The Future Fund and a swathe of leading global investors are now lining up to advocate a new approach to investing suited to the prevailing and prospective conditions.
We are now firmly in a world of high inflation and increased volatility, and it’s set to remain so.
In December, the Future Fund released a paper: The death of traditional portfolio construction? The document outlines why the Future Fund is moving further away from the standard 60/40 equities/bonds asset allocation. It’s a compelling read that some will find chilling. The message is clear. The way that advisers and investors manage money must change.
A subsequent article by Jonathan Shapiro in the Australian Financial Review featured the Future Fund’s chief executive, Raphael Arndt. He summarised several of the issues:
- “The paradigm of falling interest rates and central bank rescues had likely come to an end, which would challenge equities and bond valuations”.
- “Central banks are causing the problem, and if they didn’t do that, we would have a bigger problem, which is unsustainable inflation. There’s no easy way out”.
- “The withdrawal of easy money viathe Federal Reserve’s massive balance sheet reduction was a concept that was not “adequately understood” and represented an unknown factor for markets”.
- “If US Treasuries are going to pay 5 per cent interest, that’s going to suck liquidity from every corner of the world, and that creates volatility in every market, in every country in the world.
- “You have to ensure that your portfolio can withstand really big swings”.
- “Think about how you construct your portfolio because whatever rules you thought existed in the world to help inform you when you went to finance or business school may not exist anymore.”
- “Finance is not physics. The so-called rules are just observations of human behaviour in markets over time.”
- “There are certain scenarios, like stagflation, that are driven by supply constraints where commodities do really well,” Dr Arndt said.
- “We think the decarbonisation agenda will support commodity prices in general, but obviously, not all commodities.”
- “There is no such thing as a risk-free asset anymore. Just buying bonds isn’t going to protect you, and there’s every chance we’re going to see bonds settle at a level that has a negative return.”
The message for financial advisers and their clients is evident. The old rules no longer apply. Therefore, it’s time for an investing approach designed around prospective returns rather than historical asset class performance.
Portfolios must be engineered for risk tolerance, knowing that the traditional safe harbour asset classes no longer provide answers.
Genuine diversification encompassing alternatives, including selected commodities, is seen as necessary by investing leaders.
Answers to this challenge can be found in Dynamic Asset’s managed account solution. It uses an investment methodology that aligns with the thinking of the Future Fund, as outlined in this article.
The solution comprises a range of actively managed portfolios that target specific risk-return outcomes. Advisers can easily blend portfolios to match individual investor goals. It provides a ready-to-use and is available on platforms including Hub24 and Mason Stevens.
Dynamic Asset can help
Contact us to learn more about how Dynamic Asset can help you transform your approach to investing.
