Paul O'Conner:

Welcome all and thanks again for joining us on today's Netwealth Portfolio Construction Podcast. I'm Paul O'Connor and my role at Netwealth is as head of investments, which includes responsibility for the funds available on our investment menus and the products we issue as a responsible entity, namely being the Global Specialist Series funds and managed accounts. Joining us on today's podcast is Matt Cho from Vanguard Australia, and Matt's the head of multi-asset solutions for the business. Given Matt's role focuses on multi-asset or diversified products, I thought we would discuss returns to investors in 2024, Vanguard's economic outlook and views for 2025, how that then translates through to asset classes and their views on asset classes and portfolio positioning. The Vanguard Group Incorporated was founded in 1975 with headquarters in Pennsylvania, USA, and is now one of the largest investment managers in the world. The firm employs over 20,000 individuals and manages circa 14 and a half trillion dollars in funds under management as at the end of September, across equities, fixed income and cash strategies in many jurisdictions globally.

Vanguard Investments Australia or Vanguard Australia was established in 1996 as a wholly owned subsidiary of the Vanguard Group Incorporated. Vanguard Australia serves as both a responsible entity and investment manager for the numerous managed funds offered by the business. Vanguard is a mutual, meaning that US investors own the Vanguard Group, which really makes this unique in asset management and drives a more investor-led culture to treat investors fairly and providing the best opportunity for investment success. In his role at Vanguard, Matt primarily acts as a subject matter expert for Vanguard's range of multi-asset products providing investment support and expertise for their clients. Prior to joining Vanguard in June 2020, Matt worked as an investment consultant and research analyst at Zenith Investment Partners who are Australia's, one of Australia's leading research houses. Matt holds a Bachelor of Economics and Finance from RMIT, and a master of Applied Finance from Monash University.

There are 25 Vanguard managed funds on the Netwealth Super and IDPS menus, four managed accounts, and 29 exchange traded funds. So there's no shortage of products there covering mainly index-based strategies, investing in the traditional asset classes, but also the diversified strategies that Matt represents. 2024 has been a great year for investors with Australian equities large cap returning in excess of 23% over the last 12 months. International equities returning 30%, Australian fixed interest returning over 5%, and international fixed interest returning over 6%. So from a diversified portfolio perspective and using the Morningstar Target Allocation Indexes as a proxy, conservative portfolios typically returned almost 7% through to high growth portfolios that returned in excess of 23%. So investors have been rewarded for having exposure to risk assets, but can these strong returns continue into 2025? Whilst global economic growth is sound and expected to be around 3.2% in 2025, there are numerous headwinds markets need to navigate.

Geopolitical risks particularly remain high across Europe and Asia. Whilst inflation in developed world countries persists, indicating that central bank rate cuts may be delayed. China's economic slowdown and the response by policy makers to date has been muted. So will the world's second-largest economy continue to slow or will the government announce significant monetary and fiscal packages to boost economic growth that then would certainly flow on and assist the Australian economy. In the US, Trump's reelection as the next US president appears positive for markets, as there are signs that his second term as president will commence with increased fiscal stimulus packages that will be positive for economic growth, but again potentially delay interest rate cuts.

However, will Trump spark a global trade war based on comments about increasing tariffs on Chinese goods but also using the threat of tariffs on Canada and Mexico to address US border security concerns. From an Australian perspective, all eyes are on China given they are our major trading partner and largest purchaser of our resources. And hopes for interest rate cuts in Australia are starting to wane as unemployment rates continue at historical lows. So, as usual, risks persist in markets, but this is really what ultimately drives return premiums for risk assets. Maybe for starters, Matt, can you explain to our listeners what your role at Vanguard is and how you support the multi-asset and diversified products offered?

Matt Cho:

Certainly Paul, thanks for having me on the podcast. I'm head of multi-asset solutions for Vanguard Australia, which means I represent our multi-asset strategies locally. That includes our diversified funds and ETFs as well as our model portfolio offer, which was recently made available on the Netwealth platform earlier this year. I formed part of our broader investment product team, which is a function that operates, probably aligned to what other asset managers might call, investment specialists, where we're effectively acting as a conduit between the investment teams who are physically managing the money and our end clients. It also means we get the pleasure of talking to people like yourself, Paul, and spending a lot of time talking to our clients about what we're passionate about, which is our investment product.

Paul O'Conner:

Moving into the questions today, Matt, I mentioned in my opening remarks that investment markets have been kind to investors this year, so as you are responsible for Vanguard's multi-asset products in Australia, how have they gone in 2024?

Matt Cho:

Sure, Paul, for those not familiar with the strategy, I'll start by just giving a brief overview of what they are and how the portfolios are constructed because I think that's useful context in understanding how the portfolios have performed over the past 12 months. Core to our diversified funds is really our four investment principles, and they are firstly goals, so that's about setting clear investment goals, which is the start of any good investment strategy. Second is balance, and when we're talking about balance, we're really talking about having diversification across asset classes. I often quote Harry Markowitz who's the father of modern portfolio theory. He said the only free lunch in investing is diversification. I still think that rings true today as it did all those years ago when he said it. The third principle is cost. As an investor, there are a lot of things that are outside your control.

We would all like to be able to control what happens in market, but we inevitably can't. One thing that you can control is the cost that you pay for investment. So by minimising your costs, we believe, which is true to the Vanguard ethos, that you can improve your long-term investment outcomes. And then last is discipline. And by discipline we mean taking a long-term perspective. And by long-term we typically mean seven plus years or further. For investors that can take that long-term lens, sort of wash out the noise, they're typically rewarded with stronger risk-adjusted returns. So when we're thinking about our diversified portfolios, they're really an embodiment of those four key principles and are tailored to investors looking to maximise their long-term wealth but aren't looking to necessarily take risk outside of traditional asset classes, and by that I mean traditional bonds and equities. In terms of the asset allocation approach, these are strategic asset allocation-focused products, meaning we're not using any tactical or dynamic asset allocation on a short-term basis.

Instead, the asset allocation is built on our long-term expectations of risk and return, which are determined by our investment strategy group. That's a group of 65 investment professionals globally as well as nine right here in Melbourne, which we think is great having the pedigree and resources of the global organisation, but also local expertise, particularly when we're building portfolios for Australian investors. The last thing I'd probably mention about the products themselves is, we're not taking any explicit risk or factor tilts, rather the asset allocation is implemented using broad-based diversified exposure via our core index products. So our Australian shares exposure is gained via our Vanguard Australian Shares Index Fund, international shares via the Vanguard International Shares Index Fund and so on and so on. And given our approach to index and our scale and emphasis on cost, we see that as an advantage. So if I think about how the portfolios are constructed and then the performance over 2024, there've really been a reflection of markets and, Paul, as you mentioned, markets have been very strong over the past 12 months.

High-growth portfolio, as an example, has returned 23%. So very aligned to that Morningstar benchmark you referenced and where most of that return has been driven by the international equity sleeve, and as we all know, primarily out of the US, up around 30%. And then Australian Equities has also been a positive contributor, that 23% number that you already quoted. What has been pleasing though, I think, has been the performance of fixed-income markets. So as you mentioned, international fixed interest up 6%, Australian about five. A big part of our outlook for the year that's just gone was what we were calling a return to sound money. And what we mean by that is the bonds were beginning to look attractive on a relative basis to other asset classes because they were now providing real yields. So real yields in that the yields adjusted for inflation were giving you a strong return.

You might remember back in 2022 when we saw the equity bond correlation turn positive, noting that that's happened in the past, from time to time, and that equity bond correlation tends to be more negative than positive over the long term. But off the back of that, there were a lot of market commentators calling for the death of the 60/40 portfolio, which is I guess colloquial for a traditional diversified portfolio. But I think the return experience that we've seen in the past two years, really shows that the 60/40 portfolio remains alive and well and that diversification across traditional assets remains a sound investment strategy. The last thing I'd say is while we've been very happy with returns we've seen recently, what we're really proud of is the long-term returns we've been able to achieve in these products, particularly on a peer-related basis. And that's probably one of the primary reasons that these products have been so well-supported, particularly in the financial advisor space is because of the consistency of our track record.

Paul O'Conner:

It's sort of interesting, some of the comments you were making there that resonate with me there, Matt. 2022 was certainly an anomaly in terms of the positive correlation between bonds and equities. I think the last time that had occurred was 1994, so I think investors still need to be focused on the fact that bonds typically have a very low correlation to equities, and I guess that's what adds to, well the benefits of diversification and smoothing a return in the portfolio. The other sort of take out, when I hear you talking about Vanguard and your investment strategies there is the adoption and use of strategic asset allocation. I guess that resonates with myself. I'm sort of a long-term believer in strategic asset allocation and I guess I still struggle a little bit with dynamic asset allocation as I think it can be akin to market timing and we all know that market timing is probably the most difficult decision one could make in investment management. So I think it's pretty sound, the use of seven-year plus outlook on markets and the implementation over passive market exposures using a long-term strategic asset allocation.

Matt Cho:

I agree, Paul, and just maybe, it is a common question we get on strategic asset allocation versus tactical or dynamic, why do we not adopt some of those short-term market timing asset allocation moves. Our perspective is that as you mentioned, it's very difficult to do. And when you look at the returns of multi-asset portfolios over the long term, research that we've done and external research indicates that 90% of your return is driven by your strategic asset allocation, and only 10% or circa 10% is market timing or security selection. So if you get your strategic asset allocation right, for the majority of the way there to producing a portfolio that's going to create enduring returns, and when you think about trying to implement a tactical move correctly, there's a lot of things you need to get right.

So you need to identify a reliable indicator, first and foremost. You need to identify the security or asset class, you need to time your exit, you need to time your entry, you need to size it appropriately, and then you also need to balance the cost of implementing any trade versus the benefit so, on the balance of that, implementing TAA or DAA on a consistent basis correctly is difficult. That's not to say that TAA and DAA should be avoided altogether, but I think about the context of our diversified portfolios where there is a preference for simplicity and cost. We're noting that transacting TAA or DAA increases transaction costs, an SAA approach focused on core portfolio building blocks remains the most appropriate.

Paul O'Conner:

What do you or Vanguard Australia think about the global economy now and the market outlook for 2025 and I guess particularly given some of the risks that are hovering over the globe at the moment, as I mentioned in my introduction?

Matt Cho:

It's a timely question. So our investment strategy group are responsible for not just the asset allocation for our diversified products globally, but also our market and economic research just released their outlook for 2025. Before I go into some of the insights, I would highlight when we are setting asset allocation, as I've mentioned, we're focusing on that long-term expectations and not necessarily what we expect to happen in the next 12 months over the course of 2025. But with that in mind, broadly, our team expects that the global monetary easing or interest rate cutting cycle will continue throughout 2025 where inflation in most developed economies is now touching central bank targets. If we do a bit of around the world starting with the US, we're expecting US GDP growth to cool from its present rate of 3% to 2.1%. The US economy has obviously been very resilient and there's a lot of questions around has the US been able to achieve a soft landing due to the Fed's monetary policy?

Our position is that the resilience in their economy has largely been due to positive supply side factors, primarily strong productivity growth and an increase in the available labour. So between the second quarter of 2022 and the second quarter of this year, productivity has increased by 4% and labour supply in the US has grown by 1.8%. There's an expectation that these supply side factors should continue, but that's going to be balanced by some of the emerging risks, Paul, that you mentioned. So the potential implementation of trade tariffs and stricter immigration policies may actually have inflationary pressures. Our investment strategy group expects that the core inflation will remain above 2.5% for the course of 2025, and in response to that, the Fed may need to adjust their expectations around where that neutral rate sits, where it's currently assumed at 2.9%, we're expecting the Fed to take a cautious stance where policy will remain above 4% by year-end.

If we move over to say other economies globally, they probably haven't been as lucky, particularly on that supply side and haven't been able to achieve that combination of growth and disinflation. In the Eurozone in particular, disinflation has been strong and fast since a peak in 2022 of above 10% inflation has dropped eight percentage points to 2%. So while they're close to their target in terms of inflation, that's come at the cost of stagnating growth over the course of the past two years, that's been driven by muted external demand, [inaudible 00:18:16] productivity, and there's some lingering effects of the energy crisis, which is having a particular impact on the manufacturing sector in Europe. So we're expecting growth to remain below trend next year, and a slowdown in global trade, as you sort of mentioned, remains a key risk for that region. We also expect the European Central Bank to cut rates below their neutral range at around 1.75 by year-end.

China, it's one that you mentioned, Paul, it's obviously always of interest for Australian investors, given our proximity. Our view as policymakers still have work to do despite the pivot that occurred late in 2024. We do expect growth to pick up off the back of some of that stimulus measure, but we think that there's going to need to be more aggressive measures to overcome some of those external headwinds within China. So you've got issues with the property sector, weak confidence in both household and business, and not to mention the potential impact of trade tariffs. So we maintain a weaker than consensus view on Chinese growth expecting it to decelerate to 4.5% in 2025, and thus we expect that there's going to be additional monetary fiscal policy throughout the course of 2025. So contrary to I guess the rest of the world where the rhetoric is higher for longer as it relates to interest rates, China is likely to be lower for longer.

Paul O'Conner:

It's interesting, I'd love to, if we had the time to delve into the comments you made about the improved productivity in the US and sort of what the link is to AI or artificial intelligence there, but productivity is certainly something we've been struggling with in Australia where we have not seen any meaningful gains ultimately. Yeah, I'd love to delve in that, but perhaps for another podcast.

Paul O'Conner:

Current valuations of risk assets are at I guess all time highs earning multiples certainly on exchanges. So does that cause a rethink on the asset allocation in your multi-asset products?

Matt Cho:

It is a question on the mind for a lot of investors, particularly what happens next for US equities, I think is probably the key question.

Paul O'Conner:

Or the Magnificent Seven maybe.

Matt Cho:

Correct. In our view, while US valuations are elevated, they're not as stretched as traditional metrics might imply. So despite the increase in interest rates that you've seen in the US, many large corporations have been able to lock in lower financing costs ahead of time and more importantly, the market in the US has become more concentrated in growth-orientated sectors, so information technology, which typically support high evaluations. When we look at the cyclically adjusted PE ratio or price earnings ratio, often known as the CAPE, which is adjusted for inflation to take account for the market cycle, the US equity market has been above our estimate of fair value since 2020, aside from a brief sell-off in 2022. If we adjust for the factors I mentioned earlier, so the market concentration and that lower cost of debt, we've actually done some analysis where we adjust the CAPE/PE, and this analysis suggests that valuations may be 25% above fair value instead of 72% above fair value. And getting back to that new fair value may not require as much of a market correction as many expect.

Paul O'Conner:

Well particularly if earnings pick up significantly?

Matt Cho:

Yes, yes. So I mean that's probably the question. So depending on your time horizon, if we're thinking about short-term, if earnings hold up and economic growth hold up, those elevated valuations can be sustained, but over the long term it tends to be where valuations tend to be more dominant as a driver of equity market returns. I would say that, we'd argue, as I've sort of implied in the approach that we construct portfolios, there aren't really any good short-term market timing tools, and valuations are a famously poor one. The market tends to swing from overvaluation to periods of undervaluation while spending a fairly short amount of time in fair value territory. As it relates to our portfolios, we're focusing on longer-term forecasts. So if we think about our ten-year forecast for international equity, which incorporates US, the overall forecast for 10 years is 5.31% per annum. And for the next 10 years for Australian equities, we expect 5.39%, so not too dissimilar between Australian and international equities.

So in terms of our current allocations and splits between international Australian equities, we still feel comfortable where we sit and that they're positioned to provide strong risk-adjusted returns in the future. The last thing I'd probably say on concerns around overvaluations is it is important to think about it in the context of a portfolio. For example, our growth index fund. On a look-through basis, the exposure to US equities is 20% thereabouts. That's a lot lower than say the exposure to US equities in a misky world index of 75%. So you are minimising the impact of that potential market correction by it being in a multi-asset portfolio. It's the reason why you invest in a multi-asset portfolio is to diversify risk.

Paul O'Conner:

What are your views about the Australian economy going into 2025, Matt?

Matt Cho:

Our view is that Australian GDP is poised to recover throughout the course of 2025 after experiencing very slow growth. I think it was the slowest in the past 32 years in 2024, that's amongst some sticky inflation and interest rates remaining elevated, but we expect growth to be at about 2% for Australia in 2025. We think that improvement's going to come from rising real household incomes as inflation hopefully subsides, and expectations of rate cuts, and a potentially rebounding housing market. Obviously relative to other regions, inflation has been sticky, and I think to your point, Paul, what you mentioned earlier, a big factor in that has been the stagnant labour productivity. Our view is that that's really been driven by the fact that the market sector, so thinking about traditional sectors, mining, financials, energy, etc, has been pretty low in terms of business involvement and hasn't really grown.

On the other hand, the non-market sector, so that's education, healthcare, sectors that are tied to government spending have been expanding faster than the market sector. That shifts employment towards these non-market sectors, which are typically lower productivity, which then impacts overall productivity. So I think if you look at market employment relative to GDP over time, there's generally a fairly strong correlation or positive correlation, but if you look at non-market employment relative to GDP, that there isn't really a strong correlation. Given that the ongoing government support has primarily been for non-market sectors and business involvement remains lukewarm, we see the limited upside for labour productivity during 2025 and expect the labour market to remain reasonably tight, expecting unemployment to end the year at about 4.6% off the current rate of four. So given those persisting challenges of inflation, our base case is that the RBA won't enter an easing cycle until the second quarter of next year with a gradual and slow pace to follow.

So we expect the RBA to finish the year at three and a half percent. The other thing maybe I'll mention would just be the comments around China and the link to that economy and probably the historical alliance we've had. One of the questions is whether or not the policy stimulus we'll see from China will have a positive influence on our economy. Our view is that that would be limited and I think it's probably aligned to, the recent RBA Minutes actually discussed this, where for that to happen, you would need to see greater capacity in the mining sector where capacity is quite limited. In addition to the fact that the willingness to invest in improving capacity in the mining sector is not there. So not expecting any policy stimulus in China to have a significant impact on the Australian economy. In addition to the fact that it's maybe offset by any US tariffs that are imposed on China.

Paul O'Conner:

Interesting, your comments there, in the Australian economy and about productivity there, Matt. I guess my take-out is that productivity is driven by the private sector rather than the public sector, I guess, is reading between the lines in what you were saying there, is that a correct comment?

Matt Cho:

That's correct, Paul.

Paul O'Conner:

It's so underestimated, productivity, I mean there are two ways to grow an economy and to grow GDP. It's to get more workers on board, and Australia's been very good at migration, but also getting each worker to be more productive in their day, which is a productivity link. And I just think as an economy, we have not spent enough time focusing on improving productivity. But again, it'll be interesting how the adoption and the use of AI plays out over time. So Matt, you mentioned that Vanguard's, I guess, expectation for returns in equities Australian and international for next year, but what about the other asset classes?

Matt Cho:

Importantly, our outlook for returns are much like our portfolios, is rooted on our long-term expectations. Our return forecasts are derived from our Vanguard capital markets model, which is basically looking at 10 plus years in terms of those return forecasts. It's a model that uses historical data at a high level, looking at the relationship between risk factors, so economic data such as GDP, versus asset returns to regress and forecast what returns using a Monte Carlo simulation. Other important point about the model is it seeks to represent uncertainty inherent in forecasting by providing a range of outcomes. So the output of the model is a central estimate with probabilities around that. So the numbers that I provide you are our central estimate. If we're looking at asset classes outside of equities, so we talked about international and Australian equities, the other big portion of our portfolio is fixed income.

We do have a favourable outlook for fixed income, particularly over that ten-year horizon. Higher starting yields we have today essentially means that bond returns will be higher and it also allows investors to take advantage should interest rates and yields decline. This is what we're calling the coupon wall. It creates a symmetric risk return environment for bonds where the long-term case for bonds is really solid. So when you look at bond markets, interest rates are generally above the rate of inflation at almost all maturity levels. And what that means is it's this error of sound money that we keep coming back to. A positive real return after inflation. And we also think that's not just good news for bond investors, but it's good news for investors in a well-diversified portfolio, as bonds now aren't just providing those real yields, but there's a buffer for those yields to decline should there be market volatility, meaning bonds can act as that portfolio diversifier.

If you recall back in August, we did see a slight market correction off the back of some US growth concerns. You did see that the equity bond correlation become negative and bonds were really providing a buffer to multi-asset portfolios and really were a buffer within our diversified funds. So if you're looking at fixed income markets, we estimate for next year an 81% probability that, say the Bloomberg US aggregate as a measure, will provide a positive return next year. And that the negative returns really will only eventuate if you breach that coupon wall. So that's if the capital loss that you incur because of rising yields is greater than the income that you've generated from the coupons of the underlying bonds. So the risk to the outlook I guess for fixed income is really inflation. So if inflation increases and bond yields increase greater than our expectations, that's where you could potentially incur a loss in your bonds. But despite that, our ten-year outlook for fixed interest is very strong.

Paul O'Conner:

Markets have so far approved of the Trump re-election. So how do you expect Trump's second presidential term to impact markets? I made a couple of comments in my opening there, but do yourself or Vanguard have a view?

Matt Cho:

We, and again, we tend to take the long-term perspective. The markets have been strong in the second half of this year. There are a lot of variables to consider given the political climate in an election year, and it can make it difficult to design an investment strategy particularly around a single factor. We actually did research dating back to 1860 that found that there's no statistical relationship between the performance of a 60/40 portfolio, noting it's a US 60/40 portfolio in presidential election years and non-election years. Elections are events that generate a lot of headlines, but they shouldn't, in our view, adjust your investment strategy. Our view is, part of a successful strategy is understanding what you can control and what you can't and letting your emotions take the backseat. By maintaining perspective and being disciplined, you're typically rewarded. We also think it's a misconception that volatility is higher around elections.

Research that we conducted from 1984 on the S&P 500 actually showed that the annualised volatility in the hundred days preceding and a hundred days after an election is actually lower than the long-term average. The last thing I would say on this, Paul, is that as it relates to say policy changes, it can be difficult to navigate the uncertainty that they bring. So it's important for investors to keep in mind that policy proposals are just that, they're proposals. Comments, promises made on the campaign trail may look significantly different when they're eventually implemented, and even if they're implemented at all. So investors should be careful when adjusting your strategy based on headlines that relates to policy changes or elections. Again, we think it's about taking a long-term perspective.

Paul O'Conner:

I tend to think that also with Trump, he's a fairly, a vocal president and I guess to your point there, a lot of what he says is ultimately never implemented or it's actually structured under the institutions of the US. So yeah, you do need to take it, I think, a little bit with a grain of salt there that a lot of the commentary in the market around Trump. We've seen a huge growth in the number of private credit strategies available to investors, which certainly is not without cause for concern in my opinion, but what's Vanguard's views on private credit?

Matt Cho:

The fixed income exposure that we get within our diversified portfolios really focuses on investment grade fixed income across government and corporate bonds primarily. So there's no exposure to private credit or even high yield, but we recognise fixed incomes not a homogeneous asset class. There are multiple different sectors and sub-sectors and private credit's one that is becoming more popular. It is something that advisors do ask us about. It is a broad term. However, when we look at private credit, borrowers typically carry an elevated level of risk relative to traditional fixed income, maybe more akin to say high yield. And relative to traditional fixed income, they tend to carry other risks. So that might be higher illiquidity risk or maybe greater idiosyncratic risk. Our view is that these types of fixed income don't diversify in the same way that traditional bonds do.

Particularly where there is that greater sensitivity to equity markets and potentially allocating to them within your defensive allocation, may be akin to actually adjusting your defensive growth split, particularly where there is that sensitivity equity markets and during stressed markets. It's not to say that we think you should avoid these investments altogether. They might be appropriate given your circumstances, your objectives, or part of a well diversified portfolio as a satellite, but we think it's important that investors do their research, understand how these investments work and potentially the risk that they're taking, but in the context of our diversified funds, where there is that desire to maintain balance as well as an emphasis on cost, as I mentioned, these strategies are typically more expensive, traditional fixed income in the form of investment grade bonds remains the preference.

Paul O'Conner:

It is interesting, I guess, some of the comments you made there, Matt, and particularly, I guess, what resonates with me is the lack of transparency in private credit and the opaqueness around the credit quality. So it's interesting you made the analogy of comparing it to high yield and I'm sure there is a lot of sub-investment grade type of lending that's gone on, there may be better quality lending, but given the immaturity of this asset class, I think they're sort of what I was referring to about some of the concerns that I have over private credit that can play a role in a portfolio. But I find it quite difficult to do the research and analysis to get comfort with private credit strategies. And then also, I think to myself, in a significant economic downturn, some of those boutique managers offering private credit, the amount of time and resource to work through loans when they go into default is significant.

So, i.e., a lot of these strategies have not been tested through that cycle. So it is the caveat there that really to investors, spend your time trying to understand and working with the managers of various private credit strategies you're considering. Maybe finally then, Matt, how would you position portfolios, given all that you've said about the economic forecast and your asset class expectations and the outcome of the election, are there any slight tweaks, increases, decreases to allocations within the strategic asset allocation Vanguard's implementing in the multi-sector strategies you're managing?

Matt Cho:

No, Paul, so we believe our diversified portfolios remain well positioned given our economic and market outlook, particularly given that the outlook for bonds. I think importantly, our portfolios aren't positioned based on the next 12 months. Instead, as I've reiterated, their built on our long-term expectations, and that's what we base the SAA on that we think it's going to provide those enduring returns for investors. It's important to note that while we haven't maybe made a change to our strategic asset allocation on a year-to-year basis, the last major change we made was in 2017, we are constantly reviewing our strategic asset allocation. We do do an annual review, and that review always gets ratified by our strategic asset allocation committee, which is one of the most senior investment bodies within business.

In our minds, the ratification of the asset allocation to say it remains appropriate isn't an active decision to say, we think this asset allocation will still provide enduring returns for our investors. And what you can be ensured as an investor is if we do make a change, we're doing it because we think it's going to be material and improve those long-term returns for end investors. I think it's easy to get caught up in the noise on a year-to-year basis, and that's why we encourage investors to focus on what they control and really come back to those four core principles that I mentioned in the beginning. So having clear goals, setting a well-diversified portfolio, managing your costs, and maintaining a long-term discipline.

Paul O'Conner:

Matt, it's certainly been an interesting discussion. Certainly I guess from my perspective, having a long-term association of working with Vanguard and dealing with your products, I'm not surprised that to a degree nothing's changed, but it gets back to having that long-term focus, which for mine's avoiding market timing. And just being so well diversified across markets there in your portfolio. So I guess I also found of interest, the comments you made earlier too about the 60/40 portfolio. I do chuckle because I think every year in my 30-year plus years working in investment markets, I've always heard the line, the death of the 60/40 portfolio. So there's been a lot of people trying to kill it, but it still exists and it still seems to work soundly and for those investors anyway that are patient and continue to have that long-term focus. So I really do appreciate you joining us on the podcast today, Matt.

Matt Cho:

Thanks Paul. It's been great.

Paul O'Conner:

Thanking you. And to the listener, thanks again for joining us on another instalment of the Netwealth Portfolio Construction Podcast series.