Damian Liddell

Investors are exploring new ways to protect their portfolios in the face of rising inflation, central bank tightening, recession fears, and geopolitical instability.

Australian and global shares were down 6.5 per cent over 12 months ended June 30, 2022^[1], while bond returns also fell deeply into the red as their traditional diversification benefits failed when confronted with sharply rising interest rates.

Those falls caused the average super fund to post its first negative financial year of returns (-3.1 per cent)^[2] since the Global Financial Crisis, although performance has since bounced back in July and early-August.

“Whilst investors know the best thing they can do is sit tight and ride things out – it’s easier said than done,” says Damian Liddell, Certified Financial Planner, Contrarian Group Financial Planning. “As humans, we’re not wired that way. Most people are willing to accept modest declines but they genuinely fear a deep and protracted market decline.”

In the wake of the 2020 COVID-19 market downturn, super funds cash holdings increased by 3-4 per cent of funds under management, and up to 8 per cent for one medium sized fund – higher levels of switching to cash than reported during the Global Financial Crisis, according to the RBA^[3][4].

Protecting portfolios against deep market downfalls helps investors stay the course through all market conditions, Liddell says. One of the tools he uses is Milliman’s SmartShield range of portfolios, which have attracted steady inflows since they were launched in early-2020.

“Having a systematic, rules-based process that makes dynamic changes, provides investors with comfort that something is being done,” Liddell says.

“As a result, they’re less likely to let their emotions take over and thus better equipped to stick to the long-term strategy. It also makes my job as an adviser a lot easier, because I don’t have to crystal ball gaze or alternatively be that guy that always just says ride it out, ride it out.”

The long-term impact of shifting from a typical Growth to Balanced portfolio is expected to reduce average returns by 1.1 per cent per annum and can approximately halve the average amount left in super as a bequest (from $245,000 to $120,000) under the same withdrawal strategy^[4].

Milliman is a global actuarial firm that hedges $A176.5 billion in assets under management, helping protect the portfolios of insurers, pension funds, and wealth management firms around the world.

The Milliman SmartShield managed accounts manage volatility and provide a cushion in market downturns to manage investor behaviour. It is one of the few solutions offering an explicit built-in risk management strategy that has consistently performed through both strong and weak markets.

SmartShield’s consistency stems from its rules-based approach, which dynamically hedges the portfolio by trading futures. It creates a smoother ride for investors, applying more protection during difficult markets and allowing full participation when volatility subsides.

“The SmartShield portfolios have performed really well during the time I’ve been using them,” Liddell says. “They’ve allowed my clients to have the best of both worlds – exposure to growth and peace of mind.”

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Notes:
[1] S&P/ASX 200 TR and MSCI World Ex Australia NR AUD indices.
[2] Media Release: Best performing balanced super funds for 2022 financial year – Super Fund. (2022, August 03). Retrieved from https://www.lonsec.com.au/super-fund/2022/07/15/best-performing-balanced-super-funds-for-2022-financial-year
[3] https://www.rba.gov.au/publications/fsr/2021/apr/box-c-what-did-2020-reveal-about-liquidity-challenges-facing-superannuation-funds.html
[4] Box C: What Did 2020 Reveal About Liquidity Challenges Facing Superannuation Funds? | Financial Stability Review – April 2021. (2021, April 08). Retrieved from https://www.rba.gov.au/publications/fsr/2021/apr/box-c-what-did-2020-reveal-about-liquidity-challenges-facing-superannuation-funds.html
[5] Bequest at age 90 for a person aged 67 with a starting balance of $500,000 and $25,000 per annum withdrawals indexed to inflation. Detailed assumptions can be found at https://smartshield.millimandigital.com.

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