In the wake of the global financial crisis, a prolonged period of low inflation and historically low interest rates followed. However, with inflation soaring and interest rates subsequently rising, advisers will now face the challenge of guiding their clients through this new economic landscape.
Until May 2022, the Reserve Bank of Australia (RBA) had not increased interest rates since November 2010, but since then, it has hiked the cash rate target 11 times in just 12 meetings, with the rate moving from 0.10 per cent to 3.85 per cent.
Speaking to ifa, and reflecting on the current inflationary environment, Maple-Brown Abbott chief investment officer (CIO) Garth Rossler explained that the types of investments that have worked over the last 15 years are not going to generate equivalent returns in this novel economic context.
“The only thing [advisers] have known is growth, because the 15 years from the GFC through to 2020 has just been one way traffic,” Mr Rossler said.
“That mindset, to me, is going to come under pressure.”
According to the latest Adviser Ratings Landscape Report, the average age of a financial adviser in Australia is 49 years old, down from 51 years old in 2021. With many older advisers leaving the profession in the wake of increased education requirements and burgeoning red tape, a large contingent of the industry has only experienced the post-GFC low inflation, low interest rate environment.
Mr Rossler explained that advisers that have entered the industry during this period will need to undergo a mindset adjustment.
“If you’re working every day and it’s been sunny every day, you can forget what it was like when it rains. That’s kind of what it’s been like,” he said.
“Looking forward, there’s going to be rainy days. We think that there’s going to be a very different investment environment and slower growth, high interest rates, more inflation, probably less premium price stock markets, and less generous valuation for growth.”
Also speaking to ifa, Bell Asset Management CIO Ned Bell said that advisers should start looking at whether their portfolios are stacked with expensive stocks, which he said could represent a material downside risk.
“As an adviser, you have to start thinking about what the risks are in your portfolio,” he explained.
“For argument’s sake, if you have more than 50 per cent exposure to global market growth stocks and the markets give you a huge free kick in the first half of this year, you should be opportunistic, you should take profit in that. In my view, you should take profit to basically reduce your overall risk.”
It’s unclear at the moment whether interest rates will continue to rise, however, inflation beginning to slow has yet to deter the RBA. If this new environment is a long-term proposition, experts agree that advisers will certainly need to adapt.
Deep value manager says the run of growth is over… LOL! He’s right, but not because he’s right. Because this is his only opinion, ever, all the time. You cannot however argue with mean reversion. Active management will outperform over the coming 5 years, as will value style management. This is as obvious as the weather when you look out the window. Any adviser who’s been around long enough knows that index funds rarely beat the good active managers over time. The media talks about how index beats active 90% of the time, it should say the better active managers (the top 10%) beat he indexes over time, consistently. the period since the GFC is a drop in the ocean as far as time goes. Every single active manager I use has beat the index since their inception, and inception dates average 20+ years ago.
The only risk to portfolios is know it all active managers who seem to underperform on most occasions yet, have the nerve to lecture advisers about risk.
“Active fund manager says don’t rely on track history because the future will be different and we’ll do well.” No thanks.
I’m hoping future will be same, because index almost never outperforms quality active managers over time. And a decade isn’t “long term”. Try over 20+ years.