Challenges present as opportunities for those willing to shift portfolios away from the status quo
Global Investment Insights
with Philip Naylor, Principal Consultant, Frontier Advisors
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Philip is a Principal Consultant at Frontier Advisors and a senior member of their Investment Strategy team. He has over a decade of senior experience, much of that in currency and fixed income trading roles with the Reserve Bank of Australia (RBA) in both Sydney and New York, and as the RBA’s representative on the G20 Investment and Infrastructure Working Group.
Philip has also worked as a consultant to the World Bank in Washington DC and as an Economist at Macquarie Bank. Immediately prior to joining Frontier, Philip was the Economic Advisor to the Treasurer of the Northern Territory.
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Being a successful long-term investor often means trying to remain disciplined in focusing on ‘the big, long-term issues’ amongst the barrage of headlines and ‘issues of the day’.
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In his current role at Frontier, Philip’s focus is on thinking about how to set the best investment strategy for clients, so they can meet the needs of their beneficiaries. Philip explained that this involves thinking about how to navigate some of the big secular macro forces that are likely to play out over the long-term and includes meeting responsible investment objectives (such as achieving ‘net zero’ for example).
Helping clients navigate shorter-term fluctuations in markets is also a big focus, and to assist with this, the team runs an active dynamic asset allocation (DAA) process. That said, Philip emphasized that, “being a successful long-term investor often means trying to remain disciplined in focusing on ‘the big, long-term issues’ amongst the barrage of headlines and ‘issues of the day’ that come from ever moving global financial markets.”
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Global equity portfolios have become increasingly geographically concentrated in US stocks, at a time when valuations are very stretched.
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According to Philip, some of the biggest challenges facing investors in setting investment strategy include:
Inflation: Stepping away from the day-to-day headlines about inflation, there are risks over the more medium-term that inflation could run hotter than we have experienced over the last decade or two. This is a major concern for investors for a multitude of reasons – it obviously lowers ‘real’ (after inflation) returns, but also potentially impacts how assets move with each other (which throws up some portfolio construction challenges).
Bond allocation: (and related to inflation) Rethinking ‘what to do about bonds in a portfolio’ (particularly for more conservative portfolios). “I find this is often an issue that gets narrowly focused on, like for example, what does this mean for setting duration in fixed income’? But I think the answer lies in considering shifts across the full suite of assets in a portfolio”, Philip remarked.
Diversification: “diversification is often a buzz phrase talked about in investment circles. But it can also be the elephant in the room. Global equity portfolios have become increasingly geographically concentrated in US stocks, at a time when valuations are very stretched. Given the large role equities play in portfolios, this is a major medium-term issue to try and work through – particularly for regulated super funds that now have very real tracking error to benchmarks prescribed by APRA”, Philip highlighted.
“At times, it can be overwhelming to think through all the challenges facing investment portfolios over the coming years”, Philip said, yet he does see significant opportunities for investors also; “over a more medium-term time horizon, I think it is very possible some investors could become like a deer in the headlights with respect to certain big issues facing portfolios. That, in and of itself, brings great opportunities, for those willing to take these challenges head on and with a willingness to shift portfolios away from the status quo. Over a more short-term time horizon, there are pockets of opportunities that institutional investors should be focused on. For example, those investors who can take on illiquid investments, there are compelling opportunities in some real assets, particularly within infrastructure. Furthermore, while liquid credit market spreads remain incredibly tight, private debt offers attractive opportunities”, Philip opined.
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While liquid credit market spreads remain incredibly tight, private debt offers attractive opportunities.
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From a personal perspective, Philip is excited to be part of the investment community at a time of great change, as the focus on responsible investment continues to gain momentum.
“I think everyone wants to go to work and feel like they are making a difference. Climate change is certainly one of the biggest challenges we face as humanity, so it is very exciting that issues like carbon intensity of investment portfolios has become a very mainstream issue. My experience is that Trustees ‘get it’, that this is such an important part of being a custodian of long-term wealth creation. From a strategy point of view, I think this is very exciting. As an industry we are starting to get a handle about what carbon reduction means at an asset class level, but in my opinion, we are just scratching the surface of the innovative thinking that is to come at an asset allocation level”, Philip shared.
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Climate change is certainly one of the biggest challenges we face as humanity.
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Philip left us with some reflections of key concerns that are atop of his mind from both a personal and professional perspective.
“Professionally, when it comes to issues that we are facing more broadly at Frontier, the evolving regulatory landscape for super funds is one near the top of the worry list. I suspect an increasingly important part of our role as a trusted advisor to many types of institutional investors, like super funds, will be helping them navigate the risks and opportunities of an evolving regulatory landscape. Often, the answer is the governance level, rather than necessarily being a purely investments related issue. A trustee, either of a super fund or another type of asset owner, has an incredibly difficult job these days. However, I think our experience is that having an engaged and well-informed board/committee play an integral part in being able to navigate the many competing priorities these funds are facing”, Philip explained.
“On a personal level, there is a lot going on at the farm, which truly keeps me up at night. If you told me ten years ago that I would have been up at night worried about a bottle-fed lamb in the lounge room, I would have laughed!”, Philip shared.
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