netwealth portfolio construction series - discover cost effective investment strategies from ubs
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Index Opportunity FundsAn evolved strategy for today's investment climatePortfolio construction series
Presented by Tracey McNaughton, UBS, Head of Investment Strategy Australia
October 2016
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1
Housekeeping
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Disclaimer
This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.
Strictly confidential
October 2016
Index Opportunity Funds – An evolved strategy for today's investment climate
Tracey McNaughtonHead of Investment Strategy, Australia
Evolve or…
The investment environment has changed
0
5
10
15
20
25
30
35
<-20% -20% to -15%
-15% to -10%
-10% to -5%
-5% to 0% 0% to 5% 5% to 10% 10% to15%
15% to20%
>20%
0
100
200
300
400
500
600
Jan-00 Jan-04 Jan-08 Jan-12 Jan-16
Naughties (2000-16) – The Great Volatility
Equities
Bonds
Source: Bloomberg, Quarterly returns for S&P500 and US Treasuries
0
100
200
300
400
500
600
Dec-89 Jun-91 Dec-92 Jun-94 Dec-95 Jun-97 Dec-98
Inde
x Ja
n-19
90=1
00
1990s - The Great Moderation
Bonds
Equities
0
5
10
15
20
25
30
35
<-20% -20% to -15%
-15% to -10%
-10% to -5%
-5% to 0% 0% to 5% 5% to10%
10% to15%
15% to20%
>20%
Freq
uenc
y
7.5% annual avg
18% annual avg
2.2% annual avg
5.4% annual avg
Returns are lower; Volatility is higher
What an evolved balanced fund looks like
Charts are for illustrative purposes only
Low cost• Lower returns means portfolio costs have
to come down• Passive building blocks reduces trading
costs
Stable• More volatile environment means
diversification more important to enhance stability
Active• Set and forget in the market is no longer
sufficient• More volatile environment brings
opportunity to add value
276 330442
714
1,181
1,591
1,953
2,449
2,995
3,3133,551
3,938
4,396
03 04 05 06 07 08 09 10 11 12 13 14 15
Source: PwC
Num
ber of ETFs globallyLow costLow cost –ETF's cheap, liquid, varied
ETFs categorized by sector and style. Size=3-month avg dollar volume
Source: http://www.finviz.com
Low costETF Universe – 1 year performance
Low costWhat is an ETF?
Portfolio Management Benefits
• Diversification
• Liquidity
• Tax efficiency
• Low cost
• Transparency
ETF Selection Criteria
• Strategy mapping
• Index construction
• Diversification
• Low tracking error
• Liquidity
• Expense
Low costUsing ETF's to build a balanced portfolio
Allocation
Low costUsing ETF's in the Index Opportunity fund
StableStable – why diversification matters
Winning by not losing
Successful long-term investing is more to do with avoiding catastrophic losses than it is to do with capturing unrealised gains
S&P/ASX 200 relative to pre-crisis peak (Sep-07=100)
Source: Bloomberg, UBS,
Loss percentage Gain percentage required
-10% 11%
-20% 25%
-30% 43%
-40% 67%
-50% 100%
-60% 150%
-70% 233%
-80% 400%
-90% 900% 40
50
60
70
80
90
100
110
05 06 07 08 09 10 11 12 13 14 15 16
ActiveActive - The importance of active management
Index Opportunity: Passive foundation, activeoverlay
• Benchmark: Start with a balanced portfolio of passive pooled funds and ETFs
• Asset allocation: Determine where we are in the cycle and where we are heading
• Tactical asset allocation: Allocate to the appropriate mix of assets that will provide superior risk-adjusted returns
Equities50%
Fixed income45%
Commodities5%
Recovery Expansion Slowdown Recession
Equities50%
Fixed income45%
Commodities5%
China
USEuropeJapan
Cost effective design
Index Opportunity Fund – a core solution
• An active overlay for added alphaActive
• Diversified foundation for stabilityStable
• Passive foundation reduces trading costsLow cost
Strictly confidential
September 2016
Economic issues affecting investors today
Tracey McNaughtonHead of Investment Strategy, Australia
Equities
12.5%
6.2%
3.4%
2.6%
-1.4%
-14.1%
-20% -15% -10% -5% 0% 5% 10% 15%
Topix
DAX
ASX200
MSCI World
S&P 500
MSCI EM
How is 2016 going?2016 performance of different asset classes
Fixed Income (10-year bonds, total return)
12.3%
11.7%
8.4%
5.6%
3.5%
0.0% 5.0% 10.0% 15.0%
Japan
Italy
US
Australia
UK
17
Source Bloomberg; As of 31/08/2016
Currencies
-14.1%
-11.4%
0.5%
2.7%
3.2%
15.7%
-20% -10% 0% 10% 20%
USDJPY
AUDJPY
AUDEUR
EURUSD
AUDUSD
AUDGBP
Commodities
33.6%
23.2%
4.3%
-3.6%
-10% 0% 10% 20% 30% 40%
Copper
Oil
Gold
Iron Ore
What issues are trending?
Quantitative Easing China slowdown
Divergence
Negative interest rates
Geopolitical risk
Lower for longer
Dollar
Anti-establishment
Fed rate rise
TantrumChina
Stimulus
Oil pricesBrexit
Trump
Economic issue #1 – "Lower for longer"
Source: UBS, Bloomberg
Economic growth comparison (average GDP%)
3.7
2.8
3.4
1.4
2.3
0.71.0
0.5
2.6
1.2
5.45.8
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1996-06 2006-16
Australia US Europe Japan DM EM
A developed markets issue
Lower growth means lower inflation & interest rates
(4)
(3)
(2)
(1)
0
1
2
3
Indi
aU
KIn
done
siaIta
ly EUM
exic
oGe
rman
yAu
stra
liaCh
ina US
Fran
ceTu
rkey
Japa
nSo
uth
Kore
aCa
nada
Saud
i Ara
bia
Russ
iaSo
uth
Afric
aBr
azil
Change in CPI 2016 - 2013 (ppts)
-4.0 -3.0 -2.0 -1.0 0.0 1.0
Italy
France
South Korea
Australia
Germany
UK
Canada
US
India
Japan
China
Indonesia
Mexico
Turkey
Russia
South Africa
Brazil
Change in 10-year Government bond yield - 2016-2013 (bpts)
Source: UBS, BloombergAs at 31 August 2016
Lower interest rates means lower returnsConsequences of a suppressed risk-free rate
Source: UBS Asset Management. Return and risk expectations are no guarantee for future results. The chart is based on UBS internal risk-return estimates.For illustrative purposes only.
21
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0% 5% 10% 15% 20% 25%
Expe
cted
Ret
urn
Expected Risk
Equities Global Equities Emerging Markets Bonds U.S. Gov. Bonds U.S. Corporate
Real Estate Global Cash U.S. Bonds U.S. High Yield
1
Curve Shift
Flattening
2
3?
2016
Source: Bloomberg, UBSAs at 31 August 2016
-4
-2
0
2
4
6
8
10
08 09 10 11 12 13 14 15 16
Consumer Price Index (yoy%)
0
5
10
15
20
25
30
05 06 07 08 09 10 11 12 13 14 15 16
China Li Ke Qiang Index (composite electricity output, rail freight and loan growth)
-30
-20
-10
0
10
20
30
40
50
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
China: Exports (yoy%)
Economic issue #2 – "China" - growth stabilising
Source: Bloomberg, UBSAs at 31 August 2016
50
60
70
80
90
100
110
120
130
140
150
04 05 06 07 08 09 10 11 12 13 14 15 16
China Monetary Conditions Index(composire of real eff exchange rate, loan growth, real interest rate)
Looser
Tighter
-8
-6
-4
-2
0
2
4
6
8
10
12
05 06 08 09 10 11 13 14 15
House prices (yoy%)
China – financial conditions easier
Economic issue #3 – Quantitative failureUS recovery is weakest in post-WWII era
Source: BloombergAs at 31 August 2016
7.6
5.6
5.14.9
4.4 4.3 4.34
3.6
2.8
2.1
0
1
2
3
4
5
6
7
8
Q4 1949-Q21953
Q2 1958-Q21960
Q4 1970-Q41973
Q1 1961-Q41969
Q3 1980-Q31981
Q4 1982-Q3 1990
Q1 1975-Q11980
Q2 1954-Q31957
Q1 1991 -Q1 2001
Q4 2001 -Q4 2007
Q2 2009 -Q2 2016
Average annual change in US GDP, by expansion (%)
Source: Bloomberg, UBSAs at 31 August 2016
0.38
0.4
0.42
0.44
0.46
0.48
70 74 77 80 84 87 90 94 97 00 04 07 10 14
US Gini Index of Income Inequality
$28,524 $33,277 $33,077 $32,851 $33,297
$269,102
$689,373
$581,738
$639,514 $671,061
1979 2007 2009 2013 2014
US Real Annual WagesBottom 90% Top 1%
53.351
57
61.9
67.170.7
68.8
53.156 56.4
58.4
66.1
77.7
82.986.8
50
55
60
65
70
75
80
85
90
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
US Household Net Worth ($tn)
The issue: Quantitative easing has increased inequality
Economic issue #4 – "Trump"
Populist parties and politicians polling strongly
Country Party/Politician Stance Latest Polling
Austria Freedom Party of Austria Far Right 35%
France# National Front Far Right 28%
Germany# Alternative for Germany Far Right 12%
Greece Syriza Far Left 35%
Italy Five Star / Northern League Far right 42%
Netherlands# Freedom Party Far Right 24%
Hungary# Fidesz/Jobbik Far Right 65%
Poland Law and justice Far Right 39%
Portugal Unitary Democrat Coalition Far Left 8%
Spain Podemos Far Left 21%
Sweden Sweden Democrats Far Right 21%
Switzerland SVP Far Right 29%
USA Donald Trump Far Right 41.8%*
*Huffington Post model; #Elections in 2017
Source: Citi Research
Referendum Risk: Scottish referendum, Brexit, Catelonia
Separatism, Nationalism, Populism
Non-Mainstream/Minority Governments
Protests, Government Collapses
Political Fragmentation
Electoral Uncertainty Weak/Divided Govt
Limited reform
Myopic or populist policy making
Difficulty responding to crisis
Yearly avg DM/EM Election & Mass Protests
21.7
Post-crisis average
14.1
Pre-crisis average
Depletion of political capital
8
9
10
11
12
13
14
15
88 89 90 92 93 94 96 97 98 00 01 02 04 05 06 08 09 10 12 13 14 16
Thou
sand
s
Real net national disposable income/capita
Australia's long income boom has ended
Economic issue #5 – Australia transitioning
Source: Bloomberg, ABS, UBSAs at 31 August 2016
-2
-1
0
1
2
3
4
5
6
7
90 92 93 95 96 98 99 01 02 04 05 07 08 10 11 13 14 16
%
Australian GDP
QoQ YoY
1990: Recession we had to have
2002: Resources-led China boom starts
2008: GFC
2.0
2.5
3.0
3.5
4.0
4.5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Wage Cost Index(yoy%)
• Lower economic growth here for the next few years:– Ageing demographics
– Excess debt
– Excess capacity following the GFC
• Structural issues still confronting China impacting:– emerging markets
– commodity prices
– global trade
• Unconventional monetary policy here to stay for at least next 2-3 years– Fed rate hike cycle will be "slower than an asthmatic snail" and will revisit unconventional policy at the
next downturn
• Weak political mandates challenge fiscal policy – deficits will rise
• Australia is transitioning through the mining bust
Conclusions
Where to invest?Unattractive Neutral Attractive
Equi
ties
Fixe
d In
com
eCu
rren
cies
Emerging
Japan
EurozoneUS
Australia
Corporates
AustraliaEurozoneJapan
US
UK
Switzerland
UK
Switzerland
EMD US$
CAD
GBP
NZD
AUD
CHF
EUR
JPY
High Yield
USD
EMD local
Source: UBS Asset Management's Asset Allocation and Currency team, as of August 31, 2016. Views are provided on the basis of a 12-18 month investment horizon, are not necessarily reflective of actual portfolio positioning and are subject to change.
Disclaimer
This presentation and accompanying documents is intended to provide general information only and has been prepared by UBS Asset Management (Australia) Ltd (ABN 31 003 146 290) (AFS Licence No. 222605) without taking into account any particular person’s objectives, financial situation or needs. Investors should before acting on the information provided in this presentation, consider the appropriateness of the information having regard to their personal objectives, financial situation or needs.
Any opinions expressed in this material are those of UBS Asset Management (Australia) Ltd, a member of the Asset Management division of UBS Group AG, and are subject to change without notice. Although all information in this presentation and documents is obtained in good faith from sources believed to be reliable no representation of warranty, express or implied is made as to its accuracy or completeness. Neither UBS Group AG nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material.
The information provided during this presentation must not be relied on to make an investment decision. It is not an offer or recommendation to acquire an interest in the UBS Managed Investment Funds (UBS Funds) or recommendation to purchase or sell any particular security. Offers of interests in the UBS Funds are contained in the relevant current Product Disclosure Statement (PDS). An investment in any of the UBS Funds does not represent deposits or other liabilities of UBS Group AG or any other member company of the UBS Group. Your investment is subject to investment risk, including possible delays in repayment and loss of income and capital invested. The repayment of capital or income is not guaranteed by any company in the UBS Group.
Performance can be volatile and future returns can vary from past returns. Up-to-date performance information can be obtained by contacting UBS Asset Management (Australia) Ltd. A copy of the PDS is available from UBS Asset Management (Australia) Ltd, the issuer of the UBS Funds, on (02) 9324 3222 or freecall on 1800 023 043. You should consider that PDS and obtain professional advice before making any decision about whether to acquire or continue to hold an investment in the Fund(s).
This document may not be reproduced or copies circulated without prior authority from UBS Asset Management (Australia) Ltd.
© UBS Group AG 2016. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
Thank you
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Disclaimer
This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.