Kej Somaia, Co-Head of Multi-Asset Solutions Kej outlines the importance of dynamic multi-asset portfolios when investing. We discuss inflation, bond yields, active vs passive strategies, and ethical investing. Kej also shares his thoughts on the next 10 year returns for fixed income and equities given the strong returns of the last decade. 

Transcript

Paul O'Connor:
First Sentier Investors is a global asset management business that has invested with a long-term outlook for more than 30 years. As at December 2020, it manages 228 billion across equities, fixed income, infrastructure and multi-asset solutions, with a commitment to responsible investment. Kej Somaia has been with First Sentier Investors since 2006 and has over two decades of experience in investment roles. Kej is responsible for the development and management of the multi-asset portfolio construction as well as tailored investment solutions. Previous roles included responsibility for the asset allocation and inter-funding processes, and prior to joining First Sentier Investors he worked as a performance analyst at JP Morgan and the Commonwealth Bank.

POC:
So perhaps for starters, can you provide the listener with a summary of the asset allocation you and the multi-asset team employ in the First Sentier diversified portfolios? And I assume all strategies start with that neutral asset allocation, perhaps a strategic asset allocation as the base position, and then essentially potentially tilt those exposures pending whether it's a real return or a strategy that is actually employing dynamic asset allocation.

Kej Somaia:
Sure. I think that's a fair summary. I mean, maybe if I can begin by just describing what we manage in Australia. So we have a suite of publicly offered multi-asset funds which are stemming from traditional balanced. We have four funds across the risk spectrum from conservative funds that have 30% of equities through to high-growth funds with 100% of equities, and we also have an objective based strategy which is the real return fund that has an explicit target of inflation plus 4.5% per annum over rolling horizons of five years.

KS:
But as you mentioned, both introduction and in this question, there are two distinct engines in how we build our view of return drivers and portfolio positioning. And what we describe as a neutral asset allocation is the foundation and core for all our products, both strategic and objective based. Perhaps maybe if I explore that a little bit in terms of, I guess, how we build our fundamental view of the economic climate is by discussing and utilising a number of simulation tools to draw thousands of scenarios of economic parameters. So I'm talking about things like inflation and cash rates, long term yields and earnings growth. And then we use these as inputs to derive implied returns for various risk premia or market return often emerging markets.

KS:
We then use a bunch of proprietary tools that we built in-house with the founding members of the team to help design asset allocations based on the various objectives. I guess there's probably a key distinction between traditional balanced funds and objective based, in that balanced funds are often dictated by their growth and defensive splits, and so risk is almost a function or an output of how those allocations are built, as opposed to for our objective based strategies, more explicitly managing risk using dynamic asset allocation.

KS:
And maybe another comment you made about dynamic asset allocation might be worth highlighting. I mean, often it's probably people can be forgiven for thinking dynamic asset allocation is about chasing returns, but at least in Australia the genesis of dynamic asset allocation has been post the financial crisis in 2008 when people started to focus a little bit more on how do we minimise risk. So we think about dynamic asset allocation as very much about risk management. So the shorter term opportunities that we're looking to enhance for those portfolios is really about trying to add different return drivers to the portfolio.

KS:
So we're looking at things like momentum or carry, which are also risk premia, but they provide a slightly different approach to how the traditional balanced portfolios.

POC:
Would it be fair to say there, Kej, that your focus on dynamic asset allocation is a bit more about risk mitigation than it is adding to returns in a portfolio? Or is it a balance of both?

KS:
Look, it's definitely a combination of both, but really, as I said, the genesis was around the financial crisis. And the key thinking here is really around if we can curtail those significant draw downs that occur during equity market falls of 30% or 40%, then actually you don't need to be adding that much more risk to deliver on your objective if you can take out some of those tails. And we see the suite of products sitting on a lineup servicing different people, so definitely for those just starting out on the accumulation journey, traditional balanced portfolios can still serve a purpose because they definitely have time on their side, so they can actually ride out some of these volatile periods, where something different occurs if you approach the end of that accumulation phase, number one, you have more capital at risk.

KS:
And number two, your investment horizon begins to shorten. So you really can't withstand a significant crisis right before you're about to retire. So we see our objective based strategies about servicing those people towards the end of their accumulation and entering the retirement phase. So we think it's more of a continuum where they can sit on the platform and then allow the investors to choose the right product.

POC:
It certainly makes sense, those comments you've made there, Kej. And particularly around trying to avoid significant market draw downs. So I think they're probably... have the biggest, longer term impact on returns, if that can be managed and mitigated in any way. So yeah, it certainly sounds rational anyway, the approach that First Sentier are taking to more active asset allocation and dynamic asset allocation. So we might've touched on a few of those already, but in terms of portfolio construction, what are the most important considerations when investing across such a large global opportunity set?

KS:
Yeah, it's a good question. And if I think back to when we were developing our objective based strategies, we did actually take the approach of starting with a blank sheet of paper, as opposed to what can we do to enhance existing products. And I guess some of the key things that we thought about as major considerations back then was perhaps firstly linkages to the objective. And I mentioned we have those CPI plus rate inflation, plus objective. So we began by actually analysing the asset universe and taking it down a level in terms of sub-asset classes to understand what are the inflation characteristics for the portfolio.

KS:
And it is perhaps surprising with some of the sub-sectors within Australian equities that you'd expect to have high correlations with inflation. Obviously, things like both metals and oil, and energy typically have that, but even within inflation linked bonds, there weren't necessarily significantly high correlations with inflation over the short term. Over the long term, yes.

KS:
And I will caveat that obviously in Australia we have a three month inflation prints, but there's a significant enough history to draw some statistical conclusions. And the other interesting area was commodities for us, so we actually took the opportunity to introduce direct exposure to commodity prices in our portfolio. So that was definitely one as a starting point. I think the other key consideration is the breadth of opportunity. You want to diversify across and within asset classes, but typical fund to fund making more active asset allocation changes is a bit of a blunt tool. You tend to only have five, six, seven allocations to be able to make those calls.

KS:
So we think it's important to take it a level down and think about regional and country exposures, and in some instances, sector exposures. And the challenge with doing that is you actually need to build a portfolio from the bottom up and most multi-asset strategies aren't designed for this. So that was something we took the time to build the pipes, for lack of a better term, to allow us to do that. And the third one was liquidity. If we're going to be more dynamic in our asset allocations, then transaction cost is a significant consideration. With our fund of funds moving in and out of underlying sleeves or funds can cost as much as 20 basis points each way.

KS:
So if you're going to have a portfolio idea to add value you tend to either have to hold it for three years to justify those transaction costs, or it needs to be adding significantly more value. Whereas when you open up the opportunity to use derivatives to tilt the portfolio, that frictional cost can come down to one basis point. So it increases the ability to reflect more research and hold positions for shorter timeframe. And perhaps if we've got time, maybe one more comment is... yeah, once you start moving the portfolio around things can get complicated very quickly.

KS:
So we thought it was very important to have a definable and measurable risk budget for how we implement those ideas. And so you need to ensure that when you're adding a number of ideas they're not swamping the core allocations that you've built in the first place. So yeah, that can get quite quantitative to ensure that it's consistent and repeatable, but luckily we have a couple of math PhDs in the team to help us with building some of those tools. So yeah, that's probably the four main areas that we thought about when designing it.

POC:
Yeah. Well, again, it makes sense that you certainly need to have a strong framework in terms of running a diversified portfolio. And I guess your comments too, around portfolio administration efficiency, trying to minimise transaction costs and potentially thinking about tax outcomes, et cetera, can certainly add a lot of value in portfolios over the longer term. So it sounds like that, well, I guess First Sentier has got a long history in running diversified portfolios there, so it sounds like it's just... yeah, the team is just continuing to build out the capability.

POC:
We've seen both the Australian and US 10 year bond yields rise this year, which is certainly increased market discussion on the likelihood of a spike in inflation. What are your thoughts on inflation and how can you prepare diversified portfolios for it?

KS:
Look, inflation is obviously a hot topic. If I think about this time last year in the first lockdown, the consensus view was probably that inflation would be low for an extended period of time, and perhaps even there were fears of deflation at that point, and the consensus view today has almost completely changed. So Q1, 2021 we're seeing markets pricing inflation, perhaps at pre-COVID levels. And we've seen this as perhaps the explanation for the sudden rise in bond yields in recent things as well. I guess what I'm trying to highlight is the contradictory views and the fact that predicting inflation has always been a very difficult, particularly over the last few years. Typically low unemployment would be expected to result in inflation, at least that was the theory I was taught at university, and the backbone for central banks. But that seems to be broken.

KS:
Over the last few years there's been a number of explanations offered up for why that might be the case, but the pace of technological change is one of the key factors. And thinking ahead, I think the rate of change in technology has not really changed in 2020. In fact, perhaps the pandemic has accelerated a number of shifts in things like eCommerce and other sectors. So we think this could continue to keep a lid on inflation, particularly wage inflation over the coming period. And I guess the other key thing here is central banks.

KS:
The recent guidance by most central banks, will remain anchored at zero levels for an extended period of time, which to me suggests that they're actually still more worried about deflation than inflation. And in fact, they've stated that they're happy to let inflation run hot, for lack of a better term, over the short term. So we don't anticipate inflation being much higher than the average targets the central banks have over the period ahead, but nevertheless, this is a sort of risk that we need to think about in our portfolios.

KS:
So particularly when we have a real return funds or an inflation plus objectives, these are things that we need to think about, particularly around a sudden rise in inflation. I was just going to add just to some of the things that we think about that works in terms of the portfolio.

POC:
Yeah. Look, I'd be interested in understanding how then you can actually prepare a diversified portfolio. Obviously there are sort of some assets that I guess have a higher correlation to inflation, and commodities you mentioned, inflation, your bonds. But how's First Sentier thinking about that issue?

KS:
Well, exactly. You're hitting the nail on the head. I mean, the common approaches even equities over the long term will trigger a good protection against inflation, and property, but they do require a longer term view. So over the shorter term we have been switching our fixed income allocations to inflationary bonds and particularly as we're being defensive. Some cash allocations as well that we've moved to more floating rate exposures. And the key one that I think is a differentiated class has been commodities. Commodities do have the highest correlation with inflation in the short term.

KS:
We've seen significant recovery in oil and copper as the global economy is expected to re-instil pre-COVID levels, and even things like precious metals, gold may finally get its mojo back. So we have used gold in the portfolio as well as a potential inflation hedge in the portfolio. The key thing here is that we can be quite dynamic, so having a structural allocation to commodities wouldn't have been that positive over the last few years, but in periods such as we're in right now, adding them for periods of six to 12 months can be helpful whilst we did some reconnaissance on that.

POC:
Yeah. It is a difficult, I guess... and in perfect science, trying to inflation proof a portfolio, but it's interesting, your comments there, around commodities. The obvious, I guess, outcome of this spike in inflation... great yields. And I guess with central bankers continuing to employ very loose monetary policy and openly stating that they want to keep the cash rates and two year yields on their bonds at historical low levels. So have you got any view on potential rises in yields, and are we starting to see that in terms of interest rates moving higher and starting to normalise?

KS:
Look, as we mentioned, there's been a lot of talk because we've seen a sharp rise in the longer terms rates more recently. I would comment that a more meaningful rise in rates will be in stark contrast to the regime that's been in place for the last four decades. We've yields over that period. So I think perhaps even if we are seeing a change in regime, there'll likely be this before we see a major new uptrend in the opposition direction.

KS:
These levels, more static portfolios do have higher duration exposures because they take a benchmark exposure. So it doesn't take a significant move to hurt portfolios, but is something that we're thinking about within our traditional balanced funds, is what's an appropriate benchmark. Is it still the Osborne composite, given that it's got a duration approaching six years? Or can we look to try and tailor that and reduce some of the duration exposure in the portfolio.

KS:
In terms of our expectations, we are building in a normalisation of rates into our forecasts. However, we're applying a much slower conversion to these equilibrium levels than would have been seen in the past due to the stance of central banks. And that means that in turn sees us hold a slightly lower target duration level than we have been holding historically. The key thing here is that things are changing dynamically, especially when you're at a turning point in perhaps a longer term trend. So we actually take the discipline of viewing our fundamental ideas every six months.

KS:
It's not necessarily that our view will change, but we do think it's good just to plan to test those ideas. And also, the other thing is to capture the potential repricing that can take place in markets, as we've seen quite rapidly over the last 12 months in particular.

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POC:
Before we bring you the second part of this chat, a little bit about who we are. Netwealth is an ASX listed company established to help Australians take control of their financial futures with a wide range of super and investment accounts, a huge variety of investment options and market leading online tools. We can help you manage your wealth your way. Partner with us to see wealth differently and discover a brighter future. Visit the Netwealth website to learn more and get the PDS, which you should read before making a decision. Products issued by Netwealth Investments Limited.

POC:
Yeah. Well, it certainly will be interesting how, I guess... yeah, you've touched on it, but we've been in almost a 40 year bull market for bonds, and we've certainly hit the lows where we're hoping, and we don't think they can go any lower, the rates. But it will be interesting that you are keeping your mind open to that potential turnaround there, and an increasing yields and interest rates there. But it's a challenge that we all face, really, trying to pick when or how that will occur.

POC:
But I guess currently one of the challenges is actually running a fixed income portfolio, given bond yields are so low and I guess credit spreads have been compressed due to the bond yields being so low. So what are some of the methods you can use currently in the low interest rate environment to increase the return for investors who are really preferring not to take on excessive risk? And how do you trade off increasing risk in fixed income portfolio versus that, I guess, traditional core role that it's meant to be a defensive play in a diversified portfolio?

KS:
Yeah. So credit does indeed take you up the risk spectrum within the corporate structure towards equities, so that can be a concern for risk averse investors. And typically high yield bonds have a positive correlation with equities and tend to behave like equities in risk off market. So it's definitely something that we view as a total portfolio decision as opposed to just within fixed income. The one thing I would say within corporate bonds is that they typically do have a shorter duration than long term government bonds, and this is some area we can offset some of the risk within the fixed income bucket.

KS:
The reality is there are no new mystical asset categories to consider, and I probably can't avoid suggesting that crypto is not part of our universe, even though that was a lot of the debate recently. So the way in which we think about it is more the fact that we have flexibility to adjust our overall asset allocation, which means that there is some scope for corporate bonds, but we do look at it in the context of equities. So maybe just to talk through an example in Q2 of 2020, so we're now back into the eye of the first lockdown. We'd reduced our exposure to equities through much of Q1 and we were down as low as 30% equities in our portfolio as we went into the lockdown.

KS:
But obviously with a CPI plus 4.5% objective, we still needed to increase the return in the portfolio. So we saw credit spreads particularly in the high yield, almost 800 basis points over the equivalent government bonds. And statistically, this has always been levels in which high yield has delivered positive returns for the period ahead. So we thought it was an opportunity to increase the yield in the portfolio, particularly given the central banks were providing a lot of liquidity support that had caused some of the repricing in credit markets at that time.

KS:
But the way in which we did this was with much lower exposure equities, as I mentioned, it was only 30% equities. So that allowed us to take advantage of the higher spreads, increase the running yield of the portfolio, but ensure the overall risk of the portfolio was not compromised. So I guess my takeaway here is that there's no new asset classes to consider, but I think it's really important to start to become flexible around how you allocate to the different buckets within your portfolio, and ensure that as you do go up the risk spectrum within fixed income, that you're looking to reduce some of the risks.

POC:
Given what we've been talking about with the pending or looming potential rise in inflation and bond yields, aren't traditional bonds still defensive today? And does duration have any role to play in a diversified portfolio? And how do you think about managing interest rate risk in the First Sentier diversified portfolios?

KS:
So as I mentioned with our traditional funds, we do have to manage around a benchmark, and we do give some scope for the underlying active managers to manage around that. In terms of the portfolio, does it have some more flexibility where you could actually move away from fixed income allocations. We do actually still see a diversification benefit from high quality fixed income assets and continue to expect a low or negative correlation in periods of extreme volatility.

KS:
And the reason for that is, I guess there's been much talk in 2020 around the possibility of negative rates in Australia and New Zealand, which puts a question mark on fixed income assets. That increases the opportunity cost to hold them. But we did start to look at some of the offshore markets. And markets, just Germany, Switzerland, Japan, actually all had negative rates coming into the start of 2020. And interestingly, during the equity draw down of Q1, 2020, we saw yields fall further and prices rise.

KS:
So the bonds did provide a positive return and continue to hold their existing relationship between equities and bonds during sharp equity sell off. So that relationship did hold, but the way in which we're using those now is much more of a barbelled approach in the sense that now we would think about adding duration through, I suppose, long duration assets. So you're using less capital than you would historically to give you that duration diversification.

KS:
And then as I mentioned in the cash allocations, taking much more exposure to floating rates exposures so that we can move as rates rise. And I think the key thing here, again, is that the difference that I have today versus 10 years ago is that we're not beholden to a typical benchmark, and that's one of the key issues that we see for typical balanced funds that are managed against market capital benchmarks that continue to have to hold. Longer duration, but also across the entire universe, and not be able to set this barbell approach that we're doing right now.

POC:
Yeah. Well, I guess the movement of a lot of the more active asset allocation strategies to having an absolute return type of investment objective, a bit like your real return funds. It sort of does, I think, in many ways free up the mindset of a manager of a diversified portfolio there, and you can move away from just slightly incrementally moving the portfolio away from benchmarks to actually thinking about asset exposures in an absolute sense in a portfolio. So it's certainly starting to evolve and I think it's creating a better outcome over time for investors there.

POC:
So what's your thoughts on the returns from fixed income and equities over the next 10 years, and particularly compared to the strong returns we've all enjoyed over the last 10 years out of both these asset classes?

KS:
You're exactly right. I mean, this trend of capital market returns across both the asset categories have actually seen, each time we write our process, a slow grind, lower on expected returns given those outcomes. So the most extreme of that we've seen in recent years, so that does put a challenge to hitting objectives with a large suite of the asset categories that can't achieve that return. And in addition to that we've seen cash rates fall.

KS:
So yeah, for those that a cash plus objective, then at least that's moving in conjunction. But for us, we manage inflation plus outcome. And in Australia, we've enjoyed real returns from cash for a number of years now, which isn't there. And in terms of, I guess, moving beyond our own expected returns being lower, if you look beyond our own views and look at widely observed measures such as the or cyclically adjusted price earnings ratio, it's a bit more of a threat to it. It's hovering at levels in the mid 30s.

KS:
And this measure is... I don't think it's a timing tool, but statistically the expected returns for equities five and 10 years beyond become much lower. So the takeaway is that investors have enjoyed strong returns from balanced portfolios for the last couple of decades, and we can't expect that going forward. So I guess the next question is what can I invest into? I guess the first thing you could do is do nothing and simply just accept lower returns, and higher volatility.

KS:
The next thing you could do is increase risk, so if you have fixed buckets you could go up the risk curve, as we discussed earlier, around credit or high yield and fixed income, and moving more into higher yielding or higher earning equities into emerging markets. But you do lose a lot of diversification in your portfolio. Another idea might be just to add alpha or active management, so you could introduce more active management in various sleeves of the portfolio, or even allocate more to alternatives to try and diversify away from just market returns.

KS:
Lastly, and perhaps not surprisingly as a multi-asset investor, we think about asset allocation, and we think that being able to manage your asset allocation dynamically from a macro top down perspective is probably the most appropriate way to navigate the markets going forward. Yes, we've seen lower expected returns, but I think we're also seeing higher volatility, and that volatility can turn investors off, but actually from a dynamic asset allocation perspective, that volatility provides the opportunity to rebalance your portfolio.

KS:
I mean, if you think about this version of returns around the financial crisis was as high as 60% from the best performing to the worst performing asset class, and most people at that point would have seen that as an opportunity to rebalance their portfolios. Well, even in periods of low volatility in 2017, '19, we saw dispersion of returns as high as 20%, 25% between the best performing and the worst performing asset classes. So we think there's always opportunities to rebalance your asset allocations in markets such as these, so that's the way in which we're approaching how to deliver objectives.

POC:
Well, again, very, very rational comments I think there, Kej, based on, and you touched on it earlier in the presentation around the work that Brinson did around the main driver of returns in a portfolio. And I guess at times I do shake my head when I see the obsession with trying to pick the right equity or the right individual stock in a portfolio. And I think to myself, "Gee, I wonder if that time would be better spent focusing back on the asset allocation?" Which will have a far bigger impact on returns than getting Security A over Security B correct in an equities allocation in a portfolio.

POC:
So yeah, it's certainly positive to hear you make those concluding comments there, I think, around the asset allocation piece. I can't really have as a guest on the podcast series without asking you about the active versus passive strategies. How do you allocate to active and passive in the various asset and sub-asset classes in your portfolios?

KS:
Well, look, I mean from a multi-asset perspective, and I say this comment sitting within an investment house of largely active managers, I'm pleased to say that actually we can be a little bit grey. We can have a little bit from column A and a little bit from column B. And the key reason for that is to deliver on I guess the active tilting of asset allocations, as I mentioned before. We'd like to do this more frequently and that means that actually passive allocations can be quite useful in that context. So active management and passive management has been a debate, goes on forever, and it typically moves in cycles like many things in finance.

KS:
And periods of higher volatility and extended bear markets is when active management tends to perform well. But over the last few years it would be fair to say that passive allocations have been able to deliver on most peoples' objectives, but we think that's going to be a challenge going forward for a variety of the reasons I've mentioned before. So one of the things I do find interesting is that a lot of people out there using passive strategies are actively making asset allocation decisions, so invariably everyone that's allocating to ETFs, that become an asset allocator.

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KS:
And I kind of describe them as closet active managers whether they realise it or not in terms of those decisions that are being made. And as I said, we have the freedom to use both. When we think about a broader allocations through Australian equities or developed global market equities, we typically build those through passive allocations, and then that gives us the flexibility to tilt those allocations more frequently. And we use that hugely. It becomes important for that reason because if you were to adjust allocations using futures, but have an active underlying sleeve, then actually there's a basis risk or a difference in allocations between what an active sleeve is doing and the futures contract.

KS:
So inadvertently you can introduce other risks into the portfolio if they're not built on passive baskets. And obviously the transaction costs become much more lower, so which is actually an important consideration, as I said previously. In terms of active sleeves, we have the freedom to use them where we think there's value add, so for less efficient markets such as small cap equities, we actually use our internal Australian equities team, also where it's impractical to fully replicate the market. And we want high levels of diversification, we can use an internal active managers such as global investment grade credit. So those are areas where we've added active management.

KS:
So even in cash management, we're one of the largest cash managers in the country, it would make sense for us to take advantage of that as well. So this is something that we review as part of our six monthly review of the allocation, both the allocations themselves, but also how we're implementing the allocations. So in summary, both passive and active exposures do have a place in our portfolio.].

POC:
Yeah. And I think it's important for the listeners there to consider the comments you made there, and particularly around whether you have some level of conviction in being able to allocate to... Or firstly, that an asset class has more potential alpha available, because it's less efficient. And then secondly, can you actually find an active manager that you have a high level of confidence can take advantage of those alpha opportunities? But as you say, it's a changing landscape, there will be times when active is outperforming passive and vice versa.

POC:
And I guess as I get older I think it's a bit like the chicken versus the egg debate there, whichever came first. But yeah, particularly when markets are in periods of high volatility and there's been selloffs, some, I think the investor really needs to consider that allocation to active managers. Almost every interaction I have with a fund manager these days involves responsible vesting in ESG, and we're seeing such a dramatic growth in managers genuinely including RI and ESG overlays in their portfolios. So what are your thoughts on the latest developments in responsible investing in the multi-asset space? And has anything really changed about your portfolios as a result?

KS:
Look, it's definitely becoming more and more of a theme, and our clients, both in the wholesale and institution space, they're asking a lot more questions about it. As a firm, we've been thinking about responsible investing for a long time now and we have the exposure to our active managers within the firm to get some ideas there, but multi-asset has been a place where it's a little bit more difficult to reflect all those views. But one of the things for us is that I mentioned the fact that we have a bottom up portfolio construction approach.

KS:
The genesis of this, as I mentioned, was really about efficient portfolio management. But there's a positive by product of that, and that's the ability to tailor allocations. So if I think back to 2018 when we first started to apply some simple exclusions of things like tobacco stocks, ammunition stocks, then the other advantage of holding the underlying securities directly meant that, actually, we can take a proactive approach to engagement through proxy voting. We're a large team for multi-asset, of 10, but we're a small team in terms of being able to take active management, a list of 1,500 stocks.

KS:
So we've adopted the service in 2020 to link on their ESG policy guidance, so that's how we apply our proxy voting for a number of the securities that we hold underlying. But more recently we've extended this further in terms of thinking about our ethical, more values based themes in terms of exclusions, and extending beyond just simple exclusion, tobacco. And that's something that we've started to implement in our real return portfolio as recently as December, 2020.

KS:
And also from an engagement point of view, we've adopted sustain-alytics to help us with thinking about some proactive engagement we can have with underlying companies. So this is something that is going to continue to evolve. I think, as I said, because of our ability to implement directly, we're probably ahead of the curve in how this is being reflected in multi-asset portfolios. And also, it gives me confidence that as the thinking evolves in the ESG space, the portfolio itself will continue to be able to evolve as well rather than the traditional balanced funds that have the restriction of allocating to underlying managers, which might not have a coherent approach to ESG across each of the sleeves.

KS:
Whereas, I think for our objective based strategies this will be something that stands out as a progressive approach to ESG within multi-asset for our-

POC:
I'm glad to hear you are thinking about it, because it's certainly being so well received amongst, I think, the financial advisor community and also the retail investor there. And it is, it's something that is evolving there, and I guess it's like all investing there, and active investing particularly, that it's not set and forget. We're not perfect at it, but we continue to work together, and I think the learning and experiences tend to add on to each other. And I think, yeah, it will very much evolve over the next three or four years, I think, ESG there.

POC:
But certainly positive to hear what First Sentier are doing in that space. Finally, I'd just be interested that given that you offer a number of diversified strategies from more the, I guess, longer term benchmark relative neutral asset allocation, to real return and dynamic asset allocation, which of these are receiving the most attention from investors?

KS:
Yeah. Look, the diversified strategies have been performing well for the reasons we spoke about earlier, so in a market where there's a lot of uncertainty, we can see some interest in those. And also, across our suite of products we've recently had some recommended ratings, so there's definitely interest across the board. But I would say that most of the conversations I'm having more recently are around real return strategy. Up until now we've been running this for seven years, and we've been using it for our internal clients and also for smaller institutions.

KS:
A lot of small institutions have a inflation plus objective, and up until recently they've often been running in a strategic asset allocation mindset. But as we have conversations with their investment committees and boards, they are thinking more seriously about some of the structural exposures they have to an interest rate risk through duration in a typical SAA framework, and do start to see more the flexibility of our real returns strategy. So we're starting to see a lot more interest there. And I'm also pleased to say that now we're taking this out to the wholesale and retail market, and in fact Netwealth is the first place that we're offering this strategy, the real return fund.

KS:
So we're very glad to be part of the Netwealth platform now and we'll look to continue to roll that out over the course of the year ahead. But you might see more of us out there as we explore the wholesale retail market and take this strategy for them as well.

POC:
Excellent. Well, I certainly wish you all the best with that. And I think it's a strategy that potentially could be very well received by many Netwealth clients there. So on that note there, Kej, I'd like to thank you very much for joining us on the Netwealth Portfolio Construction podcast series. I think it's certainly been an interesting and entertaining discussion this morning, and I think you've made some really valid points there, that all of us as investors of diversified portfolios need to consider, and whether that's around inflation and how to actually manage a defensive portfolio, but also add some inflation proofing with an eye to the future.

POC:
But also then how you actually think about asset allocation and implementing it in the various range of First Sentier diversified strategies. So I really do a appreciate the time you've spent this morning, so thank you very much there, Kej.

KS:
Thank you very much, Paul. I appreciate it.

POC:
And to the listener, thank you very much for joining us again on the podcast this morning. I hope you've got a fair bit out of this morning's discussion with Kej there. I wish you all the best for the week ahead and I'll look forward to joining you on the next instalment of the Netwealth Portfolio Construction podcast series.