CIO Jonathan Armitage and Head of Investments Al Clark provide their insights on what’s driven CFS’s double-digit returns, new opportunities from inflation volatility, and the need for transparent reporting for unlisted assets. Plus, what’s next for CFS?

Hello. My name's Jonathan Armitage.


I'm the Chief Investment Officer at CFS, and I'm joined today by Al Clark, who's our Head of Investments.


Pleasure to be here Jonny.


It's probably a good idea for people to get a bit of an understanding about the role that you have as Head of Investments here.


Yes, our team looks after the diversified funds at Colonial First State.


We look after asset allocation and portfolio construction primarily.


Right, so today we're going to cover a couple of topics.


We're going to talk about the returns that we've seen out of super funds here at CFS, talking about some of the drivers to those returns.


We're going to touch on some of the topics that we've seen a little bit in the media, particularly the sort of discussion and debate around unlisted assets.


And then talk a little bit about some forward-looking thoughts as well as some of the volatility we're seeing in the inflation data.


So we've seen some very strong returns for super funds for the last financial year to the end of 30th of June.


So the median balanced fund appears to have produced a return of 8.5%.


Pleasingly, our Lifestage MySuper fund has produced an outcome of 10.5%, which is I think, a very good outcome for our members.


So I think what we might do is dive in a little bit more detail about what's been driving that, in particular the focus on global equities.


We've seen some very strong returns from global equities in the last 12 months or so.


And so Al, it would be very good to hear a little bit more about what has been driving the very strong returns you've seen from global equities, despite some interesting backdrop, both economically and geopolitically.


I think that's that's probably the key is it was unexpected.


The interesting backdrop meant if you went back 12 months, no one expected a 20% return from global equities.


So there's probably been two key things that drove that.


One is that everyone was expecting a recession and that hasn't materialised.


So that's probably the first thing.


Given expectations were so low, it was quite easy for companies and equities in particular to outperform.


And then the other key component has been this wave of generative AI.


So where everyone expected the US equity market to again have a poor year generative AI, and in particular things like ChatGPT, have paved the way or opened up the potential for huge productivity gains across a number of businesses and companies, and the US has been the major beneficiary of that.


So those two components: a recession not actually manifesting and generative AI have driven incredibly strong global equity performance the last 12 months.


You've seen some outstanding performance from a couple of securities.


There's a semiconductor company called Nvidia that's up 180%, but it's also the companies that seem to have been part of the sort of halo effect of AI, like Microsoft, even Apple, which have also seen very strong investment performance.


So we've talked about a number of the things which have been positive for our investment portfolios.


But it's also worth talking about a couple of things which have worked against us.


We know that fixed income markets have been quite volatile.


But we've also had some exposure to listed real estate and also listed infrastructure, which over the last 12 months or so has probably not given the returns that we might have hoped.


So Al, it would be good to touch on why that's been the case.


Yeah, it hasn't been a great time for, as you just said, listed infrastructure or listed property.


The valuations there have reverted significantly as opposed to their unlisted counterparts, which we may go into in a second.


One of the main reasons has been the business model for those types of entities.


The listed entities is challenged when interest rates go up, so their cost of capital goes up, and also things like work from home, so the dynamic where people aren't actually going into the offices as much means it's a real challenge for some of those property funds.


So we've seen quite negative performance from those.


I think this is one of the features that we think we're going to sort of see going forward, which is greater volatility in markets and certainly volatility in inflation expectations.


So a couple of things we've been doing within the investment team to help build out the capabilities to manage the portfolios in these environments: we have appointed a Head of Investment Risk  and significantly enhanced the risk systems that we use.


And in the coming weeks, I'll be very happy to talk about a Head of Derivatives who will be joining us, again, to help manage the risk within our investment portfolios.


So the most recent period of investment performance has also seen some changes in unlisted valuations.


And there's been quite a bit of media coverage about that so we thought we might spend a little bit of time talking about that.


One of the things that we do think is important is greater consistency about the way that unlisted assets are valued.


But this also ties into the issue around higher interest rates and also higher inflation expectations.


So it would be interesting to get your views on that Al. 


We discussed earlier how listed markets in property in particular have already suffered.


We haven't seen those valuations suffer at all in the unlisted markets and that does seem unusual.


So this could play out in a couple of ways.


We could see the listed markets rally, which we're starting to see, but we could also see the unlisted markets start to value a little bit more appropriately, which is what you're getting at.


It may take time for this to play out, but we do think there's an opportunity presenting itself there.


I think that's a really important point to make, is that with this sort of volatility, we do think over the next couple of years, the opportunity for us to be able to increase some of our exposure to unlisted assets, whether or not it's real estate infrastructure or possibly even private equity and private debt, we think that this sort of volatility and this adjustment in prices is going to throw up some very interesting future investment opportunities.


One of the things that would be good to get your thoughts on is around inflation volatility,because we do think that's probably going to play a sort of greater role in markets going forward.


I think you've hit on the appropriate word, which is volatility.


So most of the market's been fixated on high inflation, but we've seen inflation come down quickly.


I think the environment we go into now is inflation moving up and down.


So it's the volatility piece, which is the problem.


And it's a problem because in the past 15 years all we had to worry about was growth. Inflation was low and stable and when we made decisions, we didn't have to think about inflation, we just had to think about growth. Well, now that's changed.


Inflation is going up and inflation is going down.


So going forward, companies, households, central banks have a much more difficult decision–making framework because they've got to worry about growth and also worry about inflation.


And that will present significant opportunities, we believe, going forward.


And also being liquid in the way that the majority of our funds are, will give us the agility and flexibility to take advantage of those opportunities.


We do think that the investing environment is going to be a little bit more different and perhaps a bit more challenging going forward, but we think the team is, with 30 years of investment experience, well set up to do it.


And with talent like Al Clark to help us guide our investments going forward, we think we're well set.

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• This document provides general information for the adviser only and is not to be handed to any investor. Information on this webpage is provided by Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL). It may include general advice but does not consider anyone’s individual objectives, financial situation, needs or tax circumstances. You should read the Financial Services Guide (FSG) before making any recommendations to a client. This information is based on current requirements and laws as at the date of publication. Published as at 26 June 2023.