Investment strategies for volatile markets

In this special ifa Think Tank in partnership with MLC, editor Alice Uribe moderates a discussion on how to manage client expectations against a backdrop of challenging market conditions

Kathy Vincent, General Manager, Retail Wealth Platforms, MLC

Lisa Boyce, General Manager, Product and Investment Communications, NAB Asset Management

Geoff Munday, Principal, Endeavour Planning Services

Sean Abbott, Partner, Koda Capital

Alice Uribe, Editor, ifa (moderator)


AU: How would you describe the current state of markets, both here and globally, and what impact is this having on retirement?

LB: Thanks, Alice. I would describe the current market environment as extremely uncertain for clients. It’s a very challenging market environment – I think the potential for compressed returns is certainly heightened and risk is also elevated. We’re also seeing the ultra-low cash rates at the moment distorting asset prices, which is reducing that prospective risk/return trade-off for investors – so, challenging times.
From a retirement perspective, Alice, for the majority of clients, rather than short-term volatility of returns, I think that the bigger risk for most clients is actually the prospect of lower than what might be regarded as “normal” investment returns over an extended period of time.
Clearly for those clients who are in the pre-retirement phase and are about to enter retirement, short-term volatility is absolutely an issue. But for most clients the bigger risk is actually the prospect of low returns for an extended period of time.

AU: I guess that notion of volatility is quite scary for some pre-retirees or anyone when they hear the word volatility. So I’ll direct this towards you Sean: Does it always have to be negative? Can you find ways to speak to your clients positively and tell them how this may be beneficial?

SA: For clients building wealth, yes; but no, not for retirees. There’s a directness in communication that’s needed at the moment where we need to say, we don’t have all the answers to what the future holds. That said, we do know volatility, a slow-down in global growth and the associated uncertainty is all part of the investment journey for clients – the key has been to set these expectations around risk and how to respond to volatility early in the relationship.
Our primary focus, through the managers we employ, is on not losing capital through sensible asset allocation and managing client behaviour through ongoing education and communication.
So, the opportunity would really only be for those who are in the accumulation phase, are building wealth and are buying on a dollar-cost averaging into this market.

AU: OK, Kathy, how can platforms or technology help with this situation, but also create some good out of it?

KV: The first piece is to be really close to the advisers and really working to understand what they need in terms of what we’re providing on our platforms. In terms of the menu choice, we’ve recently added a further 20 funds onto our menu just to make sure that we can actually provide the best coverage for the model portfolios that advisers want to use to manage different client needs and have the right conversations with their clients. And we enable the delivery of that.

AU: What sort of investment strategies would you be looking at?

LB: I’d be very interested in Sean and Geoff’s views as well, Alice, but I think what’s really important in times like this – and Sean touched on it a little earlier – is for clients to have access to professional funds managers and in particular funds that have more latitude or flexibility to change asset allocation relative to from what I’d call ‘traditional funds’, but with the goal of focusing far more strongly on managing the downside.
In the MLC Inflation Plus portfolios we’re seeing a very strong take-up, particularly in that pre-retiree and retiree segment, Alice, where investors and advisers are focusing a lot more on that downside risk. And to be frank, in times like these, clients need access to experienced fund managers, fund managers who have done this for decades through the vagaries of many market cycles and volatile market conditions.

AU: So, what do you think about that Geoff, with your client base?

GM: Now is a really tricky time and I find myself thinking about it in a way that breaks many of the golden rules that I’ve applied, throughout not just my financial planning career but my finance career of over more than 30 years.
So my normal golden rule is time in the market, not market timing. My normal rules say, set your risk profile and then – because you’re pretty much not going to predict the falls and the peaks – stay in that through thick and thin and importantly, after markets fall, stay in there. And therefore, before you go into that risk profile, think long and hard about this and talk long and hard to clients about what falls are possible and then make sure that they are going to be able to stay in the risk profile as you’re going through.
These things are not normal. The world is pricing into markets that the inflation dragon will never return and my economics tells me one day it will, and I think it’s a very dangerous game. There is this dilemma between slow ahead, where you simply can’t afford to be too defensively positioned because if the returns are on offer you need to get a piece of that. But I’m very concerned about protecting capital and I’m trying to do whatever I can in this market, being much more cautious than I normally aim to try and protect that capital if I can.

AU: I think that brings up a really good point. I was looking at the MLC Ipsos white paper ‘Australia Today’, and what really struck me was the importance of advisers, so what you said really speaks to that.
Those that use advisers are more likely to think that they won’t have to use government assistance and they also feel more prepared for retirement.
So I guess, Sean, thinking about your different segments of your client base, how do you speak to a Millennial client versus a retiree versus a pre-retiree in these volatile times?

SA: For retirees and pre-retirees, the conversation is more around expectations management. So for the clients who have been with you on a journey of six or seven years, they’re a bit more pragmatic about acknowledging when you look at historic averages, we’ve had a seven-year run and typically bull runs are six years. We’re into the seventh year so it had to come – it’s a part of the journey and there will be more to endure in the future. Even with the recent pull back and falls, most retirees and people in that demographic are sitting on 7, 8, 9 per cent returns post-fees generally, so they’re fine with it.
If they’re recent retirees requiring an income, well, that’s a different story. They’re looking at the current volatility returns below cash and are concerned about loss of capital. So that’s an important discussion. But if you’ve got a robust investment management process, the better managers today are positioned conservatively but ready to move aggressively when the risk/return trade-off looks appropriate.
The adviser’s role is to manage the client more as opposed to the money. In terms of Millennials with a long-term horizon, volatile times can certainly be viewed as a wealth building opportunity – the sales are on, so buy. Back the truck up!

AU: So, the adviser is really there to speak to the client. For MLC, what sort of tools do you provide for advisers to speak to their clients during these times? And how does your platform assist advisers during this time?

KV: It’s really important that we have at the advisers’ fingertips the fund profile tools and the ability to actually access information around the funds that are on the [MLC] MasterKey platform, like Inflation Plus, that enable advisers to have proactive conversations around how the funds are performing and what their objectives are.

AU: Is there anything you’ve done recently that you’ve changed to speak to advisers right now?

KV: What we’ve done recently within the [MLC] Wrap platform is really investing in making sure that we’re catching the insights within the model portfolios that are being used across the industry. And making sure that we have a really good footprint of choice to enable the efficiency of the models they are choosing based on risk and client needs.

AU: Speaking of client needs, another area that is topical is the needs of women. How do you treat your clients differently, women and men, and how do you ensure women’s retirement is achievable?

GM: I love women as clients actually. I find men can be a bit like the DIY guys (when watching the reno shows on TV) and fancying themselves that they can do it. So men tend to be – overgeneralising a little – overconfident and also more inclined to believe their own view.
Women are much more discerning and much more willing to accept, ‘there’s a lot here I don’t know’. But I think the trap here we fall into with women [is they] often say that men are condescending – you know, ‘Don’t worry, I’ll look after this’. My strategy is to take the time to explain this stuff and they take the time to listen to me and that’s a much more rewarding long-term relationship because I can explain what it is I’m doing and women get to be empowered in that discussion – and it’s also fantastic for referring other people to you.

AU: From NAB’s perspective, with product creation, is that taken into account or something that you might be thinking about doing in the future?

LB: Not so much from a product creation perspective, Alice, but more from an education perspective is where there is the real opportunity. And reflecting on that comment, Geoff – and you spoke about expectations management, Sean – from our perspective, we’ve certainly been increasing the communications, the webinars and the conversations we are having with advisers to better equip advisers to have conversations with clients.

AU: Are advisers coming to you saying they need this? Are their clients being more proactive with their wealth management?

LB: I think it varies, Alice. I think we spoke a little bit before about experience and advisers like Sean and Geoff who have been doing this for a very long time. But there might be newer advisers in the industry who haven’t gone through as many cycles or are still getting to, I guess, practise some of those conversations with clients that can be quite tricky.
That’s probably where we will provide more support, but as a general requirement, certainly in this environment there is a need for us to lift the regularity of communication.

AU: And have you been doing this too, as part of Koda Capital? Do you have client communications that you send out regularly, or what sorts of things do you do?

SA: Outside of our regular contact points, we actively communicate when there is heightened volatility – and alarmist media coverage – such as August 2015 and February this year. We encourage clients to express any concerns at all times. We’ll also run briefings as required.
From an adviser’s perspective, in terms of our relationship with a product manufacturer, the platform is very important in terms of the choice, flexibility and functionality. With the funds management and product area, what’s really important is the communication coming from there to say, ‘this is what we’ve been worried about’, ‘this is what we’re doing and how we’re managing this’ – which we then use to communicate to our clients. So it’s really a combination of all three there to specialise to our areas of strength so that we can communicate to the clients.
So to answer your question: yes, we do and there are different personalities, there are people who will respond to a time like that who are quite indifferent the longer they’ve been in the market – they accept it. Some people are more nervous and they’ll need more handholding, and that’s fine, but there are others who are even more aggressive and are prepared to move cash in straight after a recent default.

AU: Speaking of different types of clients, and now looking at technology – which is again another top-of-mind piece – if advisers want to offer specific advice for different types of clients, how can the platform help them with that?

KV: [By] ensuring that on the [MLC] MasterKey platform we have sufficient breadth of choices that an adviser can select to actually lean into for those [clients] who want a greater growth exposure or those that want a more conservative exposure. So it’s very important that we are consistently assessing that menu and making sure that it’s well-aligned to the conversations and the time.

AU: And what other sorts of efficiencies can the platform provide?

KB: The elements are the communication around the performance reporting, all of the tools that advisers might use to actually enable dollar-cost averaging, which Sean referenced before and certainly permit that the adviser can actually manage their clients as a portfolio as well, rather than undertaking individual transactions. Platforms are very powerful at enabling; technology creates efficiency, so that advisers can actually have the conversations that are required.

AU: Client management is obviously a huge part of volatility

SA: Yeah, it is. It’s managing those normal emotions, trying to get clients to ignore what I call the ‘investment pornography’ that’s out there. The suggestion that for $5 you can purchase an investment magazine to be advised the next best stocks or which sector to be in for 2016.
Client management is about providing good counsel without imparting that you have all the answers regarding the future. We constantly emphasise that their portfolios are highly diversified and appropriately positioned for the current volatility, so the key is to simply hold firm. We emphasise what behaviours preserves wealth as opposed to destroying it.

AU: Sean and Geoff: in both your businesses, not only are your clients facing pressure during a volatile time but so are you. What sorts of pressures are your businesses facing, particularly with clients, which you can’t control? How do you cope with that?

GM: The way I solve that problem is right at the beginning. Before I invest any significant sum for any client, I insist on having a very detailed discussion around risk and what markets do over short, medium and long periods of time. So I sit down and show them what 100 years of markets looks like, what can happen in a five-year cycle, what can happen in one-year cycles, what can happen in a 30-year cycle and say staying in this market is a good plan.
But the problem is over quite long periods of time we could do badly, so therefore we need to design a plan that gets you to where you want to go. But we also need to have a Plan B in case we are simply unlucky on our timing. The problem is we can’t take more risk than you can accept and stay invested should the worst [that] markets [can] throw at us happen.

SA: What I’d add to Geoff’s comment would be to ensure client agreement on the investment mandate for their portfolio. We can give advice, but if there is agreement there at the outset I think it sets the expectations – clients become engaged and own the decision with us. I find nine out of 10 people very reasonable on this front.

AU: We’ve been talking about advisers having enough time to spend with their clients and talking them through these sorts of episodes. What other business efficiencies – Kathy, maybe I’ll direct this towards you – can free up advisers’ time – efficiencies either through technology or other ways?

KV: Yeah, it’s important to be mindful of tools advisers are using, whether they are using desktop software to actually manage the client’s total wealth picture, their superannuation, their investments.
I think we need to be quite mindful that advisers, for different clients’ risk appetite, might be using a combination of superannuation and investment strategies, as well as enabling the platforms to efficiently provide information to their desktop software, like Xplan or other software. So the adviser has at their fingertips what they need to be able to have the right conversations with their client.

AU: Is there anything you use day-to-day to increase efficiency in your business?

SA: Yes, absolutely – good platforms provide us with the ability that when a client calls, we can log onto the platform and immediately bring up someone’s account, 12-month performance and five-year performance.
Being able to PDF that to the client in real time is very efficient, so these platform features are a huge benefit for both advisory firms and clients.

AU: You’ve been an adviser for a long time – how has it changed? How have you gained efficiency over the years?

SA: Well, it’s changed a lot. If I think back 18-plus years, the reports used to be quite limited in information and cumbersome to produce. They were limited in terms of communicating concisely and clearly to clients exactly where and how they’re invested. Again, I also come back to speed – the better platforms today allow you to generate accurate and information-rich reports in under a minute. This feature allows an improved level of service to our clients and delivers efficiency gains to the business.

AU: You have more clients, but do you actually have deeper relationships with the clients that you have?

SA: That’s right. We have the conversation, the platforms allow us to access performance and investment information quickly, and the ‘investment product’ is managing the risk side of things with high-quality, investment managers on the platform. You asked earlier, is there any opportunity here?
I believe the key benefit to clients now is that the funds management industry has innovated and evolved a lot in terms of using other asset classes to generate return and lower risk. It doesn’t have to be all reliant on bonds and shares.
That to me was one terrific development post-GFC, where the funds management industry said, ‘look, we used to rely on diversifying risk by having less in shares and more in bonds, as the GFC was widely known as ‘the credit crunch’. Now, we talk about commodities, currencies, alternatives, hedge funds infrastructure and insurance-related investments – essentially, assets that have lower correlations with each other, meaning the client experience is no longer as reliant on publicly-listed market movements. That’s something a client can’t access off the street and again, through the combination of platform, funds management and adviser, it’s a good outcome.

AU: Lisa, can you speak to that perhaps – the mix of investment options?

LB: Sean’s entirely right. People used to have the mindset of ‘what’s the correlation between equities and bonds or equities and other asset classes?’. But as Sean said, the GFC really showed the real risks that are inherent in these asset classes.
As he outlined, MLC has been using those building blocks in our diversified portfolios for many years. Private equity is an asset class we’ve had for almost 20 years. These are very specialised investments that a typical investor can’t access, but those asset classes add a lot of value to clients and can also protect on that downside. So, when things do go wrong, it’s important clients have a diversified portfolio.
And that’s the other point I’d make, Alice. Everybody might be at a different time of their life. Volatility comes, volatility goes. But the fundamentals of investing are pretty constant. Be sensible, have diversification of asset classes, understand that there is always a risk-return trade-off, and markets are volatile. It’s an inherent part of what we do.

AU: Any ideas on how pre-retirees can maintain their composure during this time?

GM: Sure. So the dilemma we have with the budget, of course, is that it was announced by a government the day before they then cancelled Parliament and went to an election, so Lord knows how much of that is going to get legislated and find its way through. But in effect, some measures apply from budget night, so we have to act as if they are going to apply and start to plan accordingly.
I think from a client’s perspective, it’s part of another whole raft of changes in an already complex system and it runs the risk of creating mistrust in the superannuation system generally. I think actually, if you’re a technical person, you would broadly look at the changes and say it’s not that unfair; in fact, arguably quite fair and arguably sensible changes from a technical perspective.

AU: Lisa do you have any thoughts on that?

LB: There’s a lot of talk about superannuation, I get that. But as Sean said, let’s not forget about the non-super component of a client’s portfolio, and for more clients that could be a more important consideration going forward.

AU: It’s the whole person and that’s sort of what we’ve been talking about today. We’ve got the product, the platform and the adviser all working together to ensure that their client’s retirement outcome is healthy and happy, so I think that’s probably a good point at which to leave it. Has anyone got any final thoughts?

LB: I’ve been reflecting on this conversation in terms of expectations management. It did take me back to my first role in the industry: 1994, the bond market crash, I’d just left primary school clearly, but the number of phone calls I took from clients in tears saying, ‘I didn’t know I could lose money from a bond fund’. And that has certainly shaped me a lot and those who were around then.
So it’s incumbent on all of us – the fund manager, the platform and the advisers to just continue to educate, re-educate and manage expectations.

AU: Managing expectations is so important because then people don’t overreact if they know.

KV: I’d make a comment just in reference to the potential budget changes. A platform provider could look at that and say the regulatory changes are X, Y and Z and introduce certain caps and so on and so forth.
I think a better platform provider will work with advisers to actually understand how their strategies change. So how might contribution strategies change? How might non-super investment strategies change? What do we have to do differently in terms of the tools we have to provide on transition to retirement strategies and really partner with advisers to provide the right tools?
So, we’re eyes wide open about actually working with the market and truly understanding what we can do to help.

AU: Thank you everyone for joining us. It’s been a great conversation.

Any advice contained in this transcript has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice in this transcript, MLC recommends that you consider whether it is appropriate for your circumstances. MLC recommends you consider the Product Disclosure Statement (PDS), available from MLC, before making any decisions regarding MLC MasterKey. MLC MasterKey Super and Pension PDS is issued by MLC Nominees Pty Limited (MLC) ABN 93 002 814 959 R1056778 and you can obtain a copy of the PDS at


Investment strategies for volatile markets
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