do we use a small caps index or do we get active? And if we can’t find anything better or an active manager better we default back to the index. You can’t go wrong.”
And while people “dismiss” passive investing or the use of indices as a starting point for manager review, the rise and rise of indexing has fundamentally changed that conversation, according to Kyle Lidbury, head of investment research at Perpetual Private.
“It’s probably one of the biggest disruptors in the industry, the boom in indexing, and the boom in different types of indexing and the different things you can do with indices… If you are going fundamental, you have to understand that there is a people element to that; I don’t know how you get comfortable with a person in two meetings,” Lidbury said.
“So for us to invest with a manager on that basis it might take three or four years of us observing, understanding that team, understanding that person, and understanding that process, before we invest. Because it is a people business when it comes to relying on the skill of a manager to add value in a certain area.”
