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10 May 2021: The evolution of portfolio construction – what’s next?

The evolution of portfolio construction – what’s next?

10 May 2021 | Duration: 24:46 mins

How has portfolio construction evolved over time? Tune in to hear Curtis Dwyer, Peter Dymond and Ernest Kwok from the Investments team discuss the shift away from traditional 60/40 portfolios, and the evolution of strategic asset allocation in an ever-changing investment environment.

  • [intro] This podcast may contain general advice but does not take into account your personal circumstances, needs or objectives. Any scenarios and stocks mentioned during this podcast are for illustrative purposes only and do not constitute a recommendation to buy, hold or sell any financial products.

    Curtis: Hi and welcome. Thanks for tuning in to Episode 2 of Colonial First State's Investor Digest, the podcast breaking down the latest investment tips, economic insights, market developments and more.

    I'm Curtis Dwyer, Investment Specialist, and today I have two very special guests. I'm joined by Peter Dymond and Ernest Kwok from the Investments team. Welcome guys.

    Before we get into today's topic, I just want to take some time so our audience can get to know you guys a little bit better. I'll go with the age before beauty. So Pete, I'll start with you. Pete's the head of Portfolio Management and is responsible for managing team who has assets under management totaling approximately $60 billion. Is that right, Pete?

    Peter: Yes, it's just under $60 billion.

    Curtis: And Pete, you've been working at CFS since 2002?

    Peter: Yeah. So, it's certainly a long time.

    Curtis: And funnily enough, that also aligns with our inception date for our FirstChoice Multi Manager portfolios. So if you think for namesake, that's FirstChoice Balanced or FirstChoice Growth. That's right?

    Peter: Yes. Along with a couple of the members of the team, we've been here since the beginning.

    Curtis: And Ernest, I'll just move over to you. You've been in the team since 2016. I think you were in the graduate program at the Commonwealth Bank just before that?

    Ernest: Yeah, that's right. So I was under a graduate program from 2014 at the bank, did two years there, and then joined CFS in 2016.

    Curtis: Pete, I just got a few questions for you. What was the first investment you ever made?

    Peter: The first investment was actually CSR, as a share, when I was about 16, was about $300, bought through a stockbroker through a bank.

    Curtis: Just quickly, does CSR still exist?

    Peter: It still exists.

    Curtis: Okay, that's good to know.

    And I probably just want to touch on the other end of the spectrum. What was the worst investment you've ever made?

    Peter: Probably not an individual investment, but if I think of the worst investment decision, it was during the crash in 1987. Basically, like a lot of people panicked and sold a lot of assets. There's definitely a lesson.

    Curtis: Yeah. I think if I've learned anything in the past year, it's to be able to have cash available for opportunistic investments. But I will just reiterate our listeners, none of these tips or their first investment or worse investment is a recommendation from Colonial First State. We're not considering your individual circumstances.

    Ernest, I'll move to the other end of the spectrum. Your investing career’s probably started a little later than Peter's. What was the first investment you ever made?

    Ernest: For myself, it actually happened straight out of university. I invested into a healthcare exchange traded fund back then.

    Curtis: Okay, so I imagine that's probably done quite well over the last couple of years.

    Ernest: Yeah, it's been pretty good.

    Curtis: And then, does your investing journey -- is that sort of it? Or have you got any investments that in hindsight, probably weren't a great investment either?

    Ernest: I would probably say last year was a tough one, personally as well. Because when COVID first hit the US, I personally had the view that it would take a while before US markets would bounce back. So back then I made a small allocation to an inverse exchange traded fund and that didn't pan out pretty well.

    Curtis: So you were a bear, you were saying, on the markets?

    Ernest: Back then, yeah.

    Curtis: Okay. Well it has been quite remarkable how quickly the markets have turned around.

    I guess what I want to do now is sort of move over to our focus for the day. At CFS we've been constructing, well since the day Pete's been here, been constructing multi asset portfolios. Lasting sort of almost 20 years now.

    There a few areas which are probably very topical at the moment -- the value versus growth debate has been roaring for quite some time, low interest rates, and probably also building a portfolio, when you're considering inflation and potential spikes in inflation in the near future.

    Pete, I'm probably going to open things up with you. With over 30 years’ experience in the industry, I thought we'll kick things off with a question for you basically focusing on the evolution of asset allocation and what you've seen over time. Traditionally 60/40 portfolios were long heralded as the backbone of a multi asset portfolio. However, as you know, we've seen, particularly probably over the last 10 to 15 years, bond and stock returns have become a lot more correlated.

    How have you seen the thinking around asset allocation changed throughout the industry over time?

    Peter: Thanks Curtis. There's probably a couple of points in that. If I go back to the 60/40 portfolio, that was, if you'd like to think of it as, was the mainstay investment vehicle back 20 or 30 years ago. It was basically a period where, as one portfolio, a simple set of instruments that suited everyone, did the heavy lifting for the majority of people. And in fact, it still does a lot of the heavy lifting for a lot of people today. But it was an era where there is very little, if you like, transparency or education amongst investors.

    If you fast forward to more recent times, what we have today is a lot more transparency around investors, a lot more understanding around investment time frames and individual risks, through the advice process.

    So that, today, leads to – well, a 60/40 portfolio doesn't suit everyone. It could be something much more conservative or something actually, much more aggressive, but recognizing a much longer time frame.

    That's sort of one area of evolution. The other part is around asset allocation. For many people, 60/40 was, as we said, the mainstay portfolio, but you went through periods where there is actually some spectacular blow ups in the industry, where people were trying to time asset allocations through various times of crisis, such as the 1987 stock market crash. So that might have worked well, it might not have.

    But fast forward today, many portfolios are very strategic in nature, making sure that they're getting exposures to the right asset class, and trying to remove some of the human factors or biases of not being able to invest when they maybe should be invested, or vice versa, making the wrong decisions at the wrong point in time.

    Curtis: Thanks Pete. Pretty good answer, considering I was just reflecting on how many questions there were in that one question I asked you. You covered off that quite well.

    I'll move over. Ernest, probably, I just want to touch on multi asset investing. What do you see as the main benefits to investors, and what do you believe it provides them with long term?

    Ernest: Sure. Thanks, Curtis. So, multi-asset portfolios, or asset allocation in its purest form, is the practice of dividing up your investment portfolio into different types of asset classes, such as equities, bonds and cash.

    And in my opinion, one of the major benefits of asset allocation or having a multi-asset portfolio is that it helps investors reduce risk through diversification.

    It also helps balance the risk and returns in a portfolio in accordance to the investor's goals, risk tolerance and investment horizon as well.

    Curtis: That's a good point. You make on risk and return. Is there a particular way that you guys factor that in when you're creating these portfolios? I mean, we have portfolios that cover off 400% growth assets through to defensive portfolio, which is 10% growth and 90% defensive.

    Ernest: Yeah. So exactly what you said. So at CFS, we provide a wide range of different risk profile funds, expanding from, like you mentioned, most conservative investment portfolios ranges from 10% in growth to the more riskier portfolios that have 100% in growth allocations.

    Curtis: Now, Pete, pivot back to you. CFS, we utilize the strategic asset allocation process. Could you just give us a high level summary of what that is and the key considerations for investors? And then if we have time maybe touch on that versus some other types – there's dynamic asset allocation and tactical asset allocation out there as well.

    Peter: Okay. At CFS, what our proposition entails with our asset allocation funds is that we actually offer a range of what we call risk profiles, or level of exposure to growth assets.

    For example, it could be a 70/30 growth defensive fund, or it could be something more aggressive, like 80% growth assets, or something even much more conservative. So our proposition is to have a range of risk profiles available to advisors and investors that are suitable for clients at different stages in their life.

    It's important in managing for those risk profiles that at any point in time that they are in fact true to label, such that any member coming in at a point in time, they know exactly what they're getting, because that's what the advice told or that might be what they're choosing. So in managing those, as I said, it's a strategic asset allocation, where we set the level, and on a daily basis, we are actually rebalancing back to that level within a tight tolerance of approximately 1%. We do that rebalancing in a way that uses cash flow predominantly as a predominant driver, but also, market movements have a big impact on that, and at times we do need to do transactions to rebalance it back.

    But at the end of the day, what that means is at any point in time, they are true to label for an investor coming in or exiting.

    Curtis: Probably want to pick up on that point a little bit – rebalancing on a daily basis.

    What was your experience from February 24, 2020 to sort March 25? What was your experience around the portfolios and how they were able to rebalance? And was there any clear benefits that you saw about having this process in place?

    Peter: Definitely. And this goes back to once again the tenure of the team. We basically experienced a similar scenario in the global financial crisis, or be it in the COVID-induced selloff last year, there is much faster in terms of the effect, where different asset classes declined very rapidly. We had moves in currency of 10% in any given day. That certainly provides challenges. But through that our process basically ensured that we were doing the transactions to bring it back to that strategic asset allocation. So in that environment we were actually redeeming from cash and bonds to actually reinvest in equities on the decline down.

    A key benefit was once we hit the bottom of the markets, we were fully exposed at our strategic level and were able to enjoy the rebound in markets, exactly the same as what happened in the GFC.

    It might mean that the returns can be quite volatile, but it means any investor coming in at any point in time, they know that they're getting a fund true to label. And it actually removes any sort of emotion from the process.

    Curtis: One thing I've learnt speaking to some clients over the probably the last 6 to 7 months, particularly as performance has turned around is that they're thankful for having investment professionals in place, to be able to take the emotion out of investing.

    Because, a lot of people probably, we saw volumes through our call centre switching money to cash and what not and trying to time the market, but it's quite tricky, especially considering we've had 40% returns on Aussie equities over the last year. I think close 48-50% on hedged global shares.

    Now, we sort of dipped our toes into the world of asset allocation and the processes that CFS undertake in constructing their portfolios. I want to shift across and talk a bit more about the defensive side of the portfolio, considering the environment we're in.

    So, Ernest, typically what we've seen as a defensive part of portfolios, a bit of fixed interest and a bit of cash to reduce the volatility that you might experience on the growth side in your equities. I'm sure there's a whole other realm of assets out there besides just fixed income and cash. Did you want to run us through some of the other asset classes? And alternative – pardon the pun – types of investments that CFS utilise?

    Ernest: Sure. As you mentioned, normally when people hear the term defensive assets, the first thing that comes to mind might be the fixed interest assets such as sovereign bonds and cash. However, at CFS, when we talk about fixed interest assets, we also consider both Australian and global sovereign bonds, global corporate credit as well as securitised assets.

    Now if I take a step back from fixed interest assets and consider the whole defensive bucket as a whole, we also have exposures to other defensive assets such as emerging market debt, high-yield bonds, gold, and even unlisted infrastructure and unlisted property as well.

    Curtis: And there's a few securities you just mentioned there, and I might just get you to clarify on those ones. Might test your definition knowledge here. Credit – that's just a fancy word for corporate bonds?

    Ernest: Correct. So, lending towards companies.

    Curtis: And if you also just want to touch on securitised…

    Ernest: Sure. These are basically securities that are backed by a pool of assets, and in most cases debt.

    Curtis: Okay. So is that sort of a residential mortgage backed security?

    Ernest: That's an example of one. That's right, yeah.

    Curtis: Now, Pete. Alternatives. Probably one of the trickiest topics we get, not for us, but potentially for financial advisors or for investors as well, to try and understand. It's probably an asset class not many people know about, and in our industry, or in the platforms business as well, potentially some of the complexities around this asset class probably cause more confusion than clarity.

    Can you explain what alternatives are and how they diversify the portfolio?

    Peter: Okay. Alternatives is definitely a complex area. There's two broad brackets of alternatives. There are things such as direct property and direct infrastructure. But we don't typically have that in our multi-asset portfolios here. However, there are the more common types of what we call liquid alternatives, which are basically a set of complex strategies where it's very much dependent on the skill of the managers and strategies in exploiting opportunities in the markets.

    There can be a whole range of those. They are very complex in nature using these complex instruments. And they will behave in different ways.

    The ultimate benefit to the investor in our portfolios is that they offer, ultimately, an uncorrelated source of returns. So they typically aren't correlated with equities or correlated with bonds. So they give you this different path returns such that over time, it helps smooth out the overall portfolio's returns.

    Curtis: I think we've seen a good example of that, our alternatives portfolio that CFS over the last year returned, I think, approximately 14%. If you look at the index government bond in Australia, I think it's slightly negative over the year. And then Aussie equities at the other end of the spectrum of 40%. So it does look like it sort of fit well in there.

    Peter: That's correct. And within that portfolio there is a specific strategy that was designed to perform strongly in a market environment of a strong sell-off. And we saw that strategy come through delivering something like 29% in that one month period of the COVID sell-off.

    Curtis: Well, hopefully we've been able to give our listeners a bit more insight into alternatives there.

    I'll probably move on to our next section that we wanted to discuss about. And that's probably our portfolio construction process.

    Ernest, since this is probably your bread and butter and something that you're working on all year round, sort of painting the Harbour Bridge, once you finish, you're starting again and it never ends.

    So can you run me through what this process typically looks like? And I guess from a very high level, what are the key considerations you guys are thinking about when you're making a change to a portfolio or if you're not making a change to a portfolio?

    Ernest: Yeah, sure. At a high level we review our strategic asset allocation on an annual basis, where we consider both qualitative and quantitative measures. In terms of the process, we would review our risk and investment objectives to ensure that these are consistent with our members' objectives.

    We also engage closely with our asset consultant where we review their latest capital market assumptions as well as conduct scenario analysis, stress testing, and pure analysis, across our diversified funds.

    Curtis: Sorry, Ernest, just run me through a capital market assumption. Is that an outlook that they have for an asset class return over a certain period of time?

    Ernest: Yes, that's right. And the capital market assumptions that we use look at 20 years forward.

    Curtis: Okay, well I mean, superannuation can be sort of, for some people may be close to the time at a five year, but also for those not so close to a time in a 40 year investment. So it is pretty important to look at returns in that lens.

    Pete, I'll move things back to you. How much are we factoring in higher inflation and lower interest rates into our portfolio construction? It's a pretty topical part of global news and debate at the moment. Has CFS made any changes to their portfolios, given the mantra that central banks have – interest rates being lower for longer.

    Peter: It certainly is a very topical issue within the industry, and when it comes to a higher inflation rates and interest rates.

    The simple maths is that we will see higher inflation numbers come through in the near term, simply as the impact of the COVID sell off sort of washes through, or impact on inflation. You'll see this natural spike over a 12-month period.

    Lower interest rates certainly has been trending down for many, many years. People regularly say it can't get much lower. It did go lower, and we're certainly at a point once again where people would question whether it can go lower.

    And in fact in the last three months we had a lot of concerns around both inflation and interest rates, where we saw both spike up. That did have an impact on markets and portfolio returns. Where concerns on the higher interest rates flowed through to a negative return on our bond portfolios.

    So how do we think about this in a portfolio construction sense? Certainly we're not trying to time those markets in terms of what we do. We have strategic asset allocation. So we're not looking to form a view – will the inflation spike in the next six months and adjusting portfolios? – we're not doing that. We're looking through over the long term in terms of market assumptions, and factoring that in. So very much we're relying on the diversification across the asset classes to do the heavy lifting for the returns.

    Curtis: It probably touches back to Ernest's point, capital market assumptions, looking through those short term spikes in inflation and changes in the market, and keeping your eye on the prize over that sort of 10 to 20 year period.

    Now, just to wrap things up. I'll probably want to sort of reflect on, while I have you two guys in the room, and all your investment knowledge.

    Pete, on the last 12 months as a general theme, how have the multi asset portfolios performed? Did you see any parallels? Which you've already touched on a bit about the GFC and now, have you seen any parallels between the GFC and what we've been through in the last year as well?

    Peter: Definitely. Probably 90% of what we experienced was the same, albeit slightly quicker. The GFC probably took 12 to 18 months to reach its bottom, and probably took several years after that before it recovered to its highs.

    We basically saw that in the COVID, saw a similar level of sell off in the space of a month. And the recovery in many markets, basically occurring within 12 months. So we're pretty well back to square today on the ASX200, the US markets are well and truly above their pre-COVID high. So there's certainly been a lot of recovery there.

    The simple numbers are, if you look at our balanced fund for the 12 months to the end of April, it's something like 22% after fees. That number obviously doesn't pick up the COVID selloff, so you look at a longer two year time frame that looks beyond that sell off, it's a healthy 7.5% after fees. So you need the longer term investment horizon to look through some of these events.

    Curtis: And for our listeners, that's a 70/30 portfolio.

    Now, Pete does have his infamous playbook that he does like to bring out internally, but that's probably going to be a separate podcast to get through that. It has been a wealth of knowledge for us, particularly over the last year.

    Ernest, Pete's talked about the year in reflection, I'm probably going to give you the hard curly question. What do you think the biggest challenge is facing multi asset fund managers over the next five to 10 years?

    Ernest: Well, I think one of the biggest challenges for fund managers and multi-asset portfolios is going to be the low interest rate environment that we are likely to continue operating it in in the future. Given the low rate environment, this is especially important for retirees or pre-retiree investors who may have a more defensive portfolio.

    However, a defensive portfolio may not generate the same level of expected returns today if we were to compare that to five years ago when rates were a lot higher. So therefore investors and fund managers will need to further adapt to this low interest rate environment going forward.

    Curtis: Yeah, that's a pretty good point to finish on there. Across the industry, we are seeing lower environment is making our defensive portfolios to be thought about a bit more. And probably some like yourself and Jujhar Toki and Peter are probably thinking about.

    So I'll just recap some of our key points. Pete, at the beginning – not one-size-fits-all. We've moved on from the 60/40 portfolio. Although it does work for some, as you did point out.

    And probably just highlight alternatives within the portfolio. It is a complex and probably pretty underestimated world, in terms of asset class, but it has provided, and behaved as we expected within our portfolio over the last year as well.

    And then Ernest, as you touched on there, probably just thinking about asset allocation over the next five or 10 years, just given the constantly falling interest rate environment we've been in today.

    Thanks, Pete and Ernest, those were some great insights today, and a big thank you to our listeners for tuning in. If you haven't already, be sure to subscribe and reach out. If you have any comments or queries, we'd love to hear from you. In the meantime, we'll catch you next time.

    [outro] You should read the PDS available on our website, assess whether the information is appropriate for you, and consider talking to a financial advisor before making an investment decision. Past performance is no indication of future performance.

  • Quarterly market digest: inflation – what’s the big deal?

    20 April 2021 | Duration: 25:05 mins

    What was the biggest driver of investments last quarter? Tune into Investor Digest as Senior Investment Manager George Lin recaps markets over what he’s called a “transformative quarter”, and explains what the big deal is about higher inflation and the increase in global bond yields.

  • Tune in on the go - all-new investments podcast

    20 April 2021 | Duration: 1:28 mins

    What is Investor Digest? Curtis Dwyer and Tamikah Bretzke of Colonial First State reveal what can you expect to hear from this all-new investments podcast and explain why your feedback is important.

    • Tamikah: Hi and welcome. Thanks for tuning into Colonial First State’s Investor Digest – the podcast breaking down the latest investment tips, economic insights, market developments and more. We’re excited to have you here. And by we, I mean me – Tamikah Bretzke, Investment Writer – and Curtis Dwyer, Investment Specialist for Colonial First State.

      Curtis: Thanks, guys. Very happy to have you here. Super and pension investing is at the core of what Colonial First State does. But we are aware that the super environment can be both confusing and challenging. So in this podcast, we’ll aim to focus on the investments space and on providing listeners with insights from our Portfolio Management team, currently responsible for managing approximately $60 billion in assets, as well as special guest speakers including some of the world’s leading investment managers.

      Tamikah: Each month, you’ll have the opportunity to tune into the conversation and a team with more than 300 years’ combined experience, which means you’ll hear everything from timely market updates and economic developments, to investment strategies and topical insights on what’s happening around the world and what that means for investors.

      Curtis: This podcast is designed for all. And our agenda is to help you stay up to date and informed about what’s happening in investments in one’s super and retirement funds. Of course, we’d love to hear from you. Send us an email and let us know if you have any feedback or if there’s anything you’d like to hear more of in Investor Digest.

      Tamikah: To find out more, be sure to subscribe on Spotify and iTunes, and in the meantime, check out the latest from our team – simply visit Thanks again – we’ll catch you next time.


About the hosts

Tamikah Bretzke, Investment Writer

As Colonial First State’s dedicated Investment Writer, Tamikah is tasked with researching, writing and producing an expansive range of content on the ever-changing investment and economic environment. She works closely with skilled investment analysts, investment managers and key business stakeholders to create timely market updates and topical thought leadership pieces, as well as web content, video scripts, explainer articles and our all-new podcast, Investor Digest.

Curtis Dwyer, Investment Specialist

As the Investment Specialist for Colonial First State, Curtis is a trusted business partner to the Investments team, where he works as a conduit between the team’s skilled portfolio managers and various business stakeholders regarding all aspects of the investment strategy and process. Curtis also provides regular updates to the market on the current investment climate, portfolio positioning and the performance of Colonial First State’s strategies, which include FirstChoice Multi-Manager Single-Sector, Multi-Manager Multi-SectorMulti-IndexIndex Multi-Sector and Lifestage portfolios.

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