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Thinking about how to position a client’s portfolio today


Thinking about how to position a client’s portfolio today

In my role as Head of Distribution here at Montgomery, I am usually engaging with many financial planners on a daily basis. I thought it may be interesting to share with you the most recent observations I have garnered from a broad cross section of these financial planners as they seek to best set their client’s portfolio assets in the current economic environment.

Now, I must say that these are generalisations and not specific to any one client or group of clients, but more so consistent themes my team and I are hearing from a wide set of financial planners.

  1. Equities

There is a common view that is it very hard to consistently time asset allocation decisions and make out-sized returns, above and beyond setting an appropriate asset allocation in the beginning and broadly speaking letting the asset class returns drive the portfolio over time.

However, after a great run in the performance of both Australian equities and Global equities in the nine and a half years since the GFC many planners are looking to allocate to different funds for this part of the portfolio going forward. In a strongly rising market where artificially low interest rates have pushed up asset prices and generally all equities have risen regardless of their financial fortunes, there is a view that a move to allocate money to active managers, with a value tilt makes sense. The theory goes that once momentum leaves the market and interest rates rise, that investors will focus their attention to higher quality, undervalued businesses that may have been left behind in the chase for last year’s hot stocks.

There is another set of financial planners who see that a move away from just a long only equities fund to one which can vary its market exposure, through the use of holding higher levels of cash, or shorting overpriced equities is the right approach in the current environment. Some believe that making an allocation from equities to a market neutral fund is the best thing one can do. Their view is that these funds look to produce a cash plus return over the medium term but do it by holding no net long exposure to equity markets whatsoever, and instead generate a return from an equally weighted long portfolio of stocks out-performing a portfolio of short sold stocks, which should expose the investor to no net directional move of the market.

  1. Fixed Income

There is general consensus that we are now in an interest rate environment of rising bond yields and that the Fed is removing liquidity from the system. This is being done as the Fed unwinds their bond buying program (QE) and raises short term cash rates. At least two 0.25 per cent increases seem likely in the foreseeable future.

The implication from these actions is that financial planners are turning away from traditional long duration bond funds and many have been allocating fixed income assets to “total return fixed income funds”. These funds have a lot of flexibility in their investment mandate to take various positions in fixed income securities and bond duration. In effect these funds don’t have to rely on long duration government bonds to deliver their return. In fact, many of these funds can benefit from long term bond rates going up and the price of these bond security going down, because they are “short” that security. Also, many financial planners don’t want to be taking on much corporate credit risk either, particularly in the non-investment grade part of the market, or what is otherwise known as “junk bonds”. These have delivered some fantastic returns to clients over the last five years or so but now as credit risk is being re-priced many are wanting to stay away from this area.

So, if I was to sum up the key take away points from my observations, it would be that having a diverse selection of assets in a portfolio is important and will over time be the main driver of a portfolio’s returns. However, choosing the right fund within the asset class can be a useful way to give yourself a better chance of generating a superior risk and return given a particularly uncertain market outlook.


Scott joined Montgomery Investment Management in 2013. Scott joined the firm from BlackRock Investment Management, where he was Managing Director, Head of Retail Australia for 12 years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. In a rising interest rates environment, surely the appropriate fixed income exposure is floating rate notes.

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