Annual Report 2018
Multi-Asset Investments

Our Multi-Asset Investments strategy seeks to provide an attractive and persistent stream of income along with capital growth, while investing with a margin of safety. Our Multi-Asset teams employ a bottom-up approach to investing across asset classes, rooted in global value investing and utilising investment strategies which aim to preserve capital. Our portfolios typically hold 30-70 per cent in equities, with the balance invested in fixed income, commodities and cash.

Positive returns from Australian and international equities and bonds have led to solid returns for multi-asset investors over the year.

The year to 30 September 2018 saw equity markets continue to move higher. The local equity market, as measured by the S&P/ASX 300 Accumulation Index, delivered a strong return of 14.0 per cent, led mainly by growth sectors such as healthcare and energy amid rising oil prices. Overseas markets were also buoyant, especially in AUD terms, with the Australian dollar depreciating against the US dollar in particular. The MSCI World ex Australia Standard (net dividends) in AUD delivered 20.8 per cent over the year. The US market has once again led the way, led by a constructive growth environment in the local economy. The market leaders have continued to be in the technology sector, with some valuations now looking out of kilter with fundamentals. Rate sensitives lagged as the US monetary tightening cycle asserted itself.

The recent environment has been characterised by global monetary tightening, implemented via both a cessation of liquidity programs and the continuation of successive interest rate hikes in the case of the US. In spite of this, the asset class still produced a positive return during the year. The JP Morgan GBI Global Traded hedged to AUD returned 0.8 per cent and the Bloomberg AusBond Composite 0+ Yr Index delivered 3.7 per cent.

During the year, we successfully launched the Pendal Multi-Asset Target Return Fund, which targets a return of CPI +5 per cent over rolling five-year periods. The strategy utilises medium term ‘dynamic’ asset allocation, relative value strategies, trend following strategies as well as various ‘alpha’ sources from the Pendal/J O Hambro suite. The strategy’s Portfolio Manager is Michael Blayney who has run similar strategies over the last seven years before joining Pendal as Head of Multi-Asset Investments in August 2017.

The low sensitivity of returns to equities, equity-like return target and moderate volatility categorise the product as an ‘alternative’ investment, which has been a growing part of the market in both the adviser-led and institutional channels.

In addition, the risk/return profile also makes the product suitable for the growing retiree market. Our early distribution efforts have so far been centred on gaining advocacy with key platforms and research houses, as well as meeting with key institutional investors to introduce the strategy.

With regard to the Diversified Funds, we continue to make incremental improvements, including a slight increase in the allocation to alternative investments over the year. From a performance perspective, the Diversified suite of funds have had a mixed year to 30 September 2018, with the funds delivering solid absolute returns but slightly underperforming their strategic asset allocation benchmarks. Our tactical asset allocation process also added value over the year.

The flagship Pendal Active Balanced Fund delivered a return of 10.2 per cent for the year to 30 September, reflecting persistently strong equity market returns. In terms of peer group comparison, the fund is placed in the second quartile across one, three and five years (to August 2018) in the Mercer Survey. While active performance has been a touch weaker this year, a strong showing in 2016/2017 meant that we maintained our top quartile position over two years. The Australian Equities component was the strongest contributor to active return, with the fund’s allocation outperforming the ASX 300 by 3 per cent. However, the international equities component underperformed by approximately the same amount. The largest negative impact was in the Liquid Alternatives component, and while exhibiting strong, longer term track performance, experienced a marked drawdown during early 2018, a period which saw such strategies across the globe experience similar weakness.

Another key area of focus for the team has been in sustainable investing. Looking forward, we will continue to drive new research and also potentially product development in our Sustainable Balanced Funds and build on some positive momentum from a distribution perspective.

Fund Fact Sheets
FUND NAME FUND FACT SHEET
Pendal Multi-Asset Target Return Fund View the latest fact sheet
Pendal Wholesale Plus Active High Growth Fund View the latest fact sheet
Pendal Wholesale Plus Active Growth Fund View the latest fact sheet
Pendal Wholesale Plus Active Balanced Fund View the latest fact sheet
Pendal Wholesale Plus Active Moderate Fund View the latest fact sheet
Pendal Wholesale Plus Active Conservative Fund View the latest fact sheet
In FY2018 we launched the JOHCM Global Income Builder strategy via our US-based mutual fund range and Irish-domiciled OEIC fund range. Managed by our five-person Multi-Asset Value team from New York, the strategy seeks to provide an attractive and persistent stream of income along with capital growth, while investing with a margin of safety.

Our Multi-Asset Value team employs a differentiated bottom-up approach to investing across asset classes that is rooted in global value investing and utilising investment strategies which aim to preserve capital. The portfolio typically holds 30 – 70 per cent in equities, with the balance invested in fixed income, commodities and cash.

Equity valuations have remained high and, as a result, the overall equity exposure of the portfolio remained below 50 per cent. The average rating of our fixed income holdings has remained at BB, where we believe we can generate attractive risk-adjusted returns by selectively taking moderate credit and duration risk. Elsewhere, we have a small gold-related exposure, held as a portfolio hedge.

Looking ahead, investors currently seem beset with a broad range of concerns, including slowing international growth, the impact of trade wars, rising interest rates in the US and reduced global liquidity. As fear resurfaces across markets, we continue to believe our cautious approach to income investing – based on the search for durable businesses that offer a valuation margin of safety – remains appropriate.

With two-thirds of the portfolio’s equity holdings in non-US shares, we continue to see more attractive share valuations internationally. That aside, the increase in US interest rates has made US equity income assets, many of which are bond proxies, more interesting than they have in years. On the fixed income side, we have increasingly found some value in the debt of European financials and US high yield.

Fund Fact Sheets
FUND NAME FUND FACT SHEET
JOHCM Global Income Builder Fund View the latest fact sheet