Jessica Jones

Goldman Sachs Asset Management (“GSAM”) has confirmed its key themes for the 2015 GSAM Investment Forums to be held in Sydney, Melbourne, Brisbane and Perth.

At each event, a panel of international and local experts will share their perspectives on the key trends shaping today’s market environment and the potential implications for Australian investors.

The key themes on the agenda include:

• Central bank policy divergence – With interest rates at record lows and differing central bank perspectives, where can investors find opportunities in global and domestic fixed income markets and what does this divergence mean for the positioning of fixed income portfolios?
• Importance of fundamentals in Australian equity investing – Weakness in the Australian dollar, low interest rates and low commodity prices are all creating distortions in the market, emphasising the need for high-quality investments and a solid understanding of what current market valuations mean for Australian equity allocations.
• Using a more liquid approach to alternative investing – Strategic diversification during difficult times in core equity and core fixed income markets, with the potential to reduce the risk in investment portfolios.

Jessica Jones, Managing Director and Head of Third Party Distribution at Goldman Sachs Asset Management for Asia Pacific (ex-Japan), said “The divergence in global markets brings significant challenges and opportunities for investors all over the world. GSAM’s Investment Forum provides insights for Australian investors on the range of strategies available to actively manage portfolios amidst this divergence and uncertainty.

“During the sessions we will explore the importance of fundamentals, along with more dynamic approaches within fixed income and alternative investments.

Insights will be provided into the benefits of quality investments in fixed income, domestic equities and liquid alternatives to take advantage of the current market environment.”

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Retail investors say they have low confidence in Australia’s economic outlook and a low appetite for investment risk according to Goldman Sachs Asset Management’s latest Retail Investor Survey, conducted in November 2014.

Despite this, current portfolios lack diversification geographically and by asset class, with a particularly heavy bias towards Australian equities and low exposure to fixed interest, and there are no signs that investment behaviour is likely to change in the near term.

Goldman Sachs Asset Management’s research reveals that investors with financial advisers are more likely to have more diversified portfolios, and profess to have a better understanding of a wider set of asset classes.

Jessica Jones, Managing Director and Head of Third Party Distribution at Goldman Sachs Asset Management for Asia Pacific (ex-Japan), said:
“The survey revealed a clear and concerning disconnect between confidence in the domestic economy, which was low, and confidence in the outlook for domestic equities, which was high. Retail investors appear to be ignoring some important macro themes as they set investment intentions, and in our view the data points to an ongoing lack of meaningful diversification in investment portfolios.

“Of particular concern was the fact that those aged over 65, who should be focused on reducing investments in high-volatility assets, were in fact the most likely to have an allocation to domestic equities. Further, more than 36% of this age group intended to invest more capital in this asset class in the next 12 months. At the same time, less than a quarter of this age group (17%) had direct fixed interest allocations, an asset class which provides important diversification benefits.

“What isn’t clear is what is driving this equities bias. Perhaps investors don’t see the benefits of diversifying into other asset classes or geographies at a time when confidence in the Australian economy is low. Another possibility is that investors believe they can manage risk by holding diversified stocks within their equities portfolio, but we would caution investors that this type of approach could leave them vulnerable to sharp market downturns.

“The data showed that investors with financial advisers seemed more likely to be invested in a broader range of asset classes. While a domestic equities bias remained, fewer of these investors intended to increase investments in Australian equities, and they were much more likely to have
international exposure in their portfolios. This demonstrates the important role that professional advice can play through the cycle.

“It is also interesting to note that investors rated a referral from a trusted source as the single biggest influencing factor in selecting a financial adviser, well ahead of competitive fees. Understanding of the legislative frameworks was also deemed important and the emphasis on this increased with the age of investors surveyed.

“The results of our annual investor survey indicate that financial advisers can play a critical role guiding investors through volatile investment markets, and have a clear opportunity to educate clients on the importance of diversification, particularly for investors approaching retirement.”

Philip Moffitt, Head of Fixed Income Asia Pacific and CEO of Goldman Sachs Asset Management Australia and New Zealand, concluded: “With the increasing likelihood of further easing of Australian monetary policy, it’s concerning to see the overwhelming majority of Australian retail investors seeking fixed interest exposure purely through cash and term deposits. Cash rates are low and are likely to remain so for the medium term, and we would encourage investors to look for alternative fixed interest exposures, including corporate and sovereign debt.”

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Despite an encouraging valuation level for the broader market, the team believes in a targeted approach given the uncertainty that exists locally and globally. 

Outlining the key themes to emerge in Australian equities over the period the Goldman Sachs Asset Management Australian Equities team has identified an excessive focus on ‘yield at any price’ as a cause for concern, which has potential to unwind. While overall results largely reinforced the team’s sector ratings, a significant change was to exit most holdings in the REIT sector. 

“The number of companies who missed expectations, was broadly in line with the long-term historical average, with the bad news having been broadly factored in,” said Dion Hershan, Head of Australian Equities at Goldman Sachs Asset Management. “Despite this the reality is that there are a number of cross currents buffeting the Australian economy and we believe that a targeted approach is required to identify value.” 

The Goldman Sachs Asset Management team consists of 10 analysts, eight of which are sector specialists. It manages $2.8 billion on behalf of Australian institutional and individual investors. The team adopts a long-term, active, research-driven approach to managing domestic equities which includes more than a thousand meetings with Australian companies per annum. 

“There are a number of themes playing out in the market at the moment,” Hershan said. “On the positive side interest rates are falling, balance sheets have largely been strengthened, although a few weak outliers persist, and sectors exposed to higher growth regions have been resilient.” 

“On the negative side most companies are experiencing cost pressure, low productivity and the impact of a strong Australian dollar. Miners in particular are facing rising input costs, and lower commodity prices with a negative flow on effect for investment in new projects. Perhaps unsurprisingly companies are also being reticent about providing guidance which we think is a function of lower levels of confidence in uncertain markets.” 

“As a result of this uncertainty, many investors have become pre-occupied with yield and so-called ‘safe haven’ stocks,” said Hershan, “We have a strong view that ‘yield at any price’ is a flawed concept, and without valuation support, an unwind is likely. Over the long term we prefer to focus on the total return of an investment, with capital growth being critical in addition to yield.” 

“We believe that there is value to be found at the moment but you have to be extremely selective to find it. You can’t rely upon an economic recovery or normalization across the board, at least in the short-term. We are focused on identifying companies we believe can thrive irrespective of the operating environment, whether that be through organic growth, quality of the management team, or through control of the cost base and productivity gains.” 

“From an overall sector perspective the results season largely reinforced our key positions. We remain underweight metals and mining, insurance and telecoms. By contrast to our position on resources we are overweight energy. That’s a reflection of our view on energy prices and the level of confidence we have on some of these LNG projects progressing to market and delivering against return targets. We are also overweight transport where we see opportunities for increased productivity and efficiency, and banks which we think remain stable and resilient and which offer strong total returns.” 

On the team’s position on REITs Hershan added; “We were an early re-entrant back into REITs in 2009 with a view that balance sheet issues had been addressed, the underlying properties were performing well and the steep discount to asset backing was unsustainable. The valuation opportunity has largely played out and headwinds are emerging for property fundamentals with regard to rental growth and vacancies, given the broader economic environment. With the risk/reward now unfavourable we have moved to a significant underweight position.”

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The review considered forty-six ‘long only’ fund managers offering Australian equities funds, and awarded two managers with the highest AA rating. This is the first time van Eyk has awarded an AA rating in Australian equities since 2009. 

The van Eyk researchers identified the Goldman Sachs Asset Management senior investment team’s experience, quality of research and “non-consensus” stock insights as key competitive strengths. 

Philip Gardner, managing director, Goldman Sachs Asset Management Australia, welcomed the van Eyk research:  

“We are extremely pleased to receive van Eyk’s top rating in its 2012 Australian Equities Review. This recognises the efforts of our Australian Equities team and their strong focus on a fundamental, style neutral approach.”  

The Goldman Sachs Australian Equities Wholesale Fund has underlying investments in ASX listed companies that have strong capital-growth potential over the medium to long term. It is managed by a team of ten experienced investment professionals led by Dion Hershan, who has managed the fund since 2007. 

“We are delighted to receive a AA rating from van Eyk in its 2012 Australian Equities Review,” said Mr Hershan. “While the consensus view is that 2012 will be another difficult year for Australian equities we see a number of significant themes for the year ahead.” 

“The first is that with expectations having been largely reset in the Australian market, and with valuations continuing to look depressed, an opportunity is emerging in Australian equities. Clearly the local economy has weakened but we would suggest it is temporary, the companies we invest in have strong balance sheets and can withstand short term pressure.”  

“We believe it is critical to be selective and focused in the current environment. As a fundamental investor we spend a lot of time identifying companies that we feel can prosper irrespective of the macro environment and this continues to be a major focus for us. From a sector perspective we are positive on Banks, Transport and Energy where we see specific opportunities. We remain cautious around commodity prices and the risk of near term demand weakness, which is reflected in our current position in Resources.”

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