The challenge of matching one’s investment time horizon with the ebbs and flows of the market (ie sequencing risk) has led to the increased uptake of objective based investment strategies. These funds target specific outcomes irrespective of market (mis)behaviour. The risk of timing your investments is no more evident than in share markets where absolute outcomes can swiftly crush or create wealth over short or even moderate timeframes. This great conundrum of investing is one risk which we go to great lengths to mitigate in the MLC Inflation Plus portfolios. This includes going so far as to build tailored strategies within the portfolios because exactly what was needed to generate the most appropriate outcome didn’t exist.
While share markets have an important function in many multi-asset portfolios, they are also the main culprit when it comes to untimely wealth destruction. However ignoring the contribution shares can play in generating wealth is unwise, therefore investors must manage their exposure to the shares asset class while taking into account this weakness or find a way to mitigate the risks. We have opted for the latter by seeking tailored shares exposures for the MLC Inflation Plus portfolios which are more aligned with the objective of limiting exposure to significant market declines.
The clear and specific real return objectives of the MLC Inflation Plus portfolios allows for the aligning of shares exposures to serve only the portfolio’s objective, as opposed to beating the market. Liberation from traditional share benchmarks does away with the need to carry unattractive risks through fear of underperforming the broader market. For managers aiming to outperform the market, success is measured by an outcome better than the benchmark regardless of the overall absolute wealth experience. Such strategies may not be helpful to achieving the overall MLC Inflation Plus objectives, as simply doing better than the benchmark in an adverse market is unhelpful in the pursuit of a real return outcome. Although the broad market is highly diversified and this may present certain attractive characteristics, when weighed against the need to contribute towards specific MLC Inflation Plus objectives, not all stocks pass the test. It is worth noting that MLC Inflation Plus objectives are not restricted to returns only. Indeed the objective of generating an attractive return cannot be divorced from the need to control risk – without risk control, there can be no confidence in return outcomes. The consideration of risk is therefore paramount in ensuring progress towards the return objective is not derailed. There are many stock names that fall short of this hurdle.
The need for a truly absolute risk aware Australian shares exposure has led MLC into developing a tailored Australian shares exposure designed only to serve the MLC Inflation Plus portfolios. In short, it has only one master. This allows for the insights from our Investment Futures Framework to be applied directly to the Australian shares exposures, along with a targeting of stock characteristics to most efficiently contribute towards the overall MLC Inflation Plus objectives. With this approach the benchmark exists only to provide a universe of stocks from which only those most suitable companies will be considered.
In order to achieve consistency with the requirements of MLC Inflation Plus, the portfolio construction utilises the Investment Futures Framework. As such, the portfolio provides a tailored exposure to the Australian share market which has greater consistency with the objective of lowering downside risk. Such alignment and efficiency is simply unachievable through a benchmark relative approach.
The tailored Australian shares strategy is in the final stages of more than a three year development period and is expected to be introduced to the MLC Inflation Plus portfolios in the near future. This strategy has performed well, particularly as we have increased alignment with MLC Inflation Plus objectives. This capability enhancement is an important milestone in allowing MLC to achieve real return outcomes for clients.
Grant Mizens,
MLC Senior Investment Analyst
To learn more about MLC Inflation Plus and other investment solutions visit nabam.nab.com.au/benchmark
Important Information: This document is issued by MLC Investments Limited (“MLC”) (ABN 30 002 641 661, AFSL 230705), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (“NAB”) group of companies (“NAB Group”). An investment with MLC does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.
This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.
You should obtain a Product Disclosure Statement (“PDS”) relating to any financial products mentioned in this communication issued by MLC and consider it before making any decision about whether to acquire or continue to hold the products. A copy of the PDS is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au.
Any opinions expressed in this document constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this communication is correct and that any estimates, opinions, forecasts, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice) and actual events may vary materially. MLC relies on third parties to provide certain information and is not responsible for its accuracy. MLC is not liable for any loss arising from any person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.
This information is directed to and prepared for Australian residents only.
