Transcription of Finance News Network Interview with MLC Head of Investments, Susan GoslingDonna Sawyer: Hello I’m Donna Sawyer from the Finance News Network and joining me from MLC is Head of Investments, Susan Gosling. Susan welcome to FNN.
Susan Gosling: Thank you Donna, good to be here.
Donna Sawyer: What are some of the challenges that investors are facing in today’s markets?
Susan Gosling: Well over the past year, we’ve seen some very strong returns and that will tempt some investors to think that the world’s problems have been resolved. But I think also many will suspect that it’s not quite as simple as that. So the excesses that generated the Global Financial Crisis haven’t yet been fully resolved, and that means that returns remain very uncertain. We have global central banks trying to resolve the issues that we face - the big debt overhang, by having ultra loose monetary policy. And that has unknowable consequences and possibly could trigger higher inflation.
So clearly, we face a very challenging environment and the possibility of some difficult outcomes in financial markets remains. And that means that outcomes for traditional diversified funds remain uncertain as well. And there has still to be the possibility of some significant negative returns.
Donna Sawyer: One of the big concerns for investors nearing retirement is risk. What are some of the key risks that investors may not be aware of?
Susan Gosling: Well one of the risks is simply retiring at a point in time that turns out to be relatively unfortunate, or unlucky. So I’m talking about sheer bad luck. If we look at the past, we can see that if you retired just before the Eighties and Nineties, actually you had a very fortuitous period. At that point, very low share prices and quite attractive bond yields as well. So it was almost an investment nirvana.
If you compare that to the starting point today, we have share prices which are fairly fully valued, even expensive on some measures and we have unfortunately, ultra low bond yields. And that creates some very significant challenges. Even if that weren’t the case, if you’re going to be retired hopefully for 30 or 40 years, at some point in that period history tells us that you’ll meet a very difficult scenario. So be it a difficult inflation scenario, or a deep recession that has the potential to significantly impact your portfolio, and hence your lifestyle.
Donna Sawyer: One of the risks you’ve mentioned is inflation risk. Do you see that as being a real threat for investors?
Susan Gosling: Well yes, inflation can be seen as a silent killer, so it eats away at your portfolio like a tax, eroding your purchasing power. So if you get a return on your portfolio of say, five per cent and yet inflation is seven per cent, then the real purchasing power value of your portfolio actually declines. Now is this a particular concern today? Well unfortunately it is because again, we have those central banks with some very unusual monetary policies, very low interest rates around the developed world and of course, quantitative easing. And the consequences of this quantitative easing are uncertain, but historically when we look at these sorts of episodes, what we see is that eventually they end in much higher inflation. Now that’s certainly not a guarantee, but this is a risk that we should be worried about at the current time.
Donna Sawyer: How does MLC manage those types of risks?
Susan Gosling: Well MLC believes that more reliable lifestyle outcomes are achievable. And we have launched three new initiative funds, with a design to deliver inflation plus outcomes for investors. In fact, one of these funds was launched some time ago in 2005, so before the financial crisis and that means it’s been tested through that difficult period. And the reliability of returns that that portfolio has generated, it means it’s attracting a lot of interest. We now have three portfolios, each focused on delivering an inflation plus return and each with a particular time horizon - either three, five or seven years.
Now we manage these portfolios by ensuring that they have limited exposure to these very adverse advents that can occur. And that’s very important because that’s the key to reliability, is that risk control. Now our investment process builds a very deep understanding of risk by thinking about, what sorts of things can go wrong; such as much higher inflation, such as a global depression or a very severe recession. And we take those things into account, even while they seem like a remote possibility. It’s a bit like buying insurance for your house, even though you don’t expect your house to burn down. But by doing that we ensure that there’s very tight risk control in portfolios. And only then, once we have low risk control, do we seek higher returns.
Donna Sawyer: How are the MLC inflation plus portfolios different from traditional diversified funds?
Susan Gosling: Well the inflation plus portfolios are managed to deliver a CPI plus return, say over three, five or seven years. So they are maintaining and growing real wealth. In contrast traditional diversified funds are seeking to either match or exceed a market benchmark. So those two things obviously are very different. When we are investing to achieve our inflation plus objectives, then we don’t assume that markets are going to deliver what we want, to achieve our outcomes. So we’re thinking about the things that can go wrong, the risks we need to protect against, as well as the ways of actually generating the return that investors need.
So it’s a very different investment approach and what it means is that, we need to be continually weighing future risks and future opportunities. And as those things change through time, then we will reposition the portfolios flexibly. So the key difference between these funds and traditional diversified funds is the asset allocation is very flexible, and will change with the investment environment.
Donna Sawyer: You mentioned the MLC inflation plus portfolios don’t have asset allocation constraints. What are the benefits of a strategy like that?
Susan Gosling: Well a key benefit is the peace of mind it provides to retirees. It means that we’ve got that tight risk control as we go through time. But besides risk control of course, we also need returns. Now if we get risk control by simply placing the portfolio in cash, that’s not going to support investors’ lifestyles through retirement. They’re simply going to run out of money too soon. In order to get both risk control and the required returns, what we need is a very flexible asset allocation that takes into account looking forward from today, what the opportunities are and what the future risks are. So that we can build in the tight risk control and change that as the environment changes through time.
So for example if equities become more or less expensive, then that changes the return potential and it changes the risk exposure. And we need to be then able to adjust the portfolio flexibly. What that means is that regardless of what happens, there should be no nasty surprises for investors. In the event that we’re in one of those very difficult risk scenarios, it means we’ve already built in the risk control. Or if we were in a more positive environment, then we’ve built the return potential into the portfolio as well.
Donna Sawyer: Finally Susan, when does the fund launch and how do investors get exposure?
Susan Gosling: The MLC inflation plus funds will be available directly from MLC and on MLC Wrap, starting from the 1
st of October 2013.
Donna Sawyer: Susan Gosling thanks for your time.
Susan Gosling: Thank you Donna.
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