Surveying the fallout from the market meltdown

The expectations of many investors have proven surprisingly resilient in the wake of recent financial turmoil, according to Brillient!’s survey from the PortfolioConstruction Investment Markets Summit earlier this year.

Graph 1: What is the expected return from your model balanced portfolio for the next 12 months?

More than 40 per cent of respondents expect a positive overall return from their balanced portfolios of somewhere between 0-5 per cent over the next 12 months.

However, there is a second very significant group of more than 35 per cent of respondents who have a somewhat more positive view, with a return expectation of between 5-10 per cent from their balanced portfolios.

At the extremes, more than 10 per cent expect to report a negative return over 12 months, and slightly more than 10 per cent expect returns in excess of 10 per cent this year.

Graph 2: What is your expected return from your model-balanced portfolio for the next two years?

The largest group of respondents (45 per cent) are expecting a conservative 5-10 per cent return from their balanced portfolios over the next two years, while for another significant group of 35 per cent, the return expectation exceeds 10 per cent.

However, a not insignificant proportion (15 per cent) feels a two-year horizon for returns to normalise is unrealistic, instead believing their balanced portfolio return will continue to fall below 5 per cent over the next two years.

Contrasting these responses with expectations for the 12 months ahead, it’s clear that most practitioners expect markets to transition through the current uncertainty within the coming two years and returns to again normalise.

However, it appears that return expectations of balanced portfolios will still be somewhat more conservative than what was expected and experienced leading up to the global financial crisis.

Graph 3: What will you do with your Australian equity allocation?

Australian equities have traditionally been a core part of portfolios — and 20 per cent of respondents believe the local market is likely to continue to fill that role and are looking to grow their Australian equities allocations, clearly on the expectation that the local equity market will improve over the next 12 months.

However, the largest group of respondents (45 per cent) are unlikely to make any changes to their overall Australian equities allocation in the next year.

One-quarter of respondents (25 per cent) remain quite bearish on Australian equities, looking to reduce their exposure over the next 12 months.

Graph 4: What will you do with your international equity allocation?

In contrast to Australian equities, somewhat more respondents took a positive view towards international equities for the coming 12 months, with 35 per cent intending to increase their international equity allocations and close to 40 per cent intending to maintain their allocation. Less than 20 per cent of respondents are intending to reduce their allocation over the coming year.

This could indicate that a proportion of practitioners do not believe the local equity market is near or at bottom and are not expecting a dramatic bounce upward any time soon.

Graph 5: What will you do with your GEM equity allocation?

Of all allocations in the equity space, respondents are most bullish towards global emerging market (GEM) equities. Two-thirds (65 per cent) of respondents are looking to increase their allocation to global emerging market equities during 2009, with a further 20 per cent content with their current allocation.

However, a small group (10 per cent) have no specific allocation to global emerging markets, presumably leaving the decision as to whether to invest up to their global equity managers.

Graph 6: What will you do with your direct property allocation?

In contrast, more than half (55 per cent) of respondents have no intention of holding direct property investments in their portfolios in the coming 12 months, while a further 15 per cent intend to reduce their allocation. Nonetheless, 30 per cent of respondents are intending to retain or grow their allocation to direct property this year.

Graph 7: In your own portfolio, what is your allocation to cash now?

Respondents fell into two clear camps in their own portfolios — the 45 per cent of respondents whose portfolios have more than 60 per cent allocated to cash, and the 55 per cent who remain heavily invested in the markets with a 0-20 per cent allocation to cash.

Graph 8: For your own investment portfolios, what is your standout preferred asset class for the next 12 months?

Nearly one-third (30 per cent) of respondents selected global credit as their standout preferred asset class for 2009, which showed an intention to growing allocations. A large number of respondents (40 per cent) don’t agree that global credit will outperform in 2009, intending to reduce their allocation in part or move to a 0 per cent allocation.

Nearly a quarter (25 per cent) of respondents selected Australian equities as their standout asset class for the next 12 months.

The next most popular asset class is cash, with 15 per cent preferring it above all other asset classes for the next 12 months. That’s not to say that the remainder are negative towards cash, as we saw in the last graph that almost half are currently heavily overweight cash in their portfolios.

Surprisingly, given that 65 per cent of respondents said they intend to increase their allocations to GEM equities in the next 12 months (Graph 5), only 20 per cent of respondents selected GEM equities as their standout asset class for 2009. This may reflect the perception of risk in this asset class.

Relatively few respondents (10 per cent) prefer international equities, which is also surprising given respondents were more positive towards growing their allocations to international equities than they were to growing their Australian equity allocations.

Global fixed interest and property (both real estate investment trusts and direct property) were the least attractive, with few respondents selecting them as their preferred asset class. This is supported by the earlier responses towards allocation intentions to each class, with allocations to all three under significant pressure in the coming 12 months.

Graph 9: Should I be completely reviewing my asset allocation in light of the markets over the past year?

Interestingly, most respondents (70 per cent) do intend to review their asset allocation strategies in light of the markets over the past year. The largest group (close to 40 per cent) expect to modify their current asset allocations to ensure clients are taking on less risk. This lines up with what we saw earlier, with 40 per cent of respondents expecting more conservative returns of between 0-5 per cent from their balanced portfolios over the next two years.

However, nearly a third (30 per cent) of respondents plan to modify their asset allocations to ensure clients take on more risk in the coming year. Among this group of course are the 10 per cent who expect their balanced fund to return in excess of 10 per cent over the next 12 months.

Finally, the remaining 30 per cent of respondents remain confident in their asset allocation models and have no intention of completely reviewing them despite the harsh market conditions in 2008.