Are the best days for traditional portfolios behind us?

Traditions are made to be broken. While some continue to earn their place in our lives, many change with a changing world and need to be given the boot. Investing is no place for nostalgia, and time is up for the traditional Australian portfolio, according to MLC Asset Management’s Anthony Golowenko. 

We're not just talking about our over-reliance on Australian equities to carry the growth portion of portfolios either.

We all had a fairly rude awakening back in 2022 when equity markets sharply aligned with bond markets and took a nosedive. The correlation may have been temporary, but it was a stark reminder that some traditions may be best left in the past as times change. 

"I believe the best days for traditional portfolios and traditional indices-based asset allocations are behind us. Simply because you don't have the depth and breadth of asset allocation levers with which to impart investment views," says Golowenko.

When it comes to Australian equities – or beyond to other assets, Golowenko suggests investors should be clear on the purpose of the investment in the portfolio, asking themselves, “What's the role and more broadly, how does that actually diversify and contribute at the total portfolio level?”

He argues that, while the narrower styles of portfolio can still have success, a broader approach incorporating newer investment strategies and asset classes "really shines from the risk and return perspective."

It's an approach he incorporates into MLC's portfolios. 

These portfolios are a far cry from the old traditional Aussie equities, direct property and term deposits. In fact, MLC is currently underweight Australian equities and global equities, while holding overweight positions in credit - particularly investment grade and sub-investment grade - and alternative strategies. 

"We see superior risk-adjusted total returns, particularly on the downside through our credit exposures versus global equities," Golowenko says. 

He has recently sold down successful positions in short maturities, and diversified that capital into credit exposure across all maturities. 

In this episode of The Pitch, Golowenko discusses the broader universe of investing and the implications for diversification. He also has some advice about the Australian home bias.

This interview was filmed on 3 April 2024.

Edited transcript

How have shifting market dynamics change what works and what doesn't work?

We have quite a high concentration in larger cap securities for a traditional approach and in traditional indices in Australia. Many of these are income-oriented. In a world where there has been rate rises, a yield curve adjustment, there’s a full spectrum of opportunities. Thinking globally about investment grade or even high-quality sub-investment grade investments, how is the income role fulfilled within a portfolio and what are the diversity and resilience attributes. 

We just think there is a whole range of investments out there, more so than would have been considered in the past in a traditional way of constructing investments.

What are the key lessons that investors should take from this when it comes to diversification?

For Australian shares: be clear of the role. If it was a standalone, what's the role and more broadly, how does that actually diversify and contribute at the total portfolio level.

Smaller companies in Australia are likely going to deliver more growth. We advocate for really high quality companies within it, but there's a whole world of opportunities. Going global for that growth with some awareness of or management of currency. That's certainly not a foreign concept. And we just see now that whole continuum beyond Australia to listed or private markets. It's just this range of opportunities and we're fortunate enough to be able to access and bring to our clients.

Why do Australians need to reduce their bias towards Australian equities? What should they be looking at instead?

We take those arguments for home bias, whether it be franking credits or the local inflation rate. I’m not going to revisit those. Now, it’s as simple as where are you going to access the highest quality opportunities where you have a full universe of opportunity from a valuation standpoint. 

We’re fortunate in Australia, we’ve got some great businesses. If I think about Reece (ASX: REH), ARB Corporation (ASX: ARB), Reliance (ASX: RWC), Seven Group (ASX: SVW), that mid-cap space – Wisetech (ASX: WTC) in the technology space. They’re growing and they’re really high quality. Recently, in reporting season, Reece jumped almost 20% on a solid result on the day due to the US expansion. To be up 20% on the day and almost 40x PE. There are great businesses out there, but we see opportunities at better valuations. Bringing those things together, we’ve got a broader opportunity set.

Be aware of what it contributes on a standalone basis, but take the next step. What does it contribute at the total portfolio level and how does it bring the outcome you’re seeking. Ultimately, we think that’s about diversity and resilience and delivering consistent outcomes.

What does this all mean for MLCs portfolios? How are you positioning?

In short, we’re going after those opportunities. We’re really fortunate in that the breadth of the team and depth of experience allows us access to the whole range of opportunities. When it comes to constructing portfolios, we can rely on those different views and shape what isn’t just a point estimate or a single expected outcome, but a range of potential future outcomes and a diversified resilient portfolio. 

We’re really just getting started with our journey of growth and delivering for our clients, and this has got to be the best job in the world, hasn’t it!

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MLC Asset Management's portfolios combine their best thinking on asset allocation with a disciplined investment process - developed over 35 years - that optimises returns and reduces risk. For further information, please visit their website.