Structuring the growth part of the portfolio

When it comes to structuring the growth part of a portfolio, as a global actuarial management consultancy business, Milliman puts a lot of focus on what the markets are pricing in, as well as market expectations.

So, despite inflation still being high, as well as the probability of a U.S. recession remaining around 60 per cent and Australia at just under 50 per cent, and a significant shake-up of the property market in China (which potentially could lead to a sizeable slowdown in growth and deflation for China), Victor Huang — Principal and Head of Investment Solutions Asia-Pacific at Milliman — remains bullish, pointing to the VIX index and option markets which remain quite optimistic.

“The markets are pricing in a very muted level of volatility for equities over the next six months,” says Victor. “And although this volatility is likely to ramp up by Q2 or Q3 next year, it means that for the risk management strategies we manage, we’re currently quite strongly allocated to equities because of where we see volatility in the market over the short-term.”

With the current low volatility environment, Victor believes there are a number of opportunities for investors to add to the growth part of their portfolios. However, he cautions: “From an investment perspective, if we put on any form of hedging strategy, it’s important that clients understand what the objectives of the strategy are and they have a good understanding of how that strategy is expected to perform in different parts of the market environment.”  

Victor says that with any form of risk management strategy, it’s important for the strategy to be dynamic, enabling you to dial up and down your exposures relatively quickly.

“For example, right now, while we view risk volatility in the market as being relatively low, the benefit of using derivatives allows us to manage risk and implement changes quickly,” he says. “With these types of strategies, it’s all about how you implement them and being able to react to different types of environments very quickly.” 

But for long-term investors — whether accumulators or retirees — Milliman believes a large portion of assets should remain in growth, such as Aussie and global equities. Victor says investors need exposure to growth assets to combat inflation.

“The caveat here is that pre-retiree and retiree investors are more exposed to sequencing risk. So, while it’s important to have exposure to growth assets, you also need to be able to manage the risk of that exposure as well.”

Dermot believes that despite much of the performance in the market being dominated by top 50 stocks, there remains a lot of opportunity and capacity in the small caps sector, which he says offers significant growth and valuation appeal to investors.

However, when it comes to global shares as part a diversified portfolio, he says advisers need to carefully pick their region, rather than be dominated by U.S. stocks. “You need to be careful where you pick your regional allocations, otherwise you’re just buying the MSCI World.”  

Whether accumulator or retiree, Geoff agrees it is essential that advisers understand their client’s investment timeframe, risk profile and investment preferences, like ESG and impact investing. 

“The traditional 60/40 portfolio is again of interest for many clients. And with our younger/middle aged clients who have time on their side, we’re talking to them about broadening their growth assets to cover more diverse opportunities, like senior private loans and distressed debt. That’s because these younger clients are better able to cope with illiquidity for a period of time.”

Although not traditionally considered a defensive asset, David accepts there is a role for property as a defensive play within a portfolio. He believes property, particularly premium commercial property, does provide some defensive characteristics and interesting opportunities in a diversified portfolio.

At Atrium, property falls into the manager’s ‘diversification’ bucket. However, Brendan cautions that with property: you need to understand the verticals you’re looking at; what type of risks you’re taking in that part of the portfolio; and whether they are correlated to other risks you already have in parts of your portfolio.

“For this reason, we’ve been avoiding commercial/office for a while in our real estate portfolio. There are also liquidity issues to be aware of. You want to make sure that the structures you’re going into have liquidity that match the liquidity of the underlying assets,” he says.

However, Michael doesn’t believe property can be considered a defensive asset.