Transcription of Finance News Network Interview with MLC Inflation Plus Portfolio Specialist, John Owen
Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network and joining me from MLC Inflation Plus is Portfolio Specialist, John Owen. John, welcome to FNN.
John Owen: Thank you very much.
Carolyn Herbert: For those who aren’t familiar with the Inflation Plus portfolios, how are the strategies constructed and what is the Fund’s focus?
John Owen: We offer three Inflation Plus portfolios to our investors, a conservative portfolio, a moderate portfolio and an assertive portfolio. The three portfolios have different time periods of investment. The assertive portfolio we’re investing longer term for seven years, the moderate portfolio five years and the conservative portfolio three years. The common linkage with these three portfolios though, is that each of them is designed to outperform the rate of inflation, to varying degrees.
So the assertive portfolio measures success by outperforming inflation by six per cent per annum, over those rolling seven-year periods. The moderate portfolio is aiming to achieve a return above inflation of five per cent per annum, and the conservative portfolio 3.5 per cent per annum. So the focus is very much achieving an explicit return objective, in this case outperforming the rate of inflation. What these portfolios are not focussed on though, is outperforming our peers, peer funds in the industry or even market related performance benchmarks.
Carolyn Herbert: How is this investment approach different to other Fund managers?
John Owen: It differs in the way that the Funds are managed. And the way we manage these Funds is to adopt a very flexible and less constrained manner, in the way we adjust these portfolios through time. So being unconstrained and being flexible in the way we adjust these portfolios through time, we think is very important. Because it enables us to better manage risk, as risk arises in markets and also enables us to capture returns, when we see the return potential that is there.
So the asset allocation also of these Funds, therefore, extends way beyond traditional asset classes like shares and bonds, which you will find in most diversified manager portfolios. So in these portfolios, we’ve a very strong risk management focus in mind. And also going for a return, we do have a fairly significant allocation to what we call, alternative assets and managers. Managers who manage money in a very different way, or alternative asset classes like insurance related investments, or private equity.
From our perspective, the more levers we have to pull, the better we think we are able to manage risk through time and hopefully achieve, the real return objectives that these Funds are designed to achieve. So that is why the asset allocation and the composition of these Funds, will typically look very different to traditional or standard stand-alone multi manager, multi asset Funds that you see in the performance league tables.
Carolyn Herbert: Continuing on with risk, how does risk play into the positioning of the portfolio?
John Owen: The management of risk in these portfolios is a very important focus. And what we mean by risk management is minimising the impact of adverse market situations, on the returns of the investors. And to manage risk, we do a lot of what we call scenario analysis. We’re asking ourselves, where are we today and where are we heading in terms of the market and economic environment. And with those insights in mind, what should we be doing with the portfolios today, to either protect our investors if we see adverse circumstances ahead, or to position the portfolios to exploit good return opportunities, if we think they are there.
But risk management is a very very explicit focus of these Funds. That is why for instance in the conservative portfolio, we have had over 30 per cent allocated to cash, in the last couple of years.
Carolyn Herbert: What role can Inflation Plus Funds play in investment portfolios?
John Owen: Well because of the very strong risk management focus of these Funds, we find they are very popular with people who are either retired, or people who are close to retirement. And it’s those investors who have limited tolerance of a very large negative return, because they have limited ability to make up the lost capital. Time is basically not on their side.
So you could also argue though that apart from those investors, even someone with 20 or 30 years before they retire, the big risk they face is that the money they are contributing to superannuation through their life, inflation will erode the future purchasing power of that money, that they’re going to rely on when they retire.
So these portfolios are not just for retired or pre-retired investors, who have a very low risk tolerance. But you could mount a very convincing argument that even wealth accumulators, through most of their investing life, should also have these portfolios in their strategy.
Carolyn Herbert: Finally John, market volatility is very topical at the moment, especially given the start we’ve had to 2016. How have the Funds performed against this backdrop?
John Owen: You’re right. The start to the new calendar year has been particularly volatile, and even the last few months. We’re actually very pleased with the performance track record of the Funds, not just in the short term, but the long term as well. So in the year to the end of December, the assertive portfolio achieved a return of 6.5* per cent for the year. That’s pretty good in a year of fairly extreme twists and turns in the markets.
Over the long term, over the seven-year period, the Fund has delivered 9.9* per cent per annum, after fees and tax I might add, in that period of investment. So especially over the long term, the Fund has achieved its after-inflation performance target, with a very high degree of consistency.
Carolyn Herbert: John Owen, thanks for the update from MLC Inflation Plus.
John Owen: Thank you.
* Footnote –returns mentioned in the interview are after fees and taxes