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Don't go too cash heavy in risky times

March 2016




Here’s how ANZ’s Chief Investment Office balances risk and return amid a highly volatile market.

It’s human nature to want to defend ourselves when we identify potential risks. And there’s been no shortage of risks in investment markets over the past year. But what does “de-risking” your investments actually mean?

For many people, cash investments are the safest place to be in a volatile market, as they provide stable and reliable (but low) returns. That may mean taking a lot of money out of sharemarkets and other higher risk investments until the market recovers, or waiting on the sidelines until markets clearly recover. While these decisions are easy to make in hindsight, getting the timing right is much more difficult in real time, particularly when market volatility is high.

Another way to manage risk

ANZ’s Chief Investment Office believes an easier and more effective way to manage investment risk is to maintain a diversified portfolio across all asset classes at all times and focus on medium to longer term returns. This is not to say that diversified portfolios are “set and forget”. The investment team makes tactical shifts within a diversified portfolio to reflect market conditions.

As chart 1 shows, we were marginally above our 10 per cent benchmark position in December 2014 (11.5 per cent), before more uncertain market conditions saw us increase cash to 17.8 per cent in the ANZ Dynamic 70 Diversified Portfolio in October 2015 and further, to 21.3 per cent, in March 2016 to reflect our concern of the risks of a market fall.

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Our strategic asset allocation for the ANZ Dynamic 70 Diversified Portfolio

Source: ANZ Wealth

Getting the timing right is much more difficult in real time, particularly when market volatility is high.

Despite this increase in cash, our overall position in the ANZ Dynamic 70 Diversified Portfolio is still more exposed to growth assets (64.25 per cent) than defensive assets (35.75 per cent in cash and fixed income). This is slightly more conservative than our strategic asset allocation of 70 per cent growth assets.

Despite this increase in cash, our overall position in the ANZ Dynamic 70 Diversified Portfolio is still more exposed to growth assets...

Why did we not take a more defensive position when we expect more volatility in 2016?

In essence, we took out extra protection by increasing cash in the portfolio and kept our hedging ratio to the Australian dollar to around 17 per cent.

Why did we do this?

The main reason is that growth assets have historically delivered better performance than cash over the long term, even taking into account significant market corrections.

Chart 2 shows the year-on-year performance of a cash portfolio and a hypothetical diversified portfolio* of 70 per cent growth assets.

Cash vs. Hypothetical Diversified Portfolio

Source: ANZ Wealth, Bloomberg

In the year to October 2008 (the height of the global financial crisis), cash clearly outperformed the hypothetical 70:30 diversified portfolio, which fell by 17 per cent. But in the year to March 2010, the same hypothetical diversified portfolio returned 21 per cent compared to 3.7 per cent for cash.

Extend the timeframe and the trend is clear. Over the 10 years since 2006 (which includes the global financial crisis), the hypothetical diversified portfolio has averaged 7.1 per cent each year compared to 4.6 per cent for cash.

Performance of 1-year term deposit v ANZ Dynamic 70 Diversified Portfolio

Source: ANZ Wealth, Bloomberg

In dollar terms, $1 million invested since the inception of the ANZ Dynamic 70 Diversified Portfolio in October 2010 would now be worth $1.51 million. The same amount invested in cash as measured by the Bloomberg Ausbond Bank Bill Index would be worth $1.19 million.

We don’t expect another GFC

We hold a cautious asset allocation at the moment because we expect global growth to stay weak in 2016. However, we don’t believe this will end up as another GFC – largely because most key financial and activity indicators are not pointing to a deep recession at present.

Chart 4 shows the JPMorgan global manufacturing index, which currently sits at 51.4. If this purchasing managers’ index fell below 48, this would indicate a significant slowdown in growth – similar to the 2011-12 period highlighted. While a mild recession is likely, we don’t expect the type of dramatic decline seen in the PMI in 2008 that would justify a markedly more cautious asset allocation.

Global manufacturing PMI v hypothetical 70:30 diversified portfolio*

Source: ANZ Wealth, JPMorgan

The benefits of staying the course

Overall, we believe that taking a medium to long-term perspective in a diversified portfolio will deliver superior returns and preserve capital more than short-term market timing investing.

Within that framework, we also believe that market inefficiencies can present opportunities for higher returns. That’s why we will continue to actively manage our cash and other asset classes’ positions to help our portfolios benefit from, and be protected through, large swings in asset prices.


*Data provided for the hypothetical 70:30 diversified portfolio uses actual portfolio (ANZ Dynamic 70 Portfolio) data post October 2011. Data pre October 2011 was created by simulating the Dynamic 70 portfolio (to represent a 70:30 diversified portfolio) as the actual portfolio data is not available due to actual portfolio's inception in October 2010. Returns are calculated based on the strategtic asset allocation (SAA) weights of the actual portfolio: 10% Cash (Bloomberg AusBond Bank Bill Index), 20% fixed income (10.0% - Bloomberg AusBond Composite 0+ Year Index and 10.0% - Barclays Global Aggregate Index), 11.4% hedged international equities (MSCI AC World Index (ex-Australia) Net Return Hedged to AUD), 26.6% unhedged international equities (MSCI AC World Index (ex-Australia) Net Return in AUD), 32% Australian equities (S&P/ASX 100 Accumulation Index).


Mark Rider, Chief Investment Officer

Mark is responsible for delivering an overarching investment strategy, including asset allocation, investment themes, investment manager and product selection and monitoring for ANZ Wealth in Australia. Before joining ANZ in 2013, Mark spent 15 years at UBS and 10 years at the Reserve Bank of Australia, making him a well-recognised and respected member of the Australian investment community.


To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below.

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