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Netwealth portfolio construction series - Discover cost effective investment strategies from UBS

Part of Netwealth's portfolio construction webinar series - Tracey McNaughton, Head of Investment at UBS presented to an audience on 26th October 2016 about an evolved strategy for today's investment climate.

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Netwealth portfolio construction series - Discover cost effective investment strategies from UBS

  1. 1. IndexOpportunityFunds Anevolvedstrategyfor today'sinvestmentclimate Portfolio construction series Presented by Tracey McNaughton, UBS, Head of Investment Strategy Australia October 2016
  2. 2. | Netwealth Enter your questions in the question box We will get to them during at the end of the webinar. This webinar is being recorded Slides will be sent to you after the webinar. Posting to social? Make sure to use #netwealthinvest or tweet @netwealthInvest. 1 Housekeeping
  3. 3. | Netwealth Disclaimer This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.
  4. 4. Strictly confidential October 2016 Index Opportunity Funds – An evolved strategy for today's investment climate Tracey McNaughton Head of Investment Strategy, Australia
  5. 5. Evolve or…
  6. 6. The investment environment has changed 0 5 10 15 20 25 30 35 <-20% -20% to - 15% -15% to - 10% -10% to - 5% -5% to 0% 0% to 5% 5% to 10% 10% to 15% 15% to 20% >20% 0 100 200 300 400 500 600 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16 Naughties (2000-16) – The Great Volatility Equities Bonds Source: Bloomberg, Quarterly returns for S&P500 and US Treasuries 0 100 200 300 400 500 600 Dec-89 Jun-91 Dec-92 Jun-94 Dec-95 Jun-97 Dec-98 IndexJan-1990=100 1990s - The Great Moderation Bonds Equities 0 5 10 15 20 25 30 35 <-20% -20% to - 15% -15% to - 10% -10% to - 5% -5% to 0% 0% to 5% 5% to 10% 10% to 15% 15% to 20% >20% Frequency 7.5% annual avg 18% annual avg 2.2% annual avg 5.4% annual avg Returns are lower; Volatility is higher
  7. 7. What an evolved balanced fund looks like Charts are for illustrative purposes only Low cost • Lower returns means portfolio costs have to come down • Passive building blocks reduces trading costs Stable • More volatile environment means diversification more important to enhance stability Active • Set and forget in the market is no longer sufficient • More volatile environment brings opportunity to add value
  8. 8. 276 330 442 714 1,181 1,591 1,953 2,449 2,995 3,313 3,551 3,938 4,396 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: PwC NumberofETFsglobally Low cost Low cost –ETF's cheap, liquid, varied
  9. 9. ETFs categorized by sector and style. Size=3-month avg dollar volume Source: http://www.finviz.com Low cost ETF Universe – 1 year performance
  10. 10. Low cost What is an ETF?
  11. 11. Portfolio Management Benefits • Diversification • Liquidity • Tax efficiency • Low cost • Transparency ETF Selection Criteria • Strategy mapping • Index construction • Diversification • Low tracking error • Liquidity • Expense Low cost Using ETF's to build a balanced portfolio
  12. 12. Allocation Low cost Using ETF's in the Index Opportunity fund
  13. 13. Stable Stable – why diversification matters
  14. 14. Winning by not losing Successful long-term investing is more to do with avoiding catastrophic losses than it is to do with capturing unrealised gains S&P/ASX 200 relative to pre-crisis peak (Sep-07=100) Source: Bloomberg, UBS, Loss percentage Gain percentage required -10% 11% -20% 25% -30% 43% -40% 67% -50% 100% -60% 150% -70% 233% -80% 400% -90% 900% 40 50 60 70 80 90 100 110 05 06 07 08 09 10 11 12 13 14 15 16 Active Active - The importance of active management
  15. 15. Index Opportunity: Passive foundation, active overlay • Benchmark: Start with a balanced portfolio of passive pooled funds and ETFs • Asset allocation: Determine where we are in the cycle and where we are heading • Tactical asset allocation: Allocate to the appropriate mix of assets that will provide superior risk-adjusted returns Equities 50% Fixed income 45% Commodities 5% Recovery Expansion Slowdown Recession Equities 50% Fixed income 45% Commodities 5% China USEurope Japan Cost effective design
  16. 16. Index Opportunity Fund – a core solution • An active overlay for added alphaActive • Diversified foundation for stabilityStable • Passive foundation reduces trading costsLow cost
  17. 17. Strictly confidential September 2016 Economic issues affecting investors today Tracey McNaughton Head of Investment Strategy, Australia
  18. 18. Equities 12.5% 6.2% 3.4% 2.6% -1.4% -14.1% -20% -15% -10% -5% 0% 5% 10% 15% Topix DAX ASX200 MSCI World S&P 500 MSCI EM How is 2016 going? 2016 performance of different asset classes Fixed Income (10-year bonds, total return) 12.3% 11.7% 8.4% 5.6% 3.5% 0.0% 5.0% 10.0% 15.0% Japan Italy US Australia UK 17 Source Bloomberg; As of 31/08/2016 Currencies -14.1% -11.4% 0.5% 2.7% 3.2% 15.7% -20% -10% 0% 10% 20% USDJPY AUDJPY AUDEUR EURUSD AUDUSD AUDGBP Commodities 33.6% 23.2% 4.3% -3.6% -10% 0% 10% 20% 30% 40% Copper Oil Gold Iron Ore
  19. 19. What issues are trending? Quantitative Easing China slowdown Divergence Negative interest rates Geopolitical risk Lower for longer Dollar Anti-establishment Fed rate rise Tantrum China Stimulus Oil prices Brexit Trump
  20. 20. Economic issue #1 – "Lower for longer" Source: UBS, Bloomberg Economic growth comparison (average GDP%) 3.7 2.8 3.4 1.4 2.3 0.7 1.0 0.5 2.6 1.2 5.4 5.8 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 1996-06 2006-16 Australia US Europe Japan DM EM A developed markets issue
  21. 21. Lower growth means lower inflation & interest rates (4) (3) (2) (1) 0 1 2 3 India UK Indonesia Italy EU Mexico Germany Australia China US France Turkey Japan SouthKorea Canada SaudiArabia Russia SouthAfrica Brazil Change in CPI 2016 - 2013 (ppts) -4.0 -3.0 -2.0 -1.0 0.0 1.0 Italy France South Korea Australia Germany UK Canada US India Japan China Indonesia Mexico Turkey Russia South Africa Brazil Change in 10-year Government bond yield - 2016- 2013 (bpts) Source: UBS, Bloomberg As at 31 August 2016
  22. 22. Lower interest rates means lower returns Consequences of a suppressed risk-free rate Source: UBS Asset Management. Return and risk expectations are no guarantee for future results. The chart is based on UBS internal risk-return estimates. For illustrative purposes only. 21 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0% 5% 10% 15% 20% 25% ExpectedReturn Expected Risk Equities Global Equities Emerging Markets Bonds U.S. Gov. Bonds U.S. Corporate Real Estate Global Cash U.S. Bonds U.S. High Yield 1 Curve Shift Flattening 2 3? 2016
  23. 23. Source: Bloomberg, UBS As at 31 August 2016 -4 -2 0 2 4 6 8 10 08 09 10 11 12 13 14 15 16 Consumer Price Index (yoy%) 0 5 10 15 20 25 30 05 06 07 08 09 10 11 12 13 14 15 16 China Li Ke Qiang Index (composite electricity output, rail freight and loan growth) -30 -20 -10 0 10 20 30 40 50 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 China: Exports (yoy%) Economic issue #2 – "China" - growth stabilising
  24. 24. Source: Bloomberg, UBS As at 31 August 2016 50 60 70 80 90 100 110 120 130 140 150 04 05 06 07 08 09 10 11 12 13 14 15 16 China Monetary Conditions Index (composire of real eff exchange rate, loan growth, real interest rate) Looser Tighter -8 -6 -4 -2 0 2 4 6 8 10 12 05 06 08 09 10 11 13 14 15 House prices (yoy%) China – financial conditions easier
  25. 25. Economic issue #3 – Quantitative failure US recovery is weakest in post-WWII era Source: Bloomberg As at 31 August 2016 7.6 5.6 5.1 4.9 4.4 4.3 4.3 4 3.6 2.8 2.1 0 1 2 3 4 5 6 7 8 Q4 1949-Q2 1953 Q2 1958-Q2 1960 Q4 1970-Q4 1973 Q1 1961-Q4 1969 Q3 1980-Q3 1981 Q4 1982- Q3 1990 Q1 1975-Q1 1980 Q2 1954-Q3 1957 Q1 1991 - Q1 2001 Q4 2001 - Q4 2007 Q2 2009 - Q2 2016 Average annual change in US GDP, by expansion (%)
  26. 26. Source: Bloomberg, UBS As at 31 August 2016 0.38 0.4 0.42 0.44 0.46 0.48 70 74 77 80 84 87 90 94 97 00 04 07 10 14 US Gini Index of Income Inequality $28,524 $33,277 $33,077 $32,851 $33,297 $269,102 $689,373 $581,738 $639,514 $671,061 1979 2007 2009 2013 2014 US Real Annual WagesBottom 90% Top 1% 53.3 51 57 61.9 67.1 70.7 68.8 53.1 56 56.4 58.4 66.1 77.7 82.9 86.8 50 55 60 65 70 75 80 85 90 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 US Household Net Worth ($tn) The issue: Quantitative easing has increased inequality
  27. 27. Economic issue #4 – "Trump"
  28. 28. Populist parties and politicians polling strongly Country Party/Politician Stance Latest Polling Austria Freedom Party of Austria Far Right 35% France# National Front Far Right 28% Germany# Alternative for Germany Far Right 12% Greece Syriza Far Left 35% Italy Five Star / Northern League Far right 42% Netherlands# Freedom Party Far Right 24% Hungary# Fidesz/Jobbik Far Right 65% Poland Law and justice Far Right 39% Portugal Unitary Democrat Coalition Far Left 8% Spain Podemos Far Left 21% Sweden Sweden Democrats Far Right 21% Switzerland SVP Far Right 29% USA Donald Trump Far Right 41.8%* *Huffington Post model; #Elections in 2017
  29. 29. Source: Citi Research Referendum Risk: Scottish referendum, Brexit, Catelonia Separatism, Nationalism, Populism Non-Mainstream/Minority Governments Protests, Government Collapses Political Fragmentation Electoral Uncertainty Weak/Divided Govt Limited reform Myopic or populist policy making Difficulty responding to crisis Yearly avg DM/EM Election & Mass Protests 21.7 Post-crisis average 14.1 Pre-crisis average Depletion of political capital
  30. 30. 8 9 10 11 12 13 14 15 88 89 90 92 93 94 96 97 98 00 01 02 04 05 06 08 09 10 12 13 14 16 Thousands Real net national disposable income/capita Australia's long income boom has ended Economic issue #5 – Australia transitioning Source: Bloomberg, ABS, UBS As at 31 August 2016 -2 -1 0 1 2 3 4 5 6 7 90 92 93 95 96 98 99 01 02 04 05 07 08 10 11 13 14 16 % Australian GDP QoQ YoY 1990: Recession we had to have 2002: Resources-led China boom starts 2008: GFC 2.0 2.5 3.0 3.5 4.0 4.5 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Wage Cost Index(yoy%)
  31. 31. • Lower economic growth here for the next few years: – Ageing demographics – Excess debt – Excess capacity following the GFC • Structural issues still confronting China impacting: – emerging markets – commodity prices – global trade • Unconventional monetary policy here to stay for at least next 2-3 years – Fed rate hike cycle will be "slower than an asthmatic snail" and will revisit unconventional policy at the next downturn • Weak political mandates challenge fiscal policy – deficits will rise • Australia is transitioning through the mining bust Conclusions
  32. 32. Where to invest? Unattractive Neutral Attractive EquitiesFixedIncomeCurrencies Emerging Japan Eurozone US Australia Corporates AustraliaEurozoneJapan US UK Switzerland UK Switzerland EMD US$ CAD GBP NZD AUD CHF EUR JPY High Yield USD EMD local Source: UBS Asset Management's Asset Allocation and Currency team, as of August 31, 2016. Views are provided on the basis of a 12-18 month investment horizon, are not necessarily reflective of actual portfolio positioning and are subject to change.
  33. 33. Disclaimer This presentation and accompanying documents is intended to provide general information only and has been prepared by UBS Asset Management (Australia) Ltd (ABN 31 003 146 290) (AFS Licence No. 222605) without taking into account any particular person’s objectives, financial situation or needs. Investors should before acting on the information provided in this presentation, consider the appropriateness of the information having regard to their personal objectives, financial situation or needs. Any opinions expressed in this material are those of UBS Asset Management (Australia) Ltd, a member of the Asset Management division of UBS Group AG, and are subject to change without notice. Although all information in this presentation and documents is obtained in good faith from sources believed to be reliable no representation of warranty, express or implied is made as to its accuracy or completeness. Neither UBS Group AG nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material. The information provided during this presentation must not be relied on to make an investment decision. It is not an offer or recommendation to acquire an interest in the UBS Managed Investment Funds (UBS Funds) or recommendation to purchase or sell any particular security. Offers of interests in the UBS Funds are contained in the relevant current Product Disclosure Statement (PDS). An investment in any of the UBS Funds does not represent deposits or other liabilities of UBS Group AG or any other member company of the UBS Group. Your investment is subject to investment risk, including possible delays in repayment and loss of income and capital invested. The repayment of capital or income is not guaranteed by any company in the UBS Group. Performance can be volatile and future returns can vary from past returns. Up-to-date performance information can be obtained by contacting UBS Asset Management (Australia) Ltd. A copy of the PDS is available from UBS Asset Management (Australia) Ltd, the issuer of the UBS Funds, on (02) 9324 3222 or freecall on 1800 023 043. You should consider that PDS and obtain professional advice before making any decision about whether to acquire or continue to hold an investment in the Fund(s). This document may not be reproduced or copies circulated without prior authority from UBS Asset Management (Australia) Ltd. © UBS Group AG 2016. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
  34. 34. Thank you
  35. 35. | Netwealth Disclaimer This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

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