Calvin Richardson

President Trump has long been a voracious proponent of tariffs, which has been central to his ‘America First’ economic and trade policy. Tariffs were a cornerstone policy in his re-election bid, which similarly followed his prior administration’s intense affinity with tariffs.

This attraction to tariffs is rooted in a protectionist mindset and is underpinned by the following core beliefs that tariffs imposed by the US can:

• correct persistent trade deficits and promote the consumption of American-made products
• protect their domestic industries and jobs at the expense of offshore competitors
• bolster their national security through a reduced reliance on foreign countries and fortifying domestic supply chains
• extract concessions from other countries through negotiating leverage, and
• generate revenue to fund tax cuts.

There are weeks where decades happen

Although Trump campaigned strongly on implementing tariffs, it was the flurry of announcements, and the surprisingly punitive tariffs applied across all trading partners that shocked the market.

As the above chart highlights, the velocity of information that the market was grappling with severely fractured investor confidence and delivered a white-knuckle ride for markets. The peak was ‘Liberation Day’, where a sweeping swath of ‘reciprocal tariffs’ was announced, which included a 10% baseline tariff and higher country specific tariffs too.

Manic Monday

For the Australian market, this culminated in ‘manic Monday’ on 7 April 2025. The ASX200 index plummeted in response to escalating global trade tensions, marking its worst day of trading since the COVID-19 pandemic began in March 2020. The index, having fallen as much as -6.5%, finished the day down -4.5%.

This relentless drumbeat of daily negativity was driven by tangible fears of global supply chains grinding to a halt. Investors fretted over visions of empty ports, paralysed shipping containers, and the looming possibility of empty shelves in shops. The tariffs, particularly between the US and China, were expected to result in an effective trade-embargo between the two countries. The downturn from this reflected broad concerns around the globe over the potential economic impact of a prolonged trade conflict.

A tale of two halves

Consequently, the pressure was building on the Trump administration to announce a compromise. Although the stock market decline would’ve undoubtedly factored into Trump’s decision to pause, it’s been suggested that the walk-back was ultimately driven by the ‘three B’s’:

• Bonds: Fixed income markets were showing signs of dysfunction, with yields plummeting only to unexpectedly jag higher. Note that higher bond yields make servicing the US debt more costly.
• Base: The Republican base, despite being generally supportive of Trump’s trade stance, was beginning to feel the ripple effects through to their 401(k) retirement accounts (similar to our superannuation accounts).
• Business: Business groups, whose profits and supply chains were directly threatened by an escalating trade war, were exerting immense pressure on the administration to de-escalate.

At this point, the market was primed for a full-blown trade war and the prospect of real-world economic disruption. Then, on the morning of 9 April 2025, amid widespread financial anxiety came a soothing message from Trump himself that it was “a great time to buy.”

The subsequent announcement of a 90-day pause acted as a crucial circuit breaker to this escalating anxiety. US equities swiftly staged a phenomenal rally, with the S&P 500 soaring 9.5% in a single session.

This rebound caught many investors wrong-footed, especially those who had bearishly positioned their portfolios for what they believed was the imminent breakdown of global trade. Importantly, up until this point, the Zenith Portfolio Solutions team had engaged in extensive discussions as to whether we should de-risk our portfolios.

Ultimately, given the elevated volatility and a lack of visibility over a potential trade war resolution, we opted to stay invested through this period. And although we elected not to make any tilts, we remained highly attuned to the risk of further deterioration in economic fundamentals, and lay waiting to act if necessary.

TACO Trade (‘Trump Always Chickens Out’)

The subsequent market rally has given birth to a new financial acronym that has recently gained traction – the TACO trade (‘Trump Always Chickens Out’). The thesis here is that Trump has a tendency to apply maximum pressure with extreme threats that push a crisis to its brink. This causes significant volatility, and markets  aggressively sell-off.

After securing some concessions or feeling significant domestic pressure from falling markets, Trump de-escalates and share markets again, grind higher.

The ‘TACO trade’ thrived because it leveraged the market’s reflexive drive to ‘buy the dip’. This isn’t a new behaviour, but the application of a time-tested and highly profitable habit. After more than a decade of short-lived corrections and swift, policy-fuelled recoveries, investors had learned that panicking was a mistake and every sell-off was a prelude to a rally.

Is this time different?

Investors should be wary, as blindly buying this dip carries new risks. Unlike past technical corrections, a prolonged trade war threatens to inflict fundamental economic damage – disrupting supply chains and corporate earnings in a way that monetary policy cannot easily fix. It’s precisely this level of complexity that underscores the benefit of professional portfolio management.

In today’s landscape, where old reflexes can lead to suboptimal portfolio outcomes, disciplined analysis is required to distinguish between a fleeting opportunity and a fundamental downturn. This heightened uncertainty makes expert guidance crucial for managing risk and identifying genuine investment opportunities.

Portfolios that ‘zig’ when the market ‘zags’

Over the last couple of years, we‘ve methodically increased our exposure to Bonds and may look to build upon this should yields continue to creep higher. Within our equity allocations, we remain favourable on parts of the market we deem undervalued, such as global small caps, and on assets that should perform well in an environment of elevated inflation, like Real Assets.

This strategic tilt is part of our broader commitment to a well-diversified portfolio, built with complementary levers designed to protect capital during a downturn while ensuring we’re positioned to participate in further market gains. In this environment, our client portfolios remain battle-tested to withstand the vagaries of ‘tariff roulette’.

By Calvin Richardson

The post Tariff roulette and portfolio implications appeared first on AdviserVoice.

Calvin Richardson

As the U.S. presidential race heats up, markets are preparing for their usual four-year cycle of increased anxiety and short-term declines. As we enter the final stretch of the campaign, we anticipate further volatility, as markets typically shun uncertainty, and every presidential election outcome carries many ‘known unknowns’.

  This year, with both candidates neck-and-neck in the polls and unclear policy directions regarding taxation, fiscal largesse, and regulation, market uncertainty is particularly pronounced. Furthermore, with an increasingly polarised political environment and an already seasonally weak period for shares from October to November, the risk of short-term profit-taking rises.

Shoot first, ask questions later

Whilst the 2020 election brought with it unprecedented twists and turns, this election cycle has been unparalleled, with the Democrats changing candidates midstream, and two assassination attempts on former president, Donald Trump. Consequently, in periods of heightened uncertainty, markets often react swiftly and indiscriminately, preferring to ‘shoot first and ask questions later’—a hallmark of election-induced volatility.

However, despite this unpredictability, soon a winner will be crowned, the uncertainty will dissipate, and the markets will rally around the victor and look through to the new year.

Double trouble

Importantly, despite a multitude of areas where the Republicans and Democrats offer stark differences in their policy platforms, both are offering highly stimulative fiscal agendas, which pose upside risks to inflation and bond yields.

Therefore, irrespective of the ultimate outcome, we think that the risks of recurrent bouts of inflation remain elevated. To help you digest the more specific nuances between the candidates, we’ve summarised some of the key areas of divergence that may produce ripple effects across equity and fixed-income markets.

Highs, lows and must knows

Domestic policy

Despite being the incumbent Vice President, Kamala Harris is positioning herself as the ‘change candidate’, with big spending initiatives aimed at infrastructure (such as ‘clean energy’), education and health, which we expect to be positive for growth. Trump is similarly focused on job creation and economic growth – albeit with a concerted emphasis on deregulation – particularly within the finance and energy sectors. To summarise Trump’s energy policies, he’s vowed to “drill, baby, drill”, which would likely assist in bringing down energy prices and inflation.

Taxes

Unsurprisingly, Harris won’t be renewing Trump’s signature corporate tax cuts that were enacted when he was in office. This would raise the corporate tax rate from 21% to 28%, which would increase business costs and potentially impact US equity returns. Harris has likewise pledged to raise taxes on the wealthy. Conversely, Trump has vowed to retain his previous tax cuts and aims to reduce the corporate tax rate further to 15%. Naturally, this would boost earnings for US stocks and provide further tailwinds for the US market’s outperformance. 

Tariffs

The Biden/Harris administration has attempted to defuse a political line of attack and retained most of Trump’s tariffs. Trump has subsequently sought to outflank Harris on this front and announced a sweeping increase in proposed tariffs. This could lead to higher prices for imported goods, which may again, stoke inflation. For both candidates, these tariff wars risk re-igniting inflation which would hamper returns across both equities and fixed-rate bonds.

Immigration

This is a hot-button political issue that polls highlight as a key vulnerability for the Democrats. Though Harris has recently hardened her stance, border security remains one of Trump’s signature issues that he’s running on, with immigration likely to be significantly curtailed under his tenure. This could lead to further tightness in the labour market and place upward pressure on wage inflation, which would be a negative for equities and fixed-rate bonds.

Naturally, this isn’t an exhaustive list of the two candidate’s policies and the potential market impacts, yet it sheds some light on the key areas of difference.

Tik-tock, market shock

Notwithstanding the history-making twists so far this election cycle, the reality is that once the dust settles and the election uncertainty fades, markets tend to perform well. This holistic view is best illustrated via the below graphic which demonstrates that a clear upwards trajectory is observed, regardless of the party affiliation of the incumbent president or whether an election is occurring.

Source: Bloomberg

Trump bump or Trump dump?

With headlines perpetually speculating on the market impact of Trump dethroning Harris, the media tends to overstate the influence that the US president has on financial markets. Recall the hysteria when Trump took office in January 2017 that a market crash was imminent? Or the claims in the lead-up to the 2020 election that a Biden presidency would derail the COVID-19 market recovery? With the benefit of hindsight, we can now appreciate how overhyped these fears were, with the market quickly consolidating around the winner.

Who said politics was boring?

Although we strongly advocate for a long-term perspective, we anticipate significant volatility as election day approaches. The hefty 0.50% rate cut by the US Fed during their September meeting, coupled with the usual seasonal market fluctuations and the predictable last-minute rhetoric from the candidates, all contribute to investor uncertainty.

It’s now more crucial than ever to keep a level-headed perspective and disregard the media clamour, encouraging more reasoned and controlled portfolio management choices. While these measures won’t completely protect portfolios from short-term declines, managing emotions will enable you to rebalance during market downturns and capitalise on any mispricing. Ultimately, markets have weathered every election—just ensure that your portfolio does the same.

By Calvin Richardson, investment consultant 

The post Ballots, Bulls, and Bears – The US election showdown appeared first on AdviserVoice.

Calvin Richardson

Boom or bubble?

It’s that point in the cycle where Bitcoin is once again dominating the news cycle, with daily headlines flaunting bitcoin’s record highs and limitless potential. And although Bitcoin is undoubtedly the most successful cryptocurrency, its chequered history of -75% drawdowns has hitherto rendered investment suitable for only the bravest speculators.

Source: Bloomberg

Bitcoin’s detractors rightly point to these frequent boom-to-bust cycles and see no place in a diversified portfolio for an asset commanding such extreme volatility. However, whilst Bitcoin has always garnered extreme views – both positive and negative – the discourse has recently become more nuanced. Notably, the prospect of institutional adoption has started creeping into the conversation and is partly responsible for the latest buying frenzy.

And yet still, to many, Bitcoin remains an enigma and is largely viewed as a gateway into the dark web to finance nefarious activities – so, what exactly is the history of Bitcoin?

Filthy fiat

Bitcoin emerged during the depths of the Global Financial Crisis to serve as an alternative to fiat money. At the time, there were significant concerns around the longevity of the global banking system, and Bitcoin offered a medium of exchange completely divorced from the vagaries of central bank money printing and currency devaluation.

Bitcoin acts as a deflationary hedge through having a fixed supply of 21 million coins which are produced by ‘miners’ solving sophisticated algorithms. Currently (as of May 2024), 19.7 million Bitcoins have been mined; however, the rate of growth is constantly decreasing, which means the 21 million cap won’t be reached until 2140.

Bitcoin is ‘digital gold’

Because of this inherent scarcity, Bitcoin’s promoters draw parallels to gold as they both offer a finite supply. Further adding to Bitcoin’s mystique is the ‘halving’ event which occurs approximately every four years.

The abovementioned ‘miners’ are rewarded with bitcoins for validating transactions on the blockchain. Interestingly, each ‘halving’ event sees the rewards that these miners receive halved – most recently from 6.25 to 3.125 in April of this year.

Historically, this supply reduction has resulted in price increases due to the fundamental laws of supply and demand (i.e stable demand yet shrinking supply). This has likewise spurred increased interest against a backdrop of governments debasing fiat currencies through significant fiscal deficits and bond issuance.

Cruisin’ for a bruisin’

Further stoking price gains was the SEC’s landmark regulatory approval for numerous Bitcoin ETFs in January of this year, all of which have since attracted significant inflows. The perception that this would presage institutional investor adoption has likewise resulted in material price gains.

Admittedly, there is some discussion on the fringes around institutional adoption of bitcoin, yet this hasn’t gained any meaningful traction. Supposedly, the limited supply of both gold and Bitcoin and the fact that both are unshackled from government control could make the two interchangeable.

We’re yet to be convinced of Bitcoin’s merits in usurping gold in portfolio construction, as we believe the two serve radically different purposes. For example, Bitcoin has extreme volatility and is purchased to generate capital growth. This differs markedly from gold which typically acts as a safe haven in times of market stress and provides a ballast to volatile equity markets.

For our client portfolios, we currently gain this exposure through both gold and goldminers as the latter can also pay dividends (and franking credits) and grow more aggressively through exploration success, increased production and operational efficiency improvements.

White knuckle ride

Despite growing interest in bitcoin, we don’t currently advocate for its use within our clients’ portfolios due to the amplified potential for capital losses. Additionally, unlike traditional assets like property, shares or fixed income, Bitcoin doesn’t generate any rent or earnings, and unlike commodities, it isn’t used to produce goods.

Bitcoin has also consistently demonstrated a high correlation to shares, which in our view, makes it a weak diversifier. This is best illustrated in the below chart which highlights the correlation shared with the NASDAQ which is a growth-oriented equity index.

Source: Bloomberg

We therefore struggle to articulate Bitcoin’s potential role in a client’s portfolio – other than it being an outlet for speculation. And given clients have entrusted us as responsible stewards of their savings, we’re uncomfortable exposing their portfolios to what is effectively a leveraged bet on equities.

In bitcoin we (dis)trust

Although we’re currently reluctant to invest in Bitcoin, we do think that the blockchain concept has a strong use case beyond Bitcoin, which we will continue to monitor. One innovative example includes utilising ‘smart contracts’ to streamline property transactions and automating the transfer of property titles. Like many innovations on the blockchain, this would eliminate the need for third-party providers.

But for now, we remain comfortable with the range of flexible investment solutions that we have at our disposal, and don’t feel compelled to pick up coins in front of a steam roller. And for the time being we’re content with our currency of choice being the Australian dollar.

By Calvin Richardson, investment consultant

The post In bitcoin we (dis)trust appeared first on AdviserVoice.

Calvin Richardson

Recession obsession

In 2023, the market defied expectations as it rebounded from the anticipated recession that never materialised. Investors, expecting a downturn due to an unprecedented rate-hiking campaign, were caught off guard.

The technology sector is often vulnerable to rising interest rates because higher rates make companies’ future cash flows less valuable. This, in turn, disproportionately impacts the technology sector, as they’re typically valued on the basis that a meaningful portion of their profits will arrive in future years following a period of significant investment.

Tech triumph

This is why the technology sector outperformed so strongly during the zero-per cent interest rate regime and the highly stimulative monetary policy response to COVID.  This dynamic is best illustrated through the NASDAQ – which is a tech-heavy share market index – hitting a record high in late 2021, only to fall precipitously as interest rates jagged higher in 2022.

A new dawn in 2023

Coming into 2023, with so much pessimism priced into markets, reality had an exceptionally low bar to clear to beat expectations. This set the stage for an upside surprise when the economic conditions proved more favourable than predicted. And, when coupled with the transformational changes that it’s believed the artificial intelligence (‘AI’) revolution will usher in, this lit the spark for a rapid reversal in the market’s fortunes.

AI’s impact on investments 

Investors are banking on AI’s perceived productivity gains and the incremental revenue uplift associated with its broader adoption. Productivity enhancements could enable businesses to be run smarter, harder and faster – which ultimately reduces costs and increases profits. Automation of tasks, such as data entry, and the use of AI-powered chatbots can enhance business efficiency which may also free-up human resources to focus on more complex tasks.

Furthermore, there’s the incremental revenue opportunities where companies can monetise their existing customer base. For example, our largest international shares holding, Microsoft, will charge an additional fee to users who utilise their ‘co-pilot’ product, which is an AI feature that integrates into Word, Excel, PowerPoint, Outlook and Teams.

Consequently, if companies like Microsoft can successfully embed themselves within their customer base, their competitive advantage strengthens and the moat around their business becomes increasingly impenetrable.

Good buy or goodbye?

The colloquially coined ‘magnificent 7’ group of AI-centric stocks, which includes Apple, Alphabet, Amazon, Microsoft, Meta, NVIDIA and Tesla, have become eponymous with the hype around AI. However, their stretched valuations have gathered considerable attention following their rapid ascent over the last 12 months.

Whilst we’re sympathetic to these concerns, as long-term capital allocators, it‘s critical for us to partner with fund managers who thoroughly understand the immediate and longer-term risks and opportunities presented by innovative technologies, such as AI.

Diversified AI exposure

Portfolios should maintain a healthy AI allocation without relying solely on specific stocks. As such, our portfolios have retained a robust allocation to the AI thematic through our technology exposures, yet without relying on a concentrated bet on these tailwinds. In addition to Microsoft, our second largest international holding, Alphabet, is likewise aggressively competing in the AI arms race. Most recently, this has been through their newly launched generative AI model capable of ingesting video, audio and text, to rival Microsoft’s investment in Chat GPT.

Apple also features prominently in our portfolios and is similarly investing heavily in AI. Relatable examples of this include enhancing how users can search for photos in their iPhone (i.e. searching via location), interacting with Siri and Face ID.

Embracing change

The share market’s incredulous rise over the last 12 months defied many prominent forecasters’ expectations that a deteriorating global growth backdrop, negative sentiment, sticky inflation and rising interest rates would dampen market returns. And although market lows are never obvious at the time, the ensuing market recovery last year contradicted the accepted wisdom of the crowd and highlights the forward-looking nature of the market.

Importantly, markets finished the year within striking distance of a record-high, yet as is typically the case, these returns weren’t generated in a straight line and required patience – and in the case of the last 18-months, intestinal fortitude. Finally, remember that there will always be a nascent issue which could potentially derail your returns; however, if you wait for perfect clarity, the share market will be expensive by the time you find it.

By Calvin Richardson, investment consultant

The post The rise of artificial intelligence in portfolios appeared first on AdviserVoice.

Calvin Richardson

China’s deflating property market has sparked unease amongst the investment community, as the ripple effects from property developers teetering on the brink of collapse are feared to be spreading to the broader economy. The first chip to fall was Evergrande in late 2021, where rumblings of a default had been brewing for months.

Notwithstanding the media hype, the eventual default was relatively anticlimactic, as the Chinese authorities had effectively ringfenced the contagion. Following a brief period of calmness, alarm is once again percolating, as China’s highly leveraged property sector appears to be headed for more turbulence.

Pushing on a string

The below chart highlights China’s growing reliance on debt to generate GDP growth, with a clear divergence evident in recent years between the volume of debt required to generate a dwindling amount of GDP. Importantly, although the authorities have sought to curb the speculative excesses on display in the property sector, it’s believed that the People’s Bank of China (PBOC) has sufficient resources to ensure the smooth functioning of capital markets should conditions deteriorate further.

Source: Bloomberg, Zenith  

Far from being rogue operators, these developers were emblematic of China’s debt-fuelled expansion, with property now comprising 25-30% of GDP. It’s this once booming property market which underpins Evergrande and others’ rapid ascent, however a recent slowdown in the Chinese economy has exposed the crippling levels of debt that the property sector holds.

Triple threat

In recognition that property developers had been sleep walking into disaster, the ‘three red lines’ policy was introduced in August 2020 to improve the financial health of the real estate sector. The three red lines were imposed on property developers to help stem growing debt levels and unsustainable price increases, and include:

• liability-to-asset ratio (excluding advance receipts) of less than 70%
• net gearing ratio of less than 100%
• cash-to-short-term debt ratio of more than 1x.

Exacerbating property developers’ woes has been the Chinese Communist Party’s (CCP) relentless pursuit of ‘common prosperity’, which saw price limits imposed on new property developments and harsh penalties for developers who failed to deliver projects on time. Where previously it had been widely assumed that these behemoths were too big to fail and that an implicit government guarantee would act as a backstop, this optimism has recently faded as the cash-crunch worsens.

Taking the stairs up and the elevator down

Once seen as the poster child for China’s property boom, Evergrande and other high-profile property developers soon found themselves in the authorities’ crosshairs after having contravened all three red lines. This quickly sparked a chain reaction of high-profile defaults, with upwards of twenty developers having defaulted in the last year alone.

Source: Bloomberg, Zenith  

Debt Jubilee

Unlike in Australia, apartments in China are generally purchased in full and off-the-plan. Consequently, the bleak outlook for the property sector has ignited discontent amongst recent buyers who have watched the value of their unfinished apartments plummet.

In response, a large contingent of disgruntled buyers have initiated a mortgage boycott which threatens to destabilise the broader economy. A similarly growing group of suppliers to property developers have likewise followed suit and are now also withholding payments on bank loans until their own debts have been paid.

This payment protest is the latest disruptive move in China’s economy which threatens to spill over to the broader financial markets unless it’s swiftly contained. Importantly, in efforts to restore confidence to the market, China’s State Council has recently rolled out a trillion-yuan package in economic stimulus.

Part of the stimulus comprises US$146 billion targeting infrastructure, property, and private business. It also includes an additional $44 billion for State banks to finance infrastructure projects. Along with the recent surprise 10 basis point cut in interest rates, the intention is to signal safety and provide comfort to prospective buyers to enter the market.

Ripple effects

Adding to the negative sentiment around China’s once buoyant property market has been the CCP’s unrelenting zero COVID-19 policy, mass rolling lockdowns, inflationary pressures, and ongoing regulatory uncertainty. This has prompted concerns that China’s insatiable growth trajectory might finally be coming to an end.

The fear is that this might leak into the broader economy and hinder global economic growth. Within our domestic market, this has created some uncertainty given a large portion of our export revenue is derived from the commodities which have historically fuelled China’s growth.

Shaken but not stirred

Moving forward, we acknowledge that the future likely entails a more challenging macroeconomic and geopolitical backdrop, and we expect share markets to remain volatile in the near-term. However, it’s incumbent on us to balance these risks with capitalising on the investment opportunities that dislocated markets present.

We continue to believe that elevated uncertainty and indiscriminate selling creates attractive buying opportunities for active managers to exploit. Furthermore, given the range of potential outcomes remains relatively wide, we continue to advocate for well-diversified portfolios comprising high-quality managers to navigate these turbulent markets.

Equally important is to remember that investment markets are partly driven by investor psychology, which is why you see markets move through booms and busts. Maintaining discipline throughout these cyclical fluctuations is vital to achieving attractive returns through the cycle, as inevitably, the best market returns always follow the worst.

By Calvin Richardson, investment consultant, Zenith Investment Partners

The post Ten-minutes to midnight: China’s property dilemma appeared first on AdviserVoice.

Calvin Richardson

Share markets have endured a tumultuous start to the year, with the war in Ukraine, lockdowns in China and inflation anxieties relegating COVID-19 news flow to the back pages. In this environment, timing when markets will reach their nadir becomes notoriously difficult to achieve and we implore investors to overcome the temptation to make hasty or reactive portfolio decisions.

The unique nature of this inflation-driven drawdown has meant that both equities and bonds have delivered disappointing year-to-date returns, with the ASX 200 generating -2.77%, the MSCI World -14.28% and our domestic bond market -8.10% – leaving investors with few places to shelter. However, predicting short-term market movements is fraught with danger and the correction’s end will only become clear in hindsight once the market has comfortably recovered.

Whilst the resolve of investors is being tested as the market euphoria of recent years is replaced by panic, remember that to achieve attractive long-term returns, you must be prepared to endure painful drawdowns along the way.

As the above chart demonstrates, drawdowns on the ASX 200 in excess of 5% have occurred every year since 2015. Likewise, drawdowns exceeding 10% have not been uncommon, despite the market still generating a cumulative return of 36% over this period.

This highlights that although painful, the market drawdown year-to-date has been relatively normal and that generally it pays to stay invested during these ructions as the market has always recovered and subsequently breached new highs.

Fortunately, we design our portfolio with the aim of providing downside protection during risk-off scenarios, with multiple levers providing uncorrelated and differentiated return drivers. Specifically, it’s been encouraging to see our alternatives managers dampen volatility and enhance risk-adjusted returns.

Participate and protect

We consistently advocated for the use of alternatives in portfolios due to the insulation offered from typical equity market dislocations. This is due to managers’ unconstrained mandates which allows them to take both long and short positions in non-mainstream assets, such as gold, commodities, currencies and options.

Alternatives styles are varied – whether it’s managed futures where directional views can be expressed through trend signals, or global macro where valuation discrepancies can be exploited across securities, sectors, regions and asset classes. Similarly, our market neutral and multi-strategy allocations have proved to be sound portfolio diversifiers amongst broader market turbulence.

The ability to profit in falling markets (shorting) isn’t constrained to our alternatives line-up, with our domestic equity long/short allocation likewise bucking the trend and delivering attractive downside protection as markets have fallen.

For our longer dated portfolios, this emphasis on uncorrelated return drivers to buffer volatility has delivered a since inception downside and upside capture of 70% and 88%, respectively. The below chart seeks to replicate this positioning and highlights the benefits of maximising capital preservation during falling markets.

By reducing drawdowns when markets are falling, subsequent returns have a higher capital base to rebound from and ultimately deliver greater returns. We believe this asymmetry is optimised to deliver attractive absolute returns in normal market conditions, whilst providing valuable capital preservation in stressed environments.

Time in the markets, not timing the markets

Market corrections are always painful and the bruising sell-off endured this year is no different. However, it’s important to maintain a dispassionate outlook when investing in equities, as a glance back through the last 30-years of returns offered through the Australian market is instructive. The range of returns varies greatly, from a maximum gain of 30.3% in 2008 to a harsh loss of -22.1% in 2009.

Over the long term, the range of potential outcomes is overwhelmingly skewed positively, with an average return over the last 30 years of 10.4% p.a. Importantly, this has been achieved through periods of war, recessions, pandemics and other crises, which reinforces the benefits of investing through-the-cycle and not letting emotions cloud your judgement.

This time it’s different

At the market peaks and troughs, investors will inevitably use the ‘this time it’s different’ rationale to justify emotive-driven behaviours. And although it can be difficult to resist pessimism supplanting level headedness, we think viewing this drawdown through a historical lens provides invaluable perspective.

Whilst we remain highly attuned to emerging risks, we don’t feel that these are compelling enough to dissuade us from a constructive outlook on markets. As always, our underlying managers remain discerning in their investment opportunities and are using this indiscriminate selling to take advantage of dislocated markets and adding to their positions in high-quality companies trading at attractive prices.

Remember that markets always bottom well in advance of a positive shift in sentiment and making hasty portfolio decisions is generally to the detriment of meeting your long-term objectives. Instead, we remind you that a robust portfolio construction is the best way to win through not losing.

By Calvin Richardson, investment consultant

The post Winning by not losing appeared first on AdviserVoice.

Calvin Richardson

A common pain point amongst our clients in recent years has been the diminishing defensiveness associated with fixed income allocations and the expectation that future returns will be lacklustre. This frustration peaked last year when bond yields were languishing at all-time lows, and clients were questioning the defensive qualities and return potential of their fixed income allocations. These concerns were understandable as developed market central banks have interest rates anchored near zero, with seemingly little wriggle room to cut rates further should economic conditions deteriorate.

However, it’s important for investors to realise, with interest rates near record lows, this is likely to translate into lower future returns across other asset classes, not just fixed income. For example, share market forecasts may need to be revised downward as expected returns are derived from the prevailing risk-free rate (i.e. 10-Year government bond yield), which despite a recent move higher, remains stubbornly low. Admittedly, this trend has yet to transpire, noting the rapid rebound in equity markets suggests a disconnect between investor psychology and economic theory. That said, we strongly believe this dynamic will reassert itself over a longer time horizon.

Despite the low yields currently on offer from traditional government bonds, the fixed income landscape is constantly evolving and encompasses a myriad of opportunities. For those comfortable creeping along the risk spectrum, higher yielding securities may be a suitable alternative income generating prospect. However, venturing into the riskier subsets of the fixed income market can reduce the defensive attributes of your portfolio, as these bonds become increasingly susceptible to default risk and are more correlated with equity markets in risk-off environments.

Animal spirits are back…

More recently, an improved global economic backdrop as evidenced through a stronger than expected recovery in growth rates post the COVID-19 pandemic, has produced a powerful rise in inflation expectations. These emerging inflationary jitters have spooked bond markets as investors began to question whether central bankers may seek to increase interest rates to choke off demand – which flows through to bond yields. And due to the inverse relationship shared between yields and the capital value of bonds, this prompted a marked sell-off in bond valuations over the March quarter.

Source: Heuristics Investment Systems, RBA

When yields rise in a short and sharp fashion as witnessed earlier this year, the result can be painful for bond investors. Ordinarily when yields rise in an orderly fashion, the market can absorb these gyrations as yields typically increase in response to improving economic conditions. Therefore, provided the rise in yields is gradual, this shouldn’t interfere with the economic recovery.

Short-term pain, long-term gain

Unfortunately, investors relying on passive fixed income exposure have had most of their pandemic-induced gains erased as yields unexpectedly spiked during the March quarter (and, experienced the associated capital declines). This highlights our emphasis on quality, active management in the fixed income space to navigate mispriced opportunities and avoid potential pitfalls.

Furthermore, we’ve been underweight duration in recognition that inflation represented one of the key headline risks that markets were grappling with. As such, our portfolios have been less sensitive to these interest rate ructions, and pleasingly, our investors have experienced a more subdued pullback from their fixed income allocations.

A positive development from the volatility observed in fixed income markets has been that developed market government bonds now offer yields similar to pre-pandemic levels. This means the risk-return proposition associated with investing in fixed income has improved, thereby increasing the attractiveness of an allocation.

One-two punch

The reason for this is twofold: investors can now expect to generate an improved yield from an allocation to government bonds; and yields have further to fall in a market drawdown which would deliver bond holders sizeable gains to offset equity losses.

Whilst we understand investors’ disappointment that recently, their fixed income allocations haven’t demonstrated defensive qualities, we’re more optimistic that moving forward the value proposition of the asset class has improved. It’s also important to recognise that over the long term, rising rates are beneficial for bond investors as coupons (interest payments) are reinvested at higher yields.

This is illustrated in a hypothetical example below, where ‘Portfolio A’ experiences a stable rate environment, and ‘Portfolio B’ experiences a sudden 1.25% rate rise. As shown, ‘Portfolio B’ experiences a painful initial loss of capital, although is still generating income which is being reinvested at a higher yield. This ultimately offsets the initial losses and outperforms a scenario where interest rates remain static.

Source: US Department of Treasury and AllianceBernstein

The silver lining  

Considering the challenges associated with this evolving fixed income landscape, our Investment Committee recently voted to reduce our cash allocation in favour of short-term credit. This is in response to the relatively unattractive yields generated on cash and the renewed attractiveness of the income available on shorter-dated, investment grade securities.

In addition, our capital markets forecasts demonstrate that emerging market debt screens as undervalued versus developed market bonds. This means that investors may be well-compensated for holding these bonds through disproportionately higher yields. Consequently, our Investment Committee has likewise approved an allocation to an ‘unconstrained’ fixed income manager with a flexible mandate targeting emerging market regions.

Through our specialist fixed income managers, we believe we’ve optimised the competing pressures between liquidity, capital preservation and yield enhancement in a low-rate environment to bolster portfolio performance and enhance risk management. And whilst the initial decline in bonds was painful, this has reset the scene for improved yield generation and capital preservation from investors’ fixed income allocations in the future.

This is increasingly important as the unbridled enthusiasm we’ve seen in financial markets over the last year is unlikely to be sustained into the future. As such, a more concerted risk management approach is warranted when navigating the return of the fixed income animal spirits.

By Calvin Richardson, Investment Consultant

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Shailesh Jain joins Zenith as a Senior Investment Consultant and will be primarily responsible for a number of the group’s client and platform relationships.  He joins the team from Lonsec where he was Deputy Head of Active Manager Research and Manager, Australian Equities.

Calvin Richardson and Martin Kofoed have both joined the team as Investment Consultants, with responsibility for client engagement and governance in support of Zenith’s expanding number of clients. Calvin joins the team from Lonsec and Martin from Pitcher Partners, each having significant experience in both financial markets and advice delivery to investors.

Head of Consulting, Steven Tang, said he was really pleased to welcome the new additions to the team and the caliber of consultants they’ve been able to attract.

“Zenith has been providing managed account services to advisers for over four years now and this year, our service delivery to advisers has ramped-up even further,” Steven said.

“Being able to closely track and quickly communicate financial market changes and fund manager insights to advisers, let alone support them to make timely and necessary changes to their managed account portfolios over recent months, has been critical for their service to clients. Expanding our team into this growing segment of the market is important for our ongoing service commitment to advisers and their clients,” he said.

Growing interest in Zenith’s managed account product suite has seen the group cement its position as a leading provider of managed portfolios in Australia. Blending the best of their proprietary research into both customised and public menu portfolios, the Group’s growing client list includes a number of leading boutique advice businesses across the country.

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