Victor Huang

Milliman’s SmartShield managed accounts, which offer dynamic protection against market downturns, have passed $100 million in funds under management.

This milestone shows growing demand among advisers and clients for a low-cost solution to protect portfolios against market crashes and volatility without giving up the potential upside.

Milliman Principal and Head of Investment Solutions Asia-Pacific, Victor Huang, said the SmartShield managed accounts were successfully launched to the retail market just as the COVID-19 market downturn hit in early-2020.

“The COVID-19 downturn offered up a real-world situation to test the strategy. It demonstrated to investors how effective dynamically hedging their portfolios against significant market downturns can be. Global insurers, pension funds and wealth management firms have successfully used these techniques for decades. Through SmartShield, retail investors have been able to protect their portfolios in the same simple and low-cost way.”

Milliman’s Financial Risk Management (FRM) practice is a global leader in managing financial risk, providing investment advisory, hedging and consulting services on approximately $A246 billion in global assets. Milliman FRM has a well-established track record of over two decades, navigating the past three market crises. It employs more than 200 professionals across four offices globally, helping protect the portfolios of insurers, pension funds, and wealth management firms around the world.

The four SmartShield portfolios (Moderate, Balanced, Growth and High Growth) have been designed to provide a cushion against downturns and volatility (rather than a hard guarantee). The dynamic risk management strategy is implemented using futures contracts to ensure it is low cost and liquid, while providing investors with strong participation in bull markets.

Contrarian Group Financial Planning Certified Financial Planner, Damian Liddell, says the SmartShield strategy suits his retiree clients, particularly given this year’s challenging market conditions.

“The market is really choppy at the moment – we’re long overdue for a pullback,” he says. “Property and share markets have been propped up by falling interest rates for a long time. Now that rates are rising, it’s really difficult, and that’s where the SmartShield approach is good – it lets people have their cake and eat it too.”

A growing proportion of the population are approaching retirement or already drawing down capital, where they face sequencing risk, which describes the bigger impact a market downturn can have when struck in early retirement, compared to being in the accumulation phase.

Liddell’s other clients also face similar market timing risks when they invest large sums of money, such as from a property sale or inheritance.

“My clients are prepared to accept some risk – they know SmartShield is not full protection – but one that strikes the right balance at low-cost. They don’t want the risk of a sharp downturn hitting a traditional balanced portfolio and are prepared to give up some upside if they can generate reasonable returns over the long-term.”

Since inception, Milliman SmartShield High Growth portfolio added 1.22% p.a. above its benchmark (see footnote), whilst reducing volatility from 15.13% to 9.47%.

The built-in risk management within SmartShield gives advisers the confidence to increase their exposure to growth assets, knowing that the protection will kick in when needed. This potential for extra growth is important to increase the chance of delivering positive real returns in this high inflationary environment.

A growing number of investors are also now starting to consider term deposits or online savings accounts, which are becoming more attractive as interest rates rise, according to Liddell.

“For the last 5-7 years I’ve probably been too conservative,” Liddell says. “If it wasn’t for SmartShield I’d probably still have 40-50% exposure to growth assets, but with SmartShield you can just bump it up that extra 10-20% rather than going to fixed interest or even term deposits.”

Market conditions remain uncertain as central banks around the world continue to raise rates to fight surging inflation. Inflation is expected to nudge almost 8 per cent in Australia by the end of the year, while other factors, such as geo-political turmoil, are adding to volatility.

However, investors should continue to focus on their long-term goals, according to Huang.

“Dollar-cost averaging remains a popular strategy among advisers investing large sums on behalf of clients. The Milliman SmartShield managed accounts now provide another way to manage uncertainty given it provides strong protection against extended market downturns while also allowing investors to participate in bull markets.”

——–

[1] Performances are calculated net of underlying investment cost and management fee. Fees applied on the benchmark = 90bps, it represents the average management fee charged by investible multi-asset diversified portfolios as published by Morningstar research. Past performance is not indicative of future performance.
[2] Aside from hedging strategy performance, short term performance relative to the benchmark differs due to imperfect performance tracking of the underlying sector ETFs against its benchmark on a month to month basis. This is mainly caused by difference in the period that performance is accounted for between various time zones, as well as difference in effective date of dividend distributions relative to the benchmark.
[3] Inception Date: 3rd Mar 2020

The post Milliman’s SmartShield managed accounts surpass $100m as advisers seek solutions to tackle market volatility appeared first on AdviserVoice.

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.”

———

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.

The post Investors increasingly protecting portfolios in wake of rising rates and market volatility appeared first on AdviserVoice.