THE long-term outlook for investors is more positive than it has been for almost a decade, giving reason for optimism despite the volatility of 2022, says Pendal’s Alan Polley.
The forecast comes from Pendal’s multi-asset team, which has just completed its annual strategic asset-allocation process, looking at long-term trends and expected returns across asset classes.
Key to the forecast is improved returns for bonds. US 10-year treasury yields have risen almost 3 percentage points in 12 months, offering attractive yields for the first time since the global financial crisis.
Bonds can once again play a defensive role in a traditional balanced portfolio — often termed a 70:30 portfolio for its split between equities and fixed income — as well provide a reasonable level income.
This is even more important for conservative portfolios, which tend to have a higher allocation to bonds.
“The investment outlook now is more normal than it has been for a decade,” says Polley, a portfolio manager in the multi-asset team.
“Over the past five or so years there’s been commentary declaring the death of the 70:30 portfolio.
“Not only was it never dead, but now it’s definitely back and in a much stronger position than it has been for quite some time.”
That’s a good thing for investors, says Polley.
A significant implication of low returns over the past decade has been a move by investors up the risk curve into private markets and illiquid assets. Many saw no alternative.
“Looking forward, you’d think the marginal dollar that’s been chasing illiquid assets will start to dissipate, and this issue will be compounded with lagged higher discount rates.”
Investors looking for clues from history as to how markets will perform should look back to the 90s and early 2000s — because the ultra-easy monetary policy distortions of the post-GFC world are over.
“We’re going back decades prior to the GFC for a reference point when central banks weren’t artificially manipulating markets with low cash rates and quantitative easing.”
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Across all asset classes, Pendal’s review shows forward-looking, long-term returns have lifted about 1.5 per cent on average from last year.
“That additional 1.5 per cent really increases the chances of a portfolio achieving its return objectives.”
The multi-asset team’s strategic asset allocation process is run annually to analyse long term investment market behaviours.
“It’s important because all investors have a return objective and risk tolerance. The strategic asset allocation process is about building an optimal portfolio that meets those risk tolerances and long-term return objectives.
“Over the long term, what really determines your outcome is your risk tolerance, which leads to whether you invest in a 70:30 fund or a 30:70 fund or 90:10 fund.
“This is where having a long-term perspective matters,” says Polley.
“The whole point of investing is that over the long term, through the cycle, you expect to get paid for incurring the short-term ups and downs.
“You need to stay the course with a long-term investment strategy that’s consistent with your risk tolerance.
“Right now, because central banks have been materially unwinding their exceptionally loose monetary policy and markets have sold off and become better value, the long-term opportunity set is looking better than it has been for a while.”
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Alan is a portfolio manager with Pendal’s multi-asset team.
He has extensive investment management and consulting experience. Prior to joining Pendal in 2017, Alan was a senior manager at TCorp with responsibility for developing TCorp’s strategic and dynamic asset allocation processes covering $80 billion in assets.
Alan holds a Masters of Quantitative Finance, Bachelor of Business (Finance) and Bachelor of Science (Applied Physics) from the University of Technology, Sydney and is a CFA Charterholder.
Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.
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