Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Capital markets assumptions key as allocators look to profit from volatility, noise
Capital market assumptions give investors the building blocks they need for strategic portfolio construction, an especially important foundation in uncertain markets with volatility back in play in a big way. For those armed with a clear roadmap across asset classes, the extra noise is more a boon than a nuisance, multi-asset experts said.
Speaking at Morningstar’s Investor Conference Australia 2023 in Sydney, Schroders CIO Simon Doyle (pictured, left-centre) emphasised that capital markets assumption is the starting point for portfolio construction. “It’s the strategic roadmap – what broad direction do we think markets are going in and, more broadly, how do we start thinking about portfolio construction around that?”
Doyle joined Andrew Fisher (pictured, right-centre), head of investment strategy at Australian Retirement Trust, and Morningstar’s Jody Fitzgerald (pictured, right) on a panel that covered the importance of understanding a company’s fair value and future cash flows. Developing capital markets assumptions involves comparing across and within asset classes and thinking about how assets would interrelate in a forward-looking context, they explained.
“We start with cash as a building block and look at the additional return for a bond over cash and whether that’s an adequate reward for risk, and then we think about the additional return that equities should deliver,” Fisher said. “We think of all assets from a capital markets assumptions point of view as a stream of future cash flows.”
Fitzgerald agreed, saying the value of any asset can be distilled down to the cash flows it generates and the growth of those cash flows. After getting an understanding of what an asset segment’s fair value should be, she said, the next step is a valuation adjustment around whether an asset is over- or under-paying relative to its fair value.
“Portfolio managers spend a lot of time understanding the probabilities around the range of outcomes that could occur around the base case,” she said, adding that being able to look at valuations across asset segments “allows us to do deep allocation as opposed to just pulling on the big levers of headline asset classes”.
All three panellists agreed that the noise currently dominating markets is a positive for the savvy asset allocator. “The fair values of assets can change underneath the hood because of what’s happening in the environment, and the ability of an asset to generate cash flows can change,” Fitzgerald said.
“The key difference is the change in valuation, and that’s really reflecting whether the market has gotten overexcited about an asset or has completely thrown the baby out with the bathwater. Having those long-term forecasts provides an anchor point.”
According to Fisher, “in the last 12 to 18 months, notwithstanding it’s been a challenging period, the amount of noise in the market has actually been quite productive from a dynamic-asset-allocation perspective for our portfolios,” He added that, despite major challenges, the outlook for property and infrastructure is interesting, with opportunities in some sectors of the property market.
Doyle agreed the noise has been helpful. “We were in a period where volatility was way too low and suppressed, and that mispriced a whole lot of things.
“Capital markets assumptions are really about direction – where do we think we need to head, and how broadly do we need to position over the next three, five, 10 years,” Doyle said. “There’s no end of information you can analyse, but we focus on those areas, distil what they might mean in terms of relative pricing around that strategic trajectory, and position for that.”
