When Federal Treasurer Jim Chalmers hands down the budget on 14 May, the pressing need for fiscal responsibility is likely to trump spending programs.
In an era of fake news, it’s getting more difficult to separate fact from fiction. Yet it’s imperative we do so because the consequences for being deceived can be enormous.
The true value of advice is in avoiding mistakes
The value of advice is one of the hottest topics in finance right now. Successive governments have effectively strangled the demand side of the financial advice market, through layers of red tape and compliance, to the point that financial advice is now borderline unaffordable for many.
Interestingly, the strategic side of financial advice has reduced in recent years as superannuation and related legislation reduced, with an increasing role in both investment management and ancillary services like estate planning.
While much of the focus is naturally on what an adviser does when it comes to advice, administration and support services, one of the more powerful and persistent sources of value from advice is actually in what advisers don’t do (or stop their clients from doing). That is, the true value of advice lies in supporting clients and investors in not making the mistakes of others.
Mistakes could be anything from seeking out tax-driven investments to over-leveraging, diversified, over-insuring and a laundry list of others. With the sudden surge in volatility in the first half of this year, what has been a quite straightforward period for investing quickly turned, with advisers facing negative returns across the board for the financial year.
Some of the more popular investment strategies in the last few years have quickly been found wanting in 2022, in some cases not only delivering negative returns but wiping away several years’ worths of gains into outright losses. Hindsight is obviously a wonderful thing when looking at performance, however, many of the most common drivers of underperformance in 2022 were becoming clear risks in early 2022.
Among the biggest driver of negative returns in 2022 has the selloff in ‘duration’ assets. That is long-term government bonds, or fixed rate securities. The popularity of passive and ETF investing sent many investors into this asset class at just the wrong time, with recent hikes in interest rates causing losses of anywhere from 10 to 20 per cent.
This despite there being clear signs that interest rates and bond yields were set to increase way back in 2021. The challenge, of course, was finding the appropriate short-duration fixed income strategies and also being willing to be different by adding them to portfolios at risk of underperforming in the short term.
It was a similar case in ‘growth’ equities with groups like Ark Invest, T Rowe Price and Bailie Gifford, having delivered exceptional returns coming out of the pandemic by backing fast-growing technology companies despite them having little in the way of real cash flow and relying on cheap capital. Of course, holding an allocation to ‘growth’ strategies is fine, but there were no shortage of portfolios holding several funds with very similar approaches which have underperformed the index by as much as 15 to 20 per cent for the financial year.
This extends to the more exotic asset classes, with media and client pressure forcing advisers along the risk curve into less liquid, opaquer and in general higher risk products, in the pursuit of returns. For instance, private equity, venture capital and other unlisted companies have been among the most in demand products in 2021, yet with valuations set to follow listed markets down, large allocations will be problematic.
Among the most valuable roles of an adviser though, is rebalancing, and recommending that investments regularly be sold where circumstances have clearly changed. Strategic asset allocations are set for a reason, and in a market where events are priced in within days, not months, annual asset allocation updates simply aren’t enough.
So where does the next possible mistake lie? It may well be in commodities, which have been touted for months as the perfect ‘hedge’ against inflation. The stories are all too common, long-term supply shortages, secular demand changes and a new ‘super cycle’. Short-term performance has seen everyone from growth to value managers increasing allocations to commodities on the fear of missing out, yet with the copper price now at a near two-year low, iron ore down 20 per cent and oil also taking a breather, performance is already challenged.
