Changes in bond yields: a key focal point to watch in markets this year
Global Investment Insights
with Matthew Condon, Head of Asset Allocation, Togethr Trustees (Equip & Catholic Super)
Matthew is the Head of Asset Allocation for Togethr Trustees, the trustee of Equipsuper and Catholic Super, funds with total combined assets of around AU$28 billion.
The key area of focus for Matthew in his role is the financial wellbeing of the fund’s members and preparing them for financial freedom in retirement. From an investment perspective, this entails achieving investment objectives and doing it as efficiently and responsibly as possible.
“As we pursue our portfolio objectives this year, there are many big issues for us to consider, including the roll out of vaccines, fiscal stimulus measures, very low expected returns, geopolitics, and rising debt levels, to name a few. Inflation expectations have recently started rising which we are monitoring closely. The direction, and speed, of any movement in bond yields are key focal points for markets this year”, Matthew highlighted.
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The direction, and speed, of any movement in bond yields are key focal points for markets this year.
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“Our asset allocation evolves depending on market conditions and very low bond yields provide us with several problems to solve. With very low cash rates and rising inflation we are seeing negative real returns on cash and traditional bond investments, which makes them very unattractive. However, we are mindful of elevated valuations in other markets and prefer to have enough liquidity to afford us the flexibility to make portfolio changes when we want. This is a difficult balancing act”, Matthew explained.
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With very low cash rates and rising inflation we are seeing negative real returns on cash and traditional bond investments, which makes them very unattractive.
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He continued, “as interest rates have rallied over recent years, we have enjoyed stellar returns within global ‘growth’ style equities. A key consideration for us is to think about whether this is likely to continue. Low interest rates and unprecedented levels of fiscal stimulus could see higher inflation. Echoing this, recently a revival of more cyclical, valuation-based strategies has occurred and we are thinking about how sustained this will be.
We also need to be mindful of asset correlations and that past relationships can change. Indeed, if we look to past regime changes in correlations, inflation has played an important role.
Central banks, and more recently governments, have been the key driver of financial market outcomes since the financial crisis. This shows no sign of letting up. So, paying attention to any change in their rhetoric will be important. This could happen if the recovery out of COVID-19 is better than expected. Any shift in policy direction could have far reaching implications for markets and asset allocation strategy”, Matthew stated.
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Low interest rates and unprecedented levels of fiscal stimulus could see higher inflation.
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From an organisational perspective, Togethr is undergoing a merger of two funds, Equipsuper and Catholic Super. “Right now, we are deeply involved in the consolidation from which we expect to generate significant benefits to our members over time. It entails a lot of rethinking of what we do and how we do it. This is a challenging environment, and the COVID-19 situation has made it even more so. But we are certainly up for that challenge”, Matthew asserted.
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One of the many lessons from COVID-19 is that we should treat forecasts of the future with scepticism, there are just too many unknowns.
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The last year highlighted how rapidly circumstances can change and that we all need to be able to adapt. Financial markets are of course no different, and we all must rethink our assumptions about how the world operates once COVID-19 passes.
There are many lessons from this period, one is to treat forecasts of the future with scepticism, there are just too many unknowns. The other is that we are all becoming increasingly reliant on technology, in Matthew’s opinion.
“In this regard innovation within the health care space, and medical research more broadly, has been remarkable. For me this is an optimistic outcome of the pandemic in that it shows when we apply enough brain power to a problem anything is possible. The advancements we make here will have positive, far reaching impacts on people’s lives”, Matthew remarked.
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ESG has been an important factor for many institutional investors for a while now and interest is accelerating.
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ESG has been an important factor for many institutional investors for a while now and interest is accelerating. Over coming decades, the transition to a zero-carbon world will impact our lives in many ways, Matthew believes. He is particularly excited about the future of electric vehicles, and battery technology, and how quickly widespread adoption takes place. This could happen much sooner than many realise, in his view.
“Recent advancements in quantum computing are also very exciting as are developments in advanced robotics and artificial intelligence. It is still early days, and it is hard to know where it will all lead but the opportunities for investment, and society at large, seem very significant. With all these advancements on the horizon it is difficult not to be optimistic, but there will always be challenges along the way”, Matthew explained.
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Advancements in quantum computing are very exciting as are developments in advanced robotics and artificial intelligence and offer significant opportunities for investment.
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One of the ongoing challenges for Matthew in his role and that of his fund broadly is the constant need to remind their members, and themselves, that they are long term investors. He elaborated, “we operate on time horizons decades long. Often the best investment opportunities will take a long time to bear fruit. It pays to be patient and fight against short termism. The regulatory pressures we are under can sometimes compound this problem.
We operate in a highly regulated industry which brings with it many challenges. We always want to be looking for ways to be more efficient, however the constant focus on fees could result in us not investing in some opportunities that we would otherwise consider. That would be a poor outcome for members.
The superannuation industry has achieved much since its inception. To remain successful, we need the continued confidence of our members. Trust is difficult to win and easy to lose. Within financial services more generally we have seen numerous examples over recent years of inappropriate incentive structures and how destructive they can be. Ensuring incentives are appropriate and aligned with the interests of the end consumer is very important.”
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The constant focus on fees could result in us not investing in some opportunities that we would otherwise consider. That would be a poor outcome for members.
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Matthew left us with some of the key lessons learned in his career which continues to serve him well today in his current role.
“Throughout my career I have been lucky enough to work with some very good investors. Very experienced people in their part of the markets, and they have all been very patient and willing to share their knowledge.
Looking back, I think there are a couple of key lessons I have learnt. Firstly, start with your end goal in mind. That is, be very clear about what you are trying to achieve. How do you define success? It is an easy question but can be difficult to answer as everyone has their own ideas and interpretations of what success looks like. Once you have clarity on that, identifying the handful of things that are critical to achieving that success is paramount. We tend to overcomplicate things in our industry, most of the time there are only a handful of important factors that impact whether you achieve your goals. It is the 80/20 rule. Get those right and most of the time you set yourself up for success”, Matthew concluded.
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We operate on time horizons decades long. It pays to be patient and fight against short termism. The regulatory pressures we face can sometimes compound this problem.
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