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Strategic asset allocation: what matters in the long run

An annual strategic asset allocation review has led Pendal’s multi-asset team to make some recent adjustments to portfolios. Pendal’s ALAN POLLEY explains

THE build-out of renewable energy infrastructure, persistent higher inflation and geo-political risk will characterise investment markets in coming years.

But the threat of low returns related to zero interest rates is in the past as central banks revert monetary policy to more normal levels.

These are some of the findings from an annual strategic asset allocation review by Pendal’s multi-asset team.

“The strategic asset allocation process is where you forget about the day-to-day noise and think about the long term,” says Alan Polley (pictured below), a portfolio manager with the team.

“Investing, by definition, is long term. But we all get caught up in short-term, random happenings that tend to get averaged out over the long term.

“The strategic asset allocation process is that annual time to think about the long-term investment views, how you’re thinking about markets and asset classes and how to get the best outcome for your investors over their investment time horizon.”

Six major, long-term themes

Polley says six secular themes will likely characterise investment markets in coming years:

  • The ongoing importance of ESG themes (from a risk and opportunities perspective)
  • Better productivity
  • Ageing demographics
  • High debt and deleveraging
  • Enhanced geo-political risk
  • Higher inflation and spike risk

“One of the secular themes we have dropped this year is the risk of a low-return world.

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“For the past decade everyone’s been talking about expected investment returns being low.

“The main reason was because central banks had pushed down real rates to negative and market valuations to stretched levels.

“But that’s normalised. Cash and real rates are at reasonable levels.

“And now that markets have sold off as well, forward-looking returns are looking pretty good — probably the best they have for a decade.”

The other risk that is no longer hanging over markets is the prospect of a shock from the withdrawal of easy monetary policy.

“It’s been difficult this calendar year, but rates normalisation has effectively occurred.”

Inflation risk remains

Remaining as a risk is inflation, which will be a theme investors have to deal with for some time, says Polley.

“Investors consume real assets and so they’re interested in real returns. Over the last decade you’ve had this tug of war between deflation and inflation.

“Inflation will be higher than it was in the last decade and central banks are more likely to achieve their inflation objectives (as opposed to undershooting them).

“But we also think there’s more chance of inflation spikes.”

Portfolio adjustments

Weighing up the themes has led the multi-asset team to make some adjustments to portfolios.

“We’re increasing our exposure to bonds. They are offering attractive yields and have material diversification benefits again.

“This will also help defend against a potentially more volatile long-term outlook with more geo-political risk and less-supportive central banks.

“Another change we’ve made is moving some capital into listed, sustainable listed investment companies. With the secular theme of higher inflation, you want more real assets.

“The way we’re looking to get that real asset exposure is via renewable and sustainable companies with underlying real assets.”

Emerging Markets risk

“The other major change is we’re reducing exposure to emerging markets. The emerging markets index has a very high exposure to China that’s increased materially over the years to circa 30 per cent.

“Taiwan is another 15 per cent in emerging markets — so if there’s conflict, that’s almost half of the emerging markets index at risk.”

“China also appears to be transitioning to more authoritarian and nationalistic policies at the expense of market-based reforms.

Compounded by increased global national security concerns and politically driven onshoring preferences, deglobalisation could reduce China’s global manufacturing dominance. “

About Alan Polley and Pendal’s Multi-Asset capabilities

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.

Find out more about Pendal’s multi asset funds:

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at November 23, 2022. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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