Transcription of Finance News Network Interview with MLC Inflation Plus Fund Head of Investments, Dr Susan GoslingLelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from MLC Inflation Plus is its Head of Investments, Susan Gosling. Susan welcome back to FNN.
Susan Gosling: Thank you Lelde.
Lelde Smits: The MLC Inflation Plus portfolios are actively managed portfolios aimed at delivering returns above inflation, while limiting risk. Looking forward, how much risk do you see and are you worried about markets not being well behaved?
Susan Gosling: We always have to be concerned to some degree that markets won’t be well behaved, and I think that’s particularly true today. So let’s take one example, inflation risk. If we look in the past, we see that inflation has caused the most severe and significant prolonged negative returns, in the past. So is that something we need to worry about today?
Well we know that following the Financial Crisis, central banks around the world slashed interest rates, engaged in electronic money printing quantitative easing. And that begs the question as to whether the seeds have been sown of a new inflationary era. Now of course, we can’t be sure. But I think it’s fair to say that we probably face a greater risk of higher inflation today, than at any point since the end of the 1970s.
Lelde Smits: And Susan, how did we get into the current investment environment that we’re in?
Susan Gosling: Well that’s an important question and it is quite an unusual environment. And to understand it, we need to go back into the 1980s, in fact 1987 when Alan Greenspan took over as Chairman of the Federal Reserve, just a few weeks before the 1987 crash. And that was perhaps prophetic, because after that every time the economy looked like slipping into recession, or share markets started to slide, the Fed cut interest rates.
The problem with that was that excesses that should have been cleaned out in a downturn instead increased, which meant by the time we got to the housing bust in 2007, there was now massive risk built into the system. So we faced, not a recession nor a deep recession, but a depression and of course now policymakers had to act aggressively. And so they of course, cut interest rates to zero and engaged in quantitative easing, and public sector balance sheets took the strain of excessive debt. And the consequences of those policies, we continue to work through today.
Lelde Smits: How do we get out of it and back to a more familiar situation?
Susan Gosling: Well I think the good news is that another crisis may not be required. How is that possible? Well if interest rates are held below the rate of inflation, then the real value of that debt declines. So that’s the good news but it’s also the bad news, because interest rates below the rate of inflation erode the real value of investors’ savings. And they cause all asset prices to be revalued. That’s why we’ve had strong returns which is good, but it takes us into a low returning world where returns may be lower than the rate of inflation. And of course that’s very challenging, particularly if inflation now rises.
Lelde Smits: What is your approach to managing inflation and other sources of negative returns?
Susan Gosling: Now our approach to managing portfolios is to take into account that there are a range of potential futures that could occur. So we
identify the things that could go right and importantly, the things that could go wrong. How could risks arise and what’s the size of those risks and we control for that in positioning portfolios, to make sure that we get the reliable outcome. So our motto, if you like, is if we control the downside then the returns will take care of themselves.
Lelde Smits: How did the MLC Inflation Plus Fund perform over the last year and what are your expectations moving forward?
Susan Gosling: The returns over the past year have been very strong, it’s been a very strong returning environment and those funds have participated in that. Looking forward, we would expect that if returns continue to be strong, the Inflation Plus funds will do well but not quite as well as they have done. The reason for that is that share prices and the prices of risky assets in general, have run ahead of the underlying fundamentals. So they’ve become riskier and when things become riskier, we can hold less of them in the portfolio. So we’ve rebalanced our portfolio to maintain that consistent exposure to risk through time.
Lelde Smits: What is the difference between your Inflation Plus funds and more traditional diversified funds?
Susan Gosling: With the Inflation Plus funds, what we’re doing is maintaining that consistent risk profile through time. And what that means is that we have to vary the asset allocation, as the riskiness of the assets changes through time. So with traditional funds you have a lot of certainty about where your portfolio will be positioned. With the Inflation Plus funds, you have more certainty about what your return outcome is going to be.
Lelde Smits: Finally Susan, which investors do your Inflation Plus funds appeal to?
Susan Gosling: Well these funds have appeal in particular to investors who are quite sensitive to negative returns. So the Inflation Plus funds are designed to have much lower exposure to those significant negatives. And investors who are sensitive to those negative outcomes in particular, are retirees. So people who are coming towards retirement or who already are in retirement, because of significant negative, will translate through to a lifestyle problem in retirement.
So in positioning those portfolios, what we’re trying to do is bulletproof them by being ready for anything, well in advance. So our message with these funds is that we’re working hard to ensure, that badly behaved markets don’t ruin anybody’s retirement.
Lelde Smits: Susan Gosling, thank you for the update from MLC Inflation Plus.
Susan Gosling: Thank you very much.
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