Empire Financial Group > Blog > Advice Team > Investment and Empire Managed Portfolio Report: April – September 2022

Investment and Empire Managed Portfolio Report: April – September 2022

EFG September 2022 Update
  • EFG’s portfolios continue to deliver solid results in a difficult investing environment.
  • Equity markets have been bumpy in recent months with the Australian share market a rare bright spot amidst a strong reporting season
  • The value of bonds fell in August after a very strong July

Portfolio Update

 

It has been a bumpy ride for investors in recent months with sharp falls in June followed by a strong rally in July and mixed outcomes in August.

The EFG managed portfolios returned as follows in this difficult period for markets:

June 22

July 22

August 22

Balanced Income

-4.0% +3.5%

-0.9%

Balanced Growth

-4.6% +4.3%

-1.3%

Growth

-5.9% +5.5%

-1.4%

The past year has been a difficult one for investors with many markets across both equities and bonds falling significantly in the past 12 months amidst a backdrop of the highest inflation in decades, rising interest rates and geopolitical conflict.

The table below compares the performance of the Empire managed account portfolios against an appropriate market benchmark.

12 Months

To End

August

Equivalent

Morningstar

Target

Allocation

Index Return [1]

Relative

Performance

Balanced Income

-5.2% -8.4% +3.2%

Balanced Growth

-6.4%

-8.4%

+2.0%

Growth

-7.0% -7.8%

+0.8%

At Empire Financial Group our investment philosophy is to our clients’ portfolios have been positioned with a quality-growth bias as our view is this is the most suitable way to deliver long term consistent excess returns. This approach has detracted somewhat from returns in 2022 as some of the strongest performing investments have been value-oriented energy and materials investments, the type of asset not typically held in a large weight in our client portfolios.

As flagged in previous investment updates, we have been concerned for some time about the risk of rising interest rates and the potential impact on bond markets and resulting negative returns. We have accordingly carefully positioned portfolios away from interest rate sensitive investments with careful fixed income portfolio configurations. Recently we have began to ‘normalise’ our approach in this sector for clients.  Our approach to fixed income portfolio construction has added significantly value by protecting our clients from the worst of the bond market rout in 2022.

We believe it is prudent to hold some diversifying exposures in client portfolios such as property, infrastructure, and alternatives. Overall, these allocations have added to investment performance.

Market Summary

 

The S&P ASX 200 Accumulation Index rose +1.2% in August. This was a rare bright spot driven by a strong Australian earnings reporting season whilst global markets generally fell. The US S&P 500 was down 4.1% and the MSCI World ex-Australia Index was down 4.2% over the same period.

The RBA increased the cash rate in early September to 2.35% and has now raised rates by 0.50% for 4 consecutive meetings.  An Australian cash rate at this level was last seen in 2014 as the RBA aims to reduce inflationary pressures, as inflation hit an annual rate of 6.1% as of June 2022.

Bonds experienced negative returns in August. The Australian government 10-year bond yield rose from 3.1% to 3.6% and the US 10-year Treasury yield rose from 2.6% to 3.1%. Rising bond yields result in falls in interest rate sensitive fixed income exposures, most notably government bonds.

Markets for the remainder of 2022 are likely to be focussed on:

  • The slowing global economy as interest rate rises start to take effect
  • The resolve of central bankers to keep monetary policy tight to continue to fight soaring inflation which may hit double digits in the developed world in coming months
  • The energy crisis across Europe caused by Russia’s invasion of Ukraine combined with government responses and the difficulty of getting alternatives such as nuclear and coal to work effectively

[1] Source: Morningstar Balanced, Morningstar Growth Target Allocation Indices