171130 the lucky country

Will Australia remain the 'lucky country' for investors?

Articles | 30 November 2017

Singapore-based Multi Asset Solutions Senior Portfolio Manager Jan Baars looks at investors’ perception of luck, expected returns and whether it pays to take an active role in controlling your own investment destiny in Australia.

Australia, the ‘lucky country’ certainly has had its share of good fortune over the past 26 years, recently eclipsing the previous record for the longest time without a ‘technical’ recession. Destiny seems to have followed me as I am a native to the previous record holder – the Netherlands – whose 103 quarter winning streak started in 1982 and only succumbed to the turmoil of the Global Financial Crisis in 2008. But being Dutch, meticulous planning, research, and analysis is at the core of our beliefs, as opposed to luck, karma, providence…or whatever word you prefer to use to explain randomness. As it relates to both economic and investment performance, the role of luck tends to be underestimated in the short term and overestimated in the long term.

The Yin and Yang of financial markets
What goes up, must come down, particularly for those praying to the lord of mean reversion. It is somewhat of a paradox that Australians seem to be both cognizant of their good fortunate and acutely aware that their luck may be running out. This is more the case across financial markets, which have seen a near uninterrupted bull market since the post-GFC recovery began in 2009. As Fed Chair Janet Yellen famously said in 2015, “I think it’s a myth that expansions die of old age.” This may be true for economic performance but what about market performance?

Expected returns are very low
While opinions vary considerably with respect to the short term direction of markets, as both an academic and long-time practitioner of asset allocation, there is something I agree with many on: expected returns are very low. And return expectations are very low for nearly every asset class and category. My discussions with Australians have zeroed in on this conundrum. This is mostly a longer term issue as we all know markets can perform wildly different to our expectations in the shorter term. But in the short term we have the following to contend with:


  • - Low expected returns are driven by low yields and below trend economic growth in developed countries.
  • - Within Fixed Income there is still some rationale for High Yield and Emerging Markets Debt although not as much as historically as downside risks have increased for credit relative to the potential rewards.
  • - Tighter policies have been indicated by central banks in the near term.
  • - Ongoing political uncertainty, with less trust in politicians. 

What now?
With these headwinds, the most common question I have fielded in my travels has been, “What now?” My answer and the ensuing conversation typically has two parts:

 1) Expect lower returns
There’s not much we can do about this one except to say that adding risk to deliver to a particular return hurdle is a fine strategy as long as you understand that you are ADDING RISK. Also, given the suppressed volatility of markets, typically Gaussian measure of risk (standard deviation, VaR, etc) are likely underestimating the true risk in your portfolio. Our Multi-Asset Real Return Fund for example remains defensive, holding its lowest allocation to equities since inception nearly 5 years ago and recently reduced credit exposures.

2) Seek uncorrelated alpha in your portfolio
Based on our assumptions for the economic climate, and our expected returns, we can determine the likelihood of meeting the portfolio’s investment objective over the investment horizon. It is becoming increasingly likely that relying solely on market beta will not be sufficient to meet return objectives. This is where we recommend to add our dynamic asset allocation process to take into account shorter-term market dynamics to deliver additional returns and abate portfolio risks, such as tail events. By adding an uncorrelated return source (alpha) we can improve the portfolio’s likelihood of meeting the investment objective.

In other words, be realistic and take an active role in controlling your own investment destiny – because the next great opportunity may be right around the corner; you just sometimes need to make your own luck in the meantime.


This document is issued by Colonial First State Asset Management (Australia) Limited AFSL 289017 ABN 89 114 194311. Product Disclosure Statements (PDS) and Information Memoranda (IM) for the Colonial First State Wholesale Multi-Asset Real Return – Class A, ARSN 168 563 219 (Funds) issued by Colonial First State Investments Limited ABN 98 002 348 352 AFSL 232468 and Colonial First State Managed Infrastructure Limited ABN 13 006 464 428 AFSL 240550 (collectively CFS) are available from Colonial First State Global Asset Management. Investors should consider the relevant PDS or IM before making an investment decision. Past performance should not be taken as an indication of future performance.his document is directed at persons of a professional, sophisticated or wholesale nature and not the retail market. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document. References to “we” or “us” are references to Colonial First State Global Asset Management (CFSGAM) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere. Commonwealth Bank of Australia (the “Bank”) and its subsidiaries are not responsible for any statement or information contained in this document. Neither the Bank nor any of its subsidiaries guarantee the performance of the fund or security or the repayment of capital. Investments in the fund or security are not deposits or other liabilities of the Bank or its subsidiaries, and the fund or security is subject to investment risk, including loss of income and capital invested. Past performance is not a reliable indicator of future performance. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. Copyright © (2017) Colonial First State Group Limited. All rights reserved.