MLC: Now is not the time for big risk-on or risk-off portfolio decisions

If you think Trump is the biggest market concern right now, you aren’t wrong, but MLC Asset Management’s Anthony Golowenko points out there is much more investors should be paying attention to.

For example, equity valuations are a hot topic right now.

“Equity valuations in Australia and also globally being quite elevated, we have scenarios where valuations actually go higher from here. Whether that's a speculative bubble, similar to what we saw in the 2000s, or a case of US corporate balance sheets being re-leveraged with increased liquidity,” Golowenko says.

He also argues that investors need to consider that monetary easing could lead to a general slowdown and there is a need to carefully prepare for this also.

That said, Golowenko is still constructive in his positioning to growth assets and global shares.

“We’ve taken some of that exposure from global developed markets and put it into emerging markets. Some of it into things like global credit, and also thinking about our alternatives program,” he says.

“We don’t see this as a time for big asset allocation calls for big risk-on, or by the same token, risk-off positioning, but a really sensible combination with active management in a whole range of components that we believe will deliver consistently for our clients.”

In this episode of The Pitch, Golowenko discusses how he evaluates market concerns, his positioning for the portfolios he runs and the criteria he uses for selection of investments and fund managers in the separately managed account (SMA) portfolios he manages.

MLC uses an investment futures framework as part of its process. Can you explain what this is and discuss a few of the concerns that you're monitoring within this framework at the moment?

If I contextualise our investment futures framework, it primarily applies to the medium term of three to seven years within MLC Asset Management. Our investment team utilises capital market assumptions for a longer time horizon, supporting strategic asset allocation over seven to 10 years, while also considering more cyclical factors over shorter periods, such as 12 to 18 months

On the shorter-term side, the investment futures framework has been a part of MLC for a long time. In a nutshell, and at its essence, it is about building a robust portfolio to a wide range of potential future outcomes as opposed to an optimal portfolio for a narrow or very small number of those. 

So what does it mean? We want to target diversity and resilience, we want to be clear about underlying components, the role they play and whether we've just kicked off at the time of filming the NRL season, whether that's players are going to be really good on the offensive side and scoring points versus more on the defensive side.

It’s the same thing with investing - looking at Aussie small caps, emerging markets, and global shares to play an offensive role. And there may be elements within credit or derivatives, potentially short maturities, other components and we know alternatives will also provide additional defensive diversification. 

So those things in a nutshell, it's been around for many, many years. It continues to evolve and really be at the heart of what we offer in our managed accounts and as I said, diversity and resilience to deliver consistent outcomes for our clients, something that we do right across our investment management business.

Are there any particular concerns that you've had to shift the portfolio for at this point in time?

Well now obviously Trump, that has to be one of the largest factors for markets, but beyond that really valuations. Thinking of equity valuations in Australia and also globally being quite elevated, we have scenarios that valuations actually go higher from here. Whether that's more of a speculative bubble, sort of like we saw back in the 2000s or whether that's something where it's a case of US corporate balance sheets being re-leveraged and invested in more liquidity flowing. So, those things we'd see valuations actually going higher from here.

One of the main concerns in terms of potential slowdown scenarios is protectionism. Almost daily, we see new tariffs being introduced to varying degrees. But what that is around this protectionism, in that case, America first or domestic economy first, we saw things like higher inflation over a longer period. We do see that coming in impacting on earnings.

The other one will just be a general slowdown. We've had a fairly robust environment. We've had a fairly well-supported environment on both the monetary and fiscal sides. As that support wanes, a more generalised slowdown could occur. 

There is upside from here - as well as potential downside. Ultimately intelligent, considered, and insightful discussions take place, assigning probabilities to various scenarios, all of which come together in our positioning. The parameters are very uncertain, we don't know exactly, no one really knows what's going to happen. We try and prepare for those things within our positioning.

What does this mean for the asset allocations currently?

We're still constructive. As I mentioned in the offence-defence analogy, we remain constructive on growth assets and global shares. We've taken some of that exposure from global developed markets and put it into emerging markets, some of it into things like global credit, and also thinking about our alternatives programmes. So that's how we funded.

I believe at this time, we've got a really well diversified, well positioned portfolio. And again, there's a considerable uncertainty, but it's how it's playing out is that we don't see this as a time for big asset allocation calls for big risk-on, or by the same token, risk-off positioning, but a really sensible combination with active management in a whole range of components that we believe will deliver consistently for our clients and deliver consistency across a range of many things could happen from here. It's really pleasurable to be part of the intellectual discussion, debate how we frame our portfolios and only position them for our clients.

How do you identify the fund managers that you use as part of your portfolios?

In the same way that an adviser or a client may choose to partner with somebody, some of the things we offer in our SMA programme, we're an institutional asset manager, highly experienced. We're a safe pair of hands if you like, having been around for some time and we believe that and others have evaluated us to be quite capable in doing so.

When we have our sector portfolio managers as part of the investment team, we're working with them collaboratively, understanding the attributes, whether it's Australian shares, the mid and small caps, global shares, maybe a value or growth orientation, hedge versus hedge, how all of those things come together. 

A key advantage we have is that our sector portfolio managers are not spread thin researching 50 or 100 funds and writing extensive reports. We focus in on what we see as the high calibre, high quality managers can form part of our programme. And ultimately in a really simple way, we want to partner, we want to grow together. And what that brings is size into scale. 

What that brings is whether that's into institutional funds or tailored funds created just for us, all of it benefits our clients and all of it benefits in creating those consistent outcomes. And as I said, it's a real pleasure to be part of that team.

What criteria would a fund manager need to meet before you even consider it for the portfolio?

I think you have to have some degree of capability, some degree of pedigree, some elements of ‘I can do this, I've done this, I'm experienced increasingly things like systems and will tell me your compliance programme, what's your cyber programme?’ It's a fairly high hurdle. And pleasingly though, it doesn't necessarily mean you have to be a big fund. You can be really well supported in a boutique structure and a number of the funds that we've supported and grown with along the way are part of boutiques specialising in investment management, specialising in what they really want to be and clarity in delivering it, but then maybe some of the other functions provided in the boutique structure. All of those things come together. We've got a really great team of sector portfolio managers, a lot of experience for the funds that we utilise in the SMA programme. Often there's a high overlap with our institutional programme. And then when there is a need to expand or put a new manager in, those people working and thinking about that a lot, and that's actually their full-time job.

How frequently would you review the portfolio managers that you're using?

We have a regular cycle across our team. We're reviewing managers and outcomes on a quarterly basis. If there were to be an individual manager or managers that start to deviate from what they said they would deliver or if they're having perhaps outsized outcomes, we obviously want to understand those and we'll engage with them in a collaborative way.

 Whether it's an amber flag turning red, it's a continuous process. And then I guess, like school when you have a detention and then it's an afternoon detention, then a letter gets sent home, there's an escalation process and ultimately we'd lead to some changes.

But for us, it's really understanding what are the drivers, having a clear idea of the role within the portfolio and then where there is an opportunity to potentially improve that outcome. And sometimes it's a case of where a fee level that is a certain area, if we can get a similar capability, if we can get that a more attractive fee, and we can do so without disrupting things too much on the tax side. 

If that makes sense within our programme for advisers and clients to look at that sort of change. It’s a wide range of things. It's a collaborative process. It's considered, and ultimately we want to grow together and grow with our clients and deliver consistently

More broadly with the portfolios. How frequently would you review the asset allocation and rebalance portfolios? And in turn, how closely do individuals SMA align with that rebalancing?

The rebalancing ultimately is going to be market determined. What are the market prevailing market conditions? Things like, if you have a surge in equities, global equities versus fixed income. We saw that back in the end of the year in a pretty magnified way. From a hygiene side of things, we want to keep our portfolios to their desired weightings. We might have some refinement to that. Getting too technical to an inner band from our outer band to an inner band to minimise disruption in turnover.

In terms of asset allocation changes, we'll run that on a two to three year basis depending on really the market environment we've been through. That's setting what's my long-term target allocation and we do that within our framework. It goes up through the governance structure in our investment committee. Then looking at my experience in coming up on five years with the managed accounts programme, once or twice a year an asset allocation refinement. But the bigger wholesale changes, we've had one of those coming up on two years ago, but probably a two to three year basis where we're making decisions, we're looking on a wide range of outcomes.

Where are the most attractive opportunities and how are we deploying capital to most effectively take advantage of those? It's a wide range. We are actively monitoring the portfolios every day, the performance key drivers, all of those things. The big movement is going to be around markets and the big movement in something becoming more fully valued. How do we take that pocket and maybe put some exposure into something we see is a bit more attractive? So real assets and listed real assets in real estate and enlisted infrastructure. We see those compelling on a two to three year view. In the near term, there is some uncertainty and things like direct Australian shares, a large caps, they're a bit more fully valued at this time.

For investors considering moving their portfolio into an SMA, what would be the process of doing this and what happens when they have an existing portfolio of direct shares?

Using my Wesfarmers example, it has been a longstanding, really strong growing business. But if you've got a longstanding big position in Wesfarmers with a high embedded tax position, well, maybe that's something you need to speak and get some further advice beyond financial advice or tax advice with a diversified Australian shares portfolio. The first thing is, ‘am I happy with that?’ And if you are happy with that, it's delivered for you. 

You've got a foundation of income. Or maybe the discussion with a financial advisor is more in the ‘let's think about the estate planning and other things’. What we'd see is beyond that fairly narrow range of potential opportunities, there's a wide range even to smaller companies domestically. But there's a whole world out there. There's a whole world of investment opportunities. We believe the diversification attributes and seeking out those strong components over time, we'll deliver really consistently.

And as I said, diversity and resilience. If you're looking for those things, if you're looking to maybe you love personally managing these things, and look, if you do that, don't give it up, but maybe take part of that portfolio and put that into this type of solution to then help future proof and provide that diversity and resilience right through your investment journey. And maybe you want to go off sailing or you want to go to the beach or play with the grandkids, SMAs can provide that structure and working with a financial advisor, as I mentioned.

Invest with intent

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