28 June 2016

Stephen Furness

Director - Wealth Management

We have noted for some time, through our LDI Connect portfolio updates, investment risks in general terms remain elevated and the “Brexit Vote” highlights such an event that can upset markets. Brexit is just one of numerous issues at any point in time that are risk event considerations for investors as we deal with what are certainly challenging and interesting times.

We will not attempt to outline the ins and outs of Brexit as we are sure you have been overwhelmed by news reports of these events in recent days. We can assure you that we have been conscious of this issue and have positioned portfolios accordingly.

We have been advising a cautious portfolio positioning for some time for a number of reasons. Although we did not have any specific insights into the outcome of the referendum we have believed its risk was reflective of the growing polarization in politics and increasing nationalistic focus in many key countries. We should note that such developments are generally not positive for global geopolitical stability or free trade/globalisation, and ultimately financial markets.

There are currently, in our view, a number of key challenges in managing investment portfolios, including:

  • The extremely low returns offered by cash and term deposits – making defensive investing particularly difficult from a return perspective;
  • The expensive valuation, in an historic comparison context, levels of many mainstream asset sectors – making it difficult to justify higher risk investing;
  • The influence that central bank policy has had on markets – through record low interest rate settings across most global economies;
  • The high level of private and government debt globally – and uncertainty as to how this debt with ever be repaid; and
  • Growing political and geopolitical risks – and the uncertainty this creates.

These challenges suggest to us that future returns from a conventional portfolio approach are likely to be poor and that risks to substantial capital drawdowns are growing.

Our suggested portfolio approach at these times is to ensure a truly diversified portfolio is adopted with exposure to a wide variety of investment areas and risks – but with some emphasis on downside protection during very challenging market environments. We have held this view for the past 18 months or so.

Yes we are keen to optimise long term returns for our investors but not at any price. We do have a number of higher return seeking investments within our portfolios but these are offset in a risk management sense with prudent allocations to capital protective strategies.

Given the risk of further volatility in markets over coming weeks and months, we are somewhat cautious about too rapidly deploying the elevated level of cash reserves held in most portfolios. While there are risks of missing out on the upside if markets do bounce strongly in the short term, we believe it is currently difficult to identify attractive opportunities on a risk/reward basis given the still considerable downside risks in this environment. However, we will be monitoring markets closely and will continue to assess opportunities and markets generally in coming weeks and months.

If you would like to discuss any of the above in further detail, please feel free to contact us on (07) 3391 5055 or email advice@mgdwealth.com.au.

Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.