Angela Ashton

Investors, retirees, and financial planners in the current market need to look beyond the standard asset allocation choices of chasing share market beta through passive equity funds and relying on bonds for diversification, a leading investment consultant advises.

Angela Ashton, Founder and Director of investment consulting firm Evergreen Consultants, says it is time for investors to explore the alternatives, including gold, commodities, private credit, unconstrained total return multi-sector funds and real asset funds with holdings such as infrastructure and real estate.

“What we are seeing is a mix of strong, sustained inflation coming through and interest rates rising, with last month’s Fed rate rise the first since 2018. We have reached an inflection point in the cash and bond markets. Rates are going up,” Ashton says.

Evergreen’s view is that the corporate earnings cycle has peaked and equity markets will be more volatile.

“The war in Ukraine is adding to inflationary pressure, labour costs are rising and profit margins are under pressure. Equity investors should move to value or quality to position their portfolios more defensively,” Ashton says.

Evergreen Consultants’ current Long Term Expected Returns Framework says the key considerations in projecting likely investment returns are higher inflation and volatility. Evergreen is forecasting 7.75% average annual growth for Australian equities over the long term, with annualised volatility of 13.5%. This is based on a view that Australia’s long-term equity risk premium (ERP) of 4.5 % will remain unchanged.

Bonds moved extraordinarily in March, with yields moving sharply in both directions, an overall deteriorating trend and the appearance of an inverse US Treasury yield curve, with yields on two-year Treasuries higher than 10-year Treasuries at the end of the month.

“Investing in bonds will be very difficult this year as we expect a lot of volatility. It would not be surprising to see yields rise further from here and it is very hard to know where they will land. Markets are volatile and there is every chance they will overshoot,” Ashton says.

Among the alternatives, the Long Term Expected Returns Framework highlights the strong risk-adjusted returns on offer from Australian and global credit. The outlook for Australian credit is for average return of 3.95% a year, with annualised volatility of 3%, while global credit is expected to return 3.75% a year, with annualised volatility of 3%.

Ashton says credit has the advantage over bonds of having yields set at floating rates, which will rise as interest rates rise. She cautions that there is a greater likelihood that some credit funds will suffer defaults in the volatile trading conditions ahead and many funds are illiquid.

The appeal of real assets is that they can generate predictable income distributions due to stable earnings derived from the underlying asset. Regulation and/or long-term contracts reinforce stable cash flows and capital stability. For investors, this provides excellent visibility into revenues and dividends.

Gold is reconfirming its role as a safe haven holding, rising out of the range-bound position it was stuck in for much of 2021, in response to the Russian invasion of Ukraine and other global tensions. At its current level around A$2500 an ounce, it is close to a two-year high.

“The old investment rules are not going to work going forward,” Ashton says.

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