Lonsec reinforces diversification in lower return environment

Investment research house Lonsec Research (Lonsec) has announced key changes to its portfolios following the latest Strategic Asset Allocation (SAA) Review and Model Portfolio Review.

Lonsec leverages its research capability to provide advisers portfolio management guidance through a range of Core Model Portfolios. SAA recommendations are reviewed biennially and Lonsec’s model portfolios are reviewed semi-annually as part of the portfolio rebalancing process. It considers key market and product themes affecting the risk profiles of the portfolios which range from secure to high growth.

Lonsec has announced a series of changes to its own portfolios to reflect broader market trends:

– A reduction in overall total return targets due to lower long term expected return forecasts for most asset classes including global listed property, global bonds and cash
– A more balanced allocation between global and Australian equities, which reflects narrowing long term expected returns for the two asset classes
– Increased allocation to alternative assets to help investors achieve portfolio diversification and provide protection in market downturns
– Inclusion of conservative alternatives – in conjunction with growth alternatives – to provide more defensive returns, as the product offerings within this space increases.

Lonsec’s Investment Consultant Eleanor Menniti noted investors’ ongoing proactive hunt for yield in this low return environment, but warns against specifically targeting asset classes that provides tangible income at an attractive rate without taking into account the need for diversification.

“Being solely focused on income return could lead to portfolio overexposure in certain sectors – a prime example of this is current investor concentration in bank stocks. This strategy increased sensitivity to a few factors, meaning that while the market might behave well most of the time, the portfolio would suffer if those specific factors were reversed,” Ms Menniti said.

“Investors are also ignoring the impact of capital volatility on total returns as they look at yield in isolation to other market factors.”

The research house has also made a number of changes to the manager line-up within the Core Model Portfolios, mostly within global equities and alternatives. A number of these changes were made in recognition of new strategies that have recently become available to Australian retail investors, which Lonsec believes provide a differentiated approach and aligns to the underlying philosophy supporting the portfolios.

Lonsec’s investment approach is based on the SAA framework that strong returns are achieved through diversified asset classes and investment approaches over a long term investment horizon. The review notes alternatives will play a vital role for investors to achieve their objectives, allowing them to diversify their risk exposure for traditional assets.

“A common view is that alternatives are return boosters in a low return environment, when improved performance is linked to the diversification benefits this asset class provides rather than the inherent nature of the assets or the investment style used,” Ms Menniti said.

“Lonsec has positioned the portfolio with exposure across a range of approaches to ensure portfolio performance is not tied to one specific market environment,” she concluded.