MLC on generating returns for clients in a challenging investment environment

Funds Management

by Clive Tompkins

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MLC Chief Investment Officer Jonathan Armitage speaks with MLC Research Manager, Rebecca Collins about MLC's use of a range of asset classes to improve returns and diversification across its portfolios in what looks to be a challenging investment environment for returns going forward.

Rebecca Collins: Hi and welcome. I'm Rebecca Collins, research manager for MLC, and today I'm joined by MLC's Chief Investment Officer, Jonathan Armitage. Thanks for your time today, Johnny.

Jonathan Armitage: My pleasure.

Rebecca Collins: So Johnny, a lot's been happening since we last spoke. Australian interest rates are at record lows. It's a US-China trade war, Italian government, German economy, Boris Johnson. How's MLC managing all of these for our clients?

Jonathan Armitage: Well Rebecca, you're absolutely right. There's no shortage of challenges facing investors at the moment. I think it's important to separate out what really impacts markets from other global events. So the things that we're focused on is that we continue to see an ultra-low interest rate environment. You've talked about interest rates here in Australia reaching an all-time low. If you look at bond markets around the world, we now have over US$18 trillion of mostly government bonds producing a negative interest rate. And that's obviously impacting the way that investors look at future returns. So it's a pretty challenging period, particularly if we look forward as to the returns that you're likely to see out of markets going forward. We've been through a period of very strong returns for investment portfolios, but as we sit here today, and particularly with that focus on the returns that you get out of fixed income instruments, our expectations are that returns are going to be lower than they have been over the last four or five years going forward.

But as you said, because there's no shortage of areas for markets to focus on, what those returns look like is actually perhaps more challenging to predict right now than it has been for some time.

I think our focus from an investment perspective is to work out what is important for future investment returns and try to filter out some of the elements that are perhaps less important. To give a couple of examples of the ones that you mentioned, it's quite clear that what goes on in global bond markets and particularly US treasuries is probably more important to future investment returns than, if I can use the word, the pantomime that's going on in UK politics.

How do we think that about that from an investment perspective? I think the things that have been an important part of the way that we look at investments at MLC for the last 35 years remain very much in place, that we are looking for diversification, we are looking to make sure that we're managing the risk as well as the return components when we look at our investment portfolios, and ensuring that the components that we have in our client's investment funds provide a greater degree of stability for returns going forward.

Rebecca Collins: Thanks Johnny. And with negative yields and equity markets looking quite expensive, are there are other areas where investors can look to generate some returns going forward?

Jonathan Armitage: If you look at the way that we have been shifting our portfolios in the last recent while, focus has been on away from perhaps more away from some of the more traditional investment areas like pure equities and fixed income and into other areas of alternatives. That includes things like private equity and a component that we have that sits within most of our investment portfolios called the low correlation strategy. That focus on trying to find diversifying investment capabilities, which do well when you see both equities and also fixed income returns becoming more volatile. And so that's been the focus that we've had really for the last 18 months or so. And you will continue to see us selectively adding to those capabilities going forward.

Rebecca Collins: Great. So there are opportunities in the market, just not new traditional asset classes?

Jonathan Armitage: Absolutely. And that's a key focus of our investment team and the expertise that they bring to bear. There's a huge amount of due diligence that we need to do around those investment components. But we're very sure that that's an area that we have a real competitive edge in, some very significant investment capabilities and expert expertise. And we think that as we move into what we expect to beperhaps a more challenging investment environment over the next couple of years, that those investment components will be important to client returns going forward and also an important point of differentiation.

Rebecca Collins: Great. So diversification's still essential in a portfolio.

Jonathan Armitage: Absolutely, as it always has been.

Rebecca Collins: Excellent. Thanks for your time today, Johnny, and thank you for joining us.