Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Holding the line – the real adviser challenge
As the FY22 year ended a fever pitch of concern grew in financial markets. The reporting season ahead was set to be one of the most challenging’ in recent history, and the spectre of inflation warranted a complete rethink of portfolio construction.
Media headlines, economic statements and fund manager commentaries used the terms ‘inflation’, ‘recession’ and ‘new paradigm’ with alarming abandon.
These events are difficult to deal with at the best of times, let alone following the worst performance for ‘balanced’ portfolios in at least a decade. Even the world’s largest and most successful investors struggled to deliver positive returns for the year, but the dispersion was likely even wider for advised portfolios.
For financial advisers, any negative return is a challenging one, let alone one that is significantly low.
Advisers are among the few members of the financial and investment community that face the end client daily. While it may be straightforward for a major super fund to announce a negative return to the masses, most advisers must deliver this news to at least 100 individual clients and deal with the conversations that follow.
Such is the crescendo of commentary and sentiment around inflation, recession and rate hikes, that it was only natural to see significant outflows out of long duration bonds in the June quarter. Data from Calastone showed some $1 billion of the $2 billion in total outflows in the month of June came from fixed income funds.
The story extended into equity markets, with shellshocked investors questioning the worst performing investments within portfolios, in this case high-growth, technology-focused funds and ETFs, and in many cases seeking alternatives. Similar to fixed income, the outflows from ‘growth’ focused equity funds, and global equity in general were among the highest, with ‘value’ funds and Australian equities the only real beneficiary.
It is among the most difficult tasks of being a financial adviser, but keeping clients on track and reiterating the role and value of diversification remains central to long-term success and compounding.
The returns since 1 July are the perfect case in point, with the Nasdaq surging 15 per cent, the S&P500 11 per cent and the ‘underperforming’ S&P/ASX200 gaining 9 per cent.
The tendency to relent to client commentary, which in many cases is driven by sentiment, momentum and news headlines alone, is one of the biggest detractors from long-term returns. This comes in the form of locking in losses, but also in the significant transaction costs and tax implications of switching investments on a regular basis.
During periods of volatility the challenge may feel insurmountable, but the entire premise of diversification is that not every investment in a portfolio goes up at the same time. Similarly, not everything should be going down.
Headlines have called for the end of globalisation in the past and recessions have been predicted more regularly than they have occurred by multiples, but despite this quality assets continue to become more valuable. This is why holding the line is among the most powerful investment strategies in history.
