As of 3/04/2024
We recently conducted our annual strategic asset allocation (SAA) review, where we re-assessed the latest capital market assumptions, investment universe and strategic holdings of the portfolio. These SAA changes were implemented on 3rd April 2024, along with our latest tactical asset allocation (TAA) trades. The following summarises the key changes made in the portfolio.
KEY TRADES
Maintain a “risk-on” stance: Ongoing resilience in economic fundamentals, upward revisions to forward earnings, and higher return expectations for equities over bonds lead us to continue favouring growth assets.
Add new asset classes for further portfolio diversification: We add Global Listed Infrastructure and Property, along with Gold as new asset classes in our annual SAA review. Infrastructure acts as a defensive growth asset that can deliver equity-like returns with lower volatility whilst offering inflation protection. REITs are also in a favourable position to benefit from the peaking of interest rates, and Gold can offer further diversification through its negative beta to growth assets.
Increase FX hedge ratio: We increase the hedge ratio within growth assets given the potential for the Australian dollar to strengthen following depreciation of the currency in 2023. A higher currency hedge ratio would better protect the value of the portfolio in the event of a stronger Australian dollar.
Re-calibration of cross-sectional equity tilts: Japanese equities have outperformed the broad market in 2023 and year-to-date, leading us to take some profits in this position to fund an increase in US and European equities.
Reduce cash to fund inflation-linked bonds: We believe inflation may settle above central banks’ target bands, which continues to underpin our preference for inflation-linked bonds.
Market Commentary
Markets retreated over the month: Global equities, as measured by the MSCI All Country World Index (unhedged), ended the month down 2.8% as upside inflation surprises across several developed economies and rising geopolitical tensions in the Middle East weighed on risk appetite. Fixed income markets, as represented by the Bloomberg Global Aggregate Index (hedged), declined 1.7% as markets pushed out the timing and magnitude of potential central bank rate cuts.
Emerging markets outperformed Developed markets: Following a strong first quarter, Developed market equities were generally weaker in April, as sticky inflation dampened hopes for near-term policy easing. By contrast, Chinese equities, as represented by the CSI 300 Index, rose 2.0% (in local currency terms), buoyed by positive corporate earnings and the announcement of new sharemarket reforms.
Fixed income returns were muted: Global bonds were weaker in April as markets repriced yields higher alongside sticky inflation and tight labour market data across most developed economies. The Global Aggregate Index (hedged) was down 1.7%, while the Australian composite bond index fell 2.0% over the period. Meanwhile, riskier parts of the fixed income market were also weaker, as investment grade and high yield corporate credit declined, and emerging market debt indices sold off.
Performance commentary
Total portfolio returns were softer in April but remain positive over the year as the decline in major asset classes presented headwinds to total portfolio performance. Developed market equities detracted from total returns after adding value in prior months, while the exposure to Emerging market equities alongside Gold contributed positively over the month. Tactical positioning relative to the strategic asset allocation detracted slightly from returns, as positive value from the exposure to Chinese equities was offset by the preference for Developed market equities. Over the long-term horizon, the strategy has continued to outperform its peer group median, with both the strategic and tactical asset allocation delivering value over time.