Financial Keys - A member firm of Genesys Wealth Advisers


Key Moderate Model – Quarterly Update

Portfolio returns for the June quarter were weak on an absolute basis as market sentiment shifted from inflation risk to recession risk, leaving nowhere to hide. Whilst nothing to crow about in a down market, the portfolio showed some outperformance versus relevant benchmarks, with assistance mostly from asset allocation. The best performing asset classes were Cash, Asian equities, and unhedged listed infrastructure, whilst smaller companies, listed property, and Australian equities were the weaker performers.

On the asset allocation side, our overweight to global equities vs Australian equities assisted relative returns as the Australian dollar fell on rising risk-off sentiment (investors selling due to fear). Our property and infrastructure allocation assisted relative returns versus broader equities, with all the support coming from infrastructure which showed its defensive characteristics in the quarter. Whilst bonds continued to underperform cash, our lower duration positioning within bonds assisted relative returns.

Returns were negative for the quarter across most asset classes which meant fund manager returns were also negative. Managers maintained their focus on quality companies. The markets pivot to focus on recession risks meant that more cyclically and economically exposed companies came under pressure for the first time this year. The managers selected generally prefer companies that are less economically sensitive, with pricing power, barriers to entry, and revenues and expenses they have better control over, and this approach clawed back some relative performance. Bond investment selection continued to help relative portfolio returns, given lower interest rate exposure, but still fell at an absolute level. The higher credit quality of the bond portfolio also helped as credit spreads widened in the quarter.

Within Australian Equities, style bias was largely uneventful in our large companies allocation with both Greencape (GARP - growth-at-a-reasonable price) and Allan Gray (value) impacted at different points in the quarter as the market rotated from inflation fears (preferrable to value) to recession fears (preferrable to quality/GARP). Australian Eagle was the standout with both their long and short positions assisting returns. Portfolio positioning also helped with the Manager moving the portfolio back to a more style neutral stance leading into the quarter.

Within global equities, the quarter was a tale of two periods, with more value orientated stocks continuing to perform well early in the quarter, before reversing a significant amount of their performance in June as the market sought out more quality and growth orientated stocks. Orbis was the standout within the global equity lineup, with its value style bias significantly contributing to relative returns. AB also assisted relative returns as rising recession concerns forced the market to focus on company fundamentals, with AB’s strong focus on cashflows and disciplined valuation process assisting relative returns. Insync and T. Rowe Price struggled in the quarter, with Insync not helped by their fairly sizable exposure to technology companies, whilst T. Rowe’s growth bias also saw them underperform in the period.

Artisan were also challenged during the quarter, with their mid-sized company focus and growth style bias impacting returns. Pleasingly, Insync, T. Rowe Price, and Artisan clawed back some performance late in the quarter (particularly Insync) as the market sought safety in high quality stocks which all three managers are enamoured with. Additionally, all three Funds have started the current quarter with strong early returns, which will be commented upon in the next quarterly update.

Emerging markets also posted a negative return for the quarter, however the Martin Currie Fund did help overall portfolios, not falling by as much as the broader global equity index. Martin Currie’s quality/growth focus continued to come under selling pressure during the period. In saying that, the portfolio does look particularly well positioned for the period ahead with an extremely strong quality skew running through it. The fairly significant drop in the Australian dollar assisted global equity returns given our unhedged global equity stance.

Within property and infrastructure, property was clearly the most negatively impacted for the quarter as fears of recession and a steeper central bank rate hike path spooked property investors. Quay’s return was hindered by its European property exposure and some of the more cyclically exposed sectors in the portfolio. Infrastructure held up relatively well in the quarter as investors sought out safety in utilities. Magellan held its value providing a return of 0.72% for the quarter. Given the reasonable fall in the Australian dollar, our unhedged currency stance across property and infrastructure assisted relative returns.  

Within Bonds, it was a bit of roller-coaster ride for government bond yields in the quarter, continuing to rise early in the quarter due to inflationary fears, before falling sharply late in the quarter on rising recessionary fears. The latter also meant that credit spreads widened particularly in the lower credit quality parts of the market. Our combination of managers assisted relative returns due to the lower duration and high credit quality positioning. PIMCO was the most negatively impacted as expected, with its credit duration hurting returns. AB and Franklin were contributors from a relative perspective given their lower duration exposure. Ardea was the standout in the bond portfolio, helped by the fact it has no duration or credit exposure, with its trading in the prior 6-9 months producing a strong pay-off profile in the quarter.

Portfolio changes

The Committee continued to actively monitor and review the portfolio in the quarter, with no changes made, noting as well that distributions were due in July. The Committee felt it prudent to maintain the current well diversified stance with a quality focus across equity settings and a lower interest rate risk and higher credit quality stance across bond settings.

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