The September quarter was a case of back to the future for weary investors. The US S&P 500, Dow Jones Industrial Average and Nasdaq all suffered their worst quarter performance since the same period last year. In Australia, the ASX 200 has returned to its March lows.
The false dawns, AI sunrise and blinkered optimism that have driven growth market sentiment and equity values since the end of COVID have received a dose of realism. The macroeconomic conditions can no longer be ignored.
It is now even more apparent than ever that interest rates will remain higher for much longer as central banks try to tame stubborn inflation numbers. The dynamics of demand-side constraints make inflation harder to budge. Meanwhile, central bankers talk earnestly about hoping for a palatably soft landing.
The Sydney Morning Herald, referencing Perpetual's head of investment strategy, Matt Sherwood, said there had been a sharp sell-off in US government bonds since the end of August, which impacted shares in three key ways: by hurting their valuations, weighing on companies' earnings growth and pushing up equity risk premiums, making stocks less attractive against the fixed income returns from longer-term government bonds.
"What we're seeing now is a valuation decline," he said. "But we're likely to see the impact on companies' earnings and equity risk premiums in 2024. It's a trifecta of headwinds."
Is there a better way to create value as an adviser ?
Experienced financial advisers are very familiar with just how uncomfortable the current conditions are. Those managing traditional 60/40 portfolios are in the eye of the storm. On one side, there's client pressure for results, answers and proactive action. On the other is the conventional wisdom, and the simplest thing for the business is to sit tight. But doing nothing is not always a good option.
Many leading institutional investors like The Future Fund have said the same thing for over 12 months. The traditional 60/40 portfolio is not the place to be now or in the foreseeable future.
The Future Fund's approach is to actively manage portfolio allocations based on prospective returns and protection against inflation. They have significantly reduced the amount of equities held and are applying higher weightings of private equity and alternative assets such as Australian infrastructure and commodities. This sounds great, but it is not available to retail clients as a sovereign fund.
The good news for advisers is that Dynamic Asset offers a range of managed account portfolios that are different and built to operate much like the Future Fund by proactively targeting outcomes and protecting investors from volatility. The recent public statements from the Future Fund provide indirect support for the approach adopted by Dynamic Asset since its inception in the wake of the GFC.
Dynamic Asset actively manages portfolios using a Dynamic Asset Allocation (DAA) approach rather than the more typical Strategic Asset Allocation (SAA or 60/40) approach. Investment selection focuses on each asset's prospective returns rather than historical asset class performance. Its five portfolios, like the Future Fund, target specific risk-adjusted returns. Financial advisers can blend the portfolios to target specific client goals uniquely.
The approach is prudent by nature, used by institutions and endowment funds worldwide, and is now available to advisers and their retail clients through Dynamic Asset's managed account portfolios.
A positive and progressive approach for clients
Advisers know that sentiment is the enemy of logic when investing – excitable clients want to buy at the peak and sell at the bottom. Engaging with actively managed portfolios using a Dynamic Asset Allocation approach represents a positive direction for investor clients, which can remove behavioural issues and save time/ costs for the adviser and client alike. Firstly, the adviser is allocating to whichever portfolio best suits the conditions, so they are already managing your money according to these conditions by working to minimise risk. Secondly, portfolio mandates focusing on future outcomes allow the adviser and client to concentrate on the goal of the portfolio and its trajectory over time rather than the current vagaries of market conditions.
It's inherently logical and client-centric.
Contact us to learn more about how your clients and business can benefit from the Dynamic Asset managed account solution.