Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
‘Still a lot of storm clouds’: Why (and how) Equip is preparing for a recession
Save a major shift in the Fed’s policy stance, it’s “difficult to see” how the US does not fall into a recession, says Equip Super CIO Andrew Howard. And if that happens then Australia – and the rest of the world – won’t be immune from the impact. There’s a “glimmer of hope” that Australia won’t follow America off the cliff, but there’s still plenty of headwinds to contend with outside of monetary policy.
“Let’s not forget that the tragic war in Ukraine continues, energy prices remain high and could even go higher, there are still significant global supply chain issues, China is maintaining its Covid zero policy and closer to home we are still experiencing floods up and down the east coast of Australia,” Howard says. “There are still a lot of storm clouds on the horizon and if inflation remains stubbornly high then the ability of central banks to engineer a soft landing appears increasingly challenged.”
While the RBA gave some help to unrepentant bulls around the world with its recent 25 basis point hike, it’s hard to see a future where rates return to the levels that propelled the bull market of the last 10 or so years. That likely means an environment where public equity market returns are more muted – if there are returns at all.
“The tail wind that investors have enjoyed, largely unchecked, since the end of the GFC is almost certainly over and our expectation, like many in the market, is that we are entering a ‘lower for longer’ environment,” Howard says. “What is important to remember however is that in a sense we are now moving back to more normalised conditions: interest rates are no longer at record lows. I think for some investors who have enjoyed such favourable conditions for over a decade, it’s easy to forget what ‘normal’ looks like.”
Equip has recently bolstered its investment team with a slew of hires and promotions – including a new head of responsible investments and two new senior portfolio managers for defensives and real assets – and on the asset allocation front is creeping back into bonds, with Howard saying that they once again offer true defensive characteristics. And the generalised hope that markets might start to normalise soon is just that; the future path of monetary policy is likely to keep equity investors extraordinarily nervous.
“The ‘rally’ we enjoyed for a few days the other week was very short lived and we could easily see markets get worse from here before there is any sort of sustained rebound, unlike the very short-lived embers of optimism that we experience every now and again,” Howard says. “We are in a situation where ‘bad news is good news’ and vice versa: investors are sweating on every economic datapoint that is released, if economic data is better than expected then that is bad news as it only adds to the believe that Central Banks will need to maintain a strong hawkish stance for longer.
“But if the economic data points to a slowing in the economy that is worse than expected, then investors are buoyed by the news in the hope that central banks will be able to pivot sooner rather than later. Right now, however, the jury is out as to what transpires next.”
