Double digit returns from Australian and international equities and bonds have led to solid absolute returns for multi-asset investors over the year. The year to 30 September 2019 saw equity markets continue to move higher. The local equity market, as measured by the S&P/ASX300 Accumulation Index, delivered a strong return of 12.57 per cent, led mainly by growth sectors such as healthcare and energy amid rising oil prices. Overseas markets were also buoyant, especially in AUD terms, with the Australian dollar depreciating against the US dollar in particular. The MSCI World ex Australia Standard (net dividends) in AUD delivered 9.13 per cent over the year. The US market has once again led the way, led by a constructive growth environment in the local economy. The market leaders have continued to be in the technology sector, however there was some volatility associated with these names especially during second half of 2018. The recent environment has been characterised by a shift towards global monetary loosening again with most central banks cutting rates since the start of the year in a marked shift from 2018. This drove bond returns to double digits for the 12 months to 30 September 2019. The JP Morgan GBI Global Traded hedged to AUD returned 11.19 per cent and the Bloomberg AusBond Composite 0+ Yr Index delivered 11.13 per cent.
Over 2019 there were some continued enhancements to both processes and some strategies within the multi-asset business. These enhancements are an outcome of a major part of the work the team does in researching and testing new ideas to improve processes and portfolios.
With this increase in research and strategies within the multi-asset suite, there was also a new addition to support the team with Rita Fung joining in January 2019 as an investment analyst. Rita previously worked at First State Super with Michael Blayney on asset allocation research and processes.
One of the key process enhancements focussed on improving the active asset allocation within the diversified funds was to supplement the current ‘market technical’ based approach with additional signals that capture valuations and the market/economic cycle. We have termed the process associated with these as ‘Dynamic Asset Allocation’ (DAA).
Within our alternatives strategy there was a restructure which has been over two years of work and was executed over 2019. The key changes reflect the move towards a more diverse set of alternative return streams to complement the existing suite as well as improving the cost and capital efficiency of the portfolio.
The interest in the sustainable multi-asset strategies across our client base has increased dramatically and we are working with a few clients on evolving these strategies to reflect newer ways of implementing on platforms (i.e. SMAs) or to further enhance existing mandates to incorporate more sustainability by looking at a sustainable alternative strategy. The incorporation of Regnan into the Pendal business is also driving product development and we expect our multi-asset clients to benefit from this in further improving the multi-asset sustainable offering we have.
For our newest strategy, which was launched in May 2018, the Multi-Asset Target Return strategy (MATR), progress this year has been very promising. The strategy has received initial ratings from both Lonsec and Zenith research houses as well as some client interest with our first institutional client coming in this financial year as well as initial support from some advisers and high net worth clients. Whilst still early days, the differentiation in this strategy has already been shown through the market downturn in October last year, where this was the best performing real return strategy. We are finding good relative value opportunities across markets and are positioning the portfolio to benefit for these over the next few years.
Over 2019 we had strong absolute return numbers due to rising equity and bond markets, however our active returns and peer relative returns were disappointing. A number of key drivers of index-relative returns all underperformed at the same time, something that does not occur often but is not unexpected for ‘single manager’ multi-asset funds. Whilst we look to diversify both asset classes as well as active strategies, over short timeframes, this diversification might not be effective. The 2019 Financial Year was a difficult year for most active strategies, as a combination of geopolitical risks and central bank intervention saw markets diverge from fundamentals at times. Value-based strategies also underperformed significantly as falling bond yields saw investors gravitate towards higher price-earnings growth-orientated stocks. This saw our Australian and global shares underperform, together with alternatives and tactical asset allocation strategies. However, as we end this financial year, pleasingly, we are starting to see a turnaround in performance of some of these strategies.
In the chart below we have highlighted the dispersion between ‘value’ stocks and the broader market that has arisen in the last few years. While this has been a drag on returns historically, we believe that over a 3-5 year horizon, this positions ‘value’ for outperformance looking forward.
For our MATR strategy we are a little below our target return for the last 12 months, as we have had lower exposure to some of the stronger return equity markets, and bond markets generally, due to our valuation oriented DAA approach. We believe that maintaining a modest level of equity exposure biased towards the better valued Asian equity markets, coupled with a focus on relative value – particularly in respect of gaining exposure to ‘value stocks’ (with the corresponding market exposure hedged out), strikes a sensible balance between return-seeking and downside risk management looking forward.
Forward PE Discount – MSCI All Country World Value Index vs MSCI All Country World Index
Fund Fact Sheets
|Fund Name||Fund Fact Sheet|
|Pendal Multi-Asset Target Return Fund||View the latest fact sheet|
|Pendal Active Balanced Fund||View the latest fact sheet|
|Pendal Sustainable Balanced Fund||View the latest fact sheet|