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 back.
John Owen: Thank you very much, nice to be back.
Carolyn Herbert: For those investors, who aren’t familiar with the MLC Inflation Plus portfolios, can you give us an introduction to the Funds and what are their objectives?
John Owen: MLC provides investors with three Inflation Plus portfolios. And each portfolio aims to provide investors with a return that exceeds inflation, over defined time periods. So let’s use the Assertive portfolio, the Inflation Plus Assertive portfolio, as an example. It aims to provide its investors with a return, above inflation of six per cent per annum before fees, over rolling seven-year periods. And the Conservative portfolio and the Moderate portfolios have similar inflation plus objectives, with their own time periods of investment.
Now we think trying to outperform inflation is a sensible way to invest, for a couple of reasons. Firstly, it makes sense to try where we can, preserve the future purchasing power of peoples’ investment savings. In 20 years time, they want to be spending their money on a lifestyle that hopefully they will enjoy. If their return doesn’t exceed inflation over that time period, their future purchasing power is going to go backwards.
So that’s the first reason we think it makes sense. Secondly, by being fairly explicit on the return target that we’re trying to achieve, provides a lot more certainty to investors, as they plan for their retirement.
Carolyn Herbert: How’re the Inflation Plus Funds different to traditional mainstream Funds?
John Owen: They are different and they’re different for a number of reasons. Firstly, they have a fairly explicit return target, in this case returns above inflation. When you compare that with a lot of other Funds, who are trying to achieve a return above a market benchmark, that’s OK but it’s not much use to investors if the benchmark has done minus 10 for the year. Secondly, the Inflation Plus portfolios are managed with a very explicit focus on managing risk.
So we believe very strongly that investors will be better off in the long-term, if we can help cushion them from adverse market circumstances. It’s not a guarantee they won’t get a negative return, but we believe that we can provide a return that won’t be as severe in difficult market circumstances. And that’s why we find these portfolios are actually very popular with pre-retirees or people already in retirement, who can’t tolerate a nasty substantial negative return.
Thirdly, to achieve that risk management and also return potential as well, we manage these portfolios in a very flexible fashion. We can change these portfolios quite dramatically if we need to; whereas a lot of mainstream Funds have a very narrow band, in which they manage their portfolios. So to manage risk and achieve return, we think a lot of flexibility that we can use over time, is very important.
And finally, you’ll find that these portfolios can look very different to mainstream Funds, who are largely dependent and invested in shares, bonds, property and cash. You’ll find some very different managers and very different asset classes, in these portfolios. And at times, we will have quite accentuated exposures to those strategies.
Carolyn Herbert: How are the risks identified and managed?
John Owen: We think the best way to manage risk for our clients is to have an investment process that is explicitly focused on understanding what the future holds. Where are we today and where to from here? So an important part of that process is to focus on over 50 scenarios, both market and economic scenarios and understanding how risk and return emerges, in each of those scenarios.
And with that focus and also with a very strong team effort in trying to identify, what are the most likely scenarios that could unfold in the next couple of years, it enables us then to ask ourselves what changes do we need to make to the portfolios today, to either protect our clients from those risks that we see in the future, or actually exploit return potential as well.
Carolyn Herbert: What scenarios have you been focusing on recently?
John Owen: The obvious one at the moment that everyone’s talking about is Brexit. That is actually just one manifestation of a whole range of scenarios that we’ve had in mind, for an extended period of time that has led us to have a very defensive focus, in the way we’ve managed these portfolios. But it also ranges to other larger issues as well. What impact will the slowdown in China’s economy have on Australia? What are the valuations of the various asset classes after years of quantitative easing? Basically, where to from here and what are the most likely scenarios that could unfold in the future?
Carolyn Herbert: Finally John. How successful have the Funds been in achieving their objectives?
John Owen: The returns have actually been very pleasing. I’ll refer to the Assertive portfolio, because that’s got the longest track record. Over the last seven years to the end of May, that Fund has done 9.9 per cent per annum, after fees and tax. So it’s not only provided its investors with very good absolute returns, but it’s also outperformed its stated objective of inflation plus six per cent per annum.
We’d like to think that our investment process is sufficiently robust, that that return outcome isn’t just a one-off. And that we’ll continue to be able to generate good returns for our clients, by managing risk and identifying return opportunities that we think are worth exploiting.
Carolyn Herbert: John Owen, thanks for the update.
John Owen: Pleasure.