Equities will continue to be a core growth asset in a portfolio to match the long-term liabilities of asset owners, even though the current uncertainty around interest rates, currency, monetary policy and inflation will hurt returns in the short term.
Greg Barnes, head of public markets at the $230 billion Australian Retirement Trust, said the fund has a long-term investment horizon due to its liabilities which could extend to 50 to 70 years and needed growth assets to support its members who were living longer.
“Equities will always maintain a core part of our portfolios, both on the accumulation side but also the decumulation side,” Barnes said at Investment Magazine’s recent Equities Summit in Sydney.
“They’re the combination of technology, capital, entrepreneurialism, creating real economic growth and wealth; the key growth engine of the portfolio.
“It’s definitely a high-risk environment so what that means is that we’re likely going to see lower absolute returns for the asset class.”
With a significant and growing asset base, ART also grapples with investing at scale, said Barnes.
“For us, scale is increasingly important,” he said.
“Making sure that we get the equity asset class beta right and how we access a little bit of alpha around the margin, at scale and at a reasonable cost.”
However, size inhibits ART’s ability to adapt quickly to changing market conditions.
“It’s very difficult for us at scale to make quick structural changes in the portfolio,” Barnes said.
“Our external managers can adapt to those small changes but within the asset class, we’re really focussed on diversification to ensure that we really deliver a consistent beta for the asset class.”
Duration investing
Despite all the negativity in the market, Investment Magazine’s Equities Summit heard that investors should take a long-term view.
“Investing in equities is always a bit of an uncertain world but what really strikes me about the market today is just how negative sentiment has become,” said Aaron Anderson, senior vice president of research at US-based Fisher Investments with US$197 billion of assets under management.
“The compelling case for equities over the long term is that companies are able to adapt, management teams are able to navigate these periods of interest rates and supply chain issues.”
But Anderson warned investors not to look for cues in equity markets for an answer to macroeconomic or geopolitical issues.
“Equity markets are a very expensive place to get that clarity because they tend to start moving well before you get resolution on inflation or you figure out exactly what central bankers are going to do or before geopolitical issues resolve themselves,” he said.
Long-term investors will have to work out the winners and losers in the changing global economy over the next decade, heavily impacted by an aging population as well as climate change, decarbonisation and digitalisation.
“There’s got to be this massive growth in the older aged population and that’s really hunting ground for us in terms of the spending on health care and across all the OECD countries,” said Raaz Bhuyan, portfolio manager at Australian-based WaveStone Capital, a $4.5 billion portfolio manager.
COVID has had a huge impact on the digitalisation of services with soaring growth in online retail as one example and companies of scale such as Wesfarmers or Woolworths will benefit from the investment in technology and innovation, said Bhuyan.
“The reality is kind of just focusing on the longer term, trying to work out where the puck’s going, and we feel like as active managers, it’s never been better because valuations have suddenly come down to earth.”
