March quarter 2019 markets update with MLC

Funds Management

by Clive Tompkins

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MLC Chief Investment Officer, Jonathan Armitage speaks with Rebecca Collins, Research Manager, MLC about a strong quarter in which markets rose following an easing in trade tensions and bonds yields.

Rebecca Collins: Hi and welcome, I’m Rebecca Collins, Research Manager for MLC and today I’m joined by Chief Investment Officer, Jonathan Armitage. Thanks for joining us today Jonathan.

Jonathan Armitage: My pleasure.

Rebecca Collins: Markets seem to have recovered from the December quarter lows. What’s been driving the recent returns?

Jonathan Armitage: I think there’ve been a couple of reasons. The first one is that at the end of last year, there was quite a lot of discussion about the potential for the US economy, to go into recession. And I think that was both premature and probably mistaken. Growth in the US has continued to be pretty robust and certainly, compared to other developed economies. One of the other drivers has been that bond yields have continued to fall, quite sharply. And so given the opportunity set that investors have to look at, equities have been seen as being pretty attractive. And so that has attracted more capital into those areas.

Rebecca Collins: Bond yields are quite influential on unlisted assets, such as property and infrastructure. I guess we don’t see the market movement in those assets, but they still have a role to play in a portfolio. Can you talk through that?

Jonathan Armitage: Unlisted assets play as important a role in terms of diversification. The valuations there tend to change at a slightly lower rate. But those assets, whether or not it’s infrastructure or real estate, will continue to benefit from falling bond yields. I think the question that investors have to ask themselves now is that, given how low bond yields have become, whether or not it’s here in Australia or certainly in parts of Europe and the US. Whether or not there’s any further declines that could be seen there, and then how that translates into property values. One of the things that we think is quite important is diversification across all your asset classes. And that includes unlisted assets as well.

One of the things that we focused on within our own portfolios has been private equity. The thing that differentiates private equity assets, from other unlisted areas is that you’ve got management teams that can respond much more rapidly, to changing economic circumstances. You can’t change very much with an office property, a power station. But if you’re running a manufacturing business and you see a change in the outlook for those businesses, you can make some changes to the operating model and respond to that changing economic environment, pretty rapidly.

Rebecca Collins: One of the things that people do need to think about with unlisted assets is how they’re actually classified in the portfolio. Whether they’re a growth asset or a defensive asset. Have you got any thoughts on that?

Jonathan Armitage: I think this is a very important topic. The reason for that is that with bond yields getting to such low levels and so for example, a couple of weeks ago, the benchmark German bond actually went into negative territory. With yields so low, you have to start asking the question about whether or not, these assets are really truly defensive. I think most people think that if something is defensive, you’re actually likely to lose or not lose very much money in that, and particularly in a bond.

If you’ve got negative yields, I think that very much calls into question, just how defensive those asset classes are. And so we are seeing some unusual circumstances in different parts of both equity and bond markets, at the moment. And I think that’s a question that investors need to contemplate, when they’re allocating money into particular parts of the market.

Rebecca Collins: So unlisted assets have a role to play in a portfolio.

Jonathan Armitage: Absolutely.

Rebecca Collins: Thanks for your time today Jonathan.

Jonathan Armitage: My pleasure.

Rebecca Collins: And thank you for joining us.