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The best time to prepare for bumps in portfolio returns is right now

Written by Matthew Smith, originally published on

Professional Planneron 6 September 2021
  5 min read

Opening conversations with clients about changing market conditions that may lay ahead – particularly on the back of strong portfolio returns – is a good way to keep the lines of communication open to ensure behaviours during future periods of volatility are kept in check, Trevor McGowan, an experienced financial adviser with MLC Advice says.

It was the time McGowan spent with clients discussing potential investment portfolio outcomes leading into extreme periods of volatility – like leading into March and April last year – that helped his clients keep calm for the most part, he says in an interview with Professional Planner.

Now, during the lockdowns which have enveloped the country’s largest cities, McGowan is again stepping up his communication with existing clients via seminars, calls and newsletters in addition to annual reviews.

“We have constant communication going on,” McGowan explains.

McGowan recalls in March last year when share market valuations dropped sharply in the order of 20 per cent, “there wasn’t much time to do anything”.

“I think we had our clients at that stage so well educated about volatility they were pretty good at that time. They didn’t stress too much,” he says.

Evolving narrative

But the narrative has progressed from the conversations McGowan and many other advisers were likely having with clients leading into March last year, when the very first onset of the global pandemic gripped financial markets, resulting in panic selling and widespread uncertainty.

The conversation with clients today comes on the back of 12 months of very strong investment returns particularly in the equities markets where losses have been recovered and added to in all sectors with technology and healthcare in particular roaring past their previous highs.

“A lot of the story in the last 12 months has really been about central banks conventionally, but also unconventionally, just piling on with QE [quantitative easing] the extent to which we have really not seen since the end of so that obviously has a big impact in driving markets higher,” Anthony Golowenko, portfolio manager with MLC Asset Management’s multi-asset portfolio team, describes.

“So fast forward to where we are now – we’ve had some absolutely cracking investment results over the one year, the way we’d sort of think about as a two and three year period so now we’re getting back to be more on trend [with longer term averages],” Golowenko says.

In light of the steep drawdown in March and April 2020 and the supercharged recovery in the last 12 months, Golowenko highlights MLC Asset Management’s shifting priorities to potentially higher quality opportunities able to generate strong cashflows which can compete in an environment where inflation is emerging.

Drums beating louder

When it comes to talking about inflation, McGowan’s conversations at the moment revolve around the potential for interest rates to increase, the possibility clients may need to be paying more money towards their loans and of course the likelihood they’ll need some more growth exposure in their portfolios to keep ahead of cost of living and spending.

“I think as the vaccines get rolled out, and the economies around the world open up that’s going to stimulate a bit of economic activity and I think that will be a positive for markets over the next year or so. After that I think we just need to be aware that inflation becomes part of the dialogue which could cause potential increases in interest rates and need to be mindful of that and what that can sometimes do to portfolios,” McGowan says.

“The drums are definitely beating louder,” Golowenko describes, pointing to evidence in boardrooms within companies as well as supply chains, not to mention jawboning by central banks, that the economy is starting to run hot and that inflation might be tangibly closer.

In the meantime, while cash rates and bond yields effectively sit at zero, we are still looking to generate yield in client portfolios by investing in things like resources stocks, infrastructure and high quality property, Golowenko points out.

“But we also recognise that beyond the next 12 months the real picture might emerge. It might seem easy now like running down a hill or running down a hill with a big, strong wind at your back, but eventually, the wind will stop and you’ll get to the bottom of the hill, and it might be different, or you might actually trip over,” Golowenko says.

Return expectations

Golowenko suggests advisers start getting clients to think about a more normalised three and five year return instead of hoping to replicate the last 12 months of returns.

He also says they are now looking at investing in longer term opportunities like infrastructure and in particular airports despite the challenges the tourism sector has been facing while lockdowns have stilted interstate travel and halted overseas travel altogether. He also highlights a return to pricing of investments more closely reflecting earnings than they perhaps have in recent times.

“I think there’s a different environment that lies ahead and probably those easy gains or easy returns coming out of the depths with such enormous stimulus might not be as easy as they were,” Golowenko says.

Golowenko uses MLC Asset Management’s scenarios approach to examine a variety of different economic and market outcomes called Investment Futures Framework.

“This allows us to be responsive and strike the right balance of participating in investment opportunities to maximise returns, while dynamically using protective strategies to provide a cushion during downturns,” he describes.

The bucketing approach while not new or revolutionary was effective for clients to ensure they weren’t selling growth assets at the wrong time, McGowan points out, something he says he’s been reminding clients of again recently.

McGowan adds he’s got plenty to talk to clients about at the moment with so much potential for divergent outcomes in investment portfolios in the next 12 months and beyond.

“It’s important to keep the conversations fresh but most importantly relevant to the current portfolios and market conditions,” he says.

This content is produced by Professional Planner in commercial partnership with MLC.