Russell Investments Portfolio Series – Conservative (RIM0023AU) Report & Performance

The direct Australian equity portfolio underperformed the benchmark. A modest underweight to the strong-performing utilities space detracted from returns. Stock selection within the materials and energy sectors also weighed on performance, including overweights to Ampol and James Hardie.

Partly offsetting these positions was a nil exposure to Pilbara Minerals, which fell sharply over the period. Stock selection within the financials space also added value; notably an overweight to Suncorp Group. Within the fixed income portfolio, the Russell Investments International Bond Fund – $A Hedged outperformed its benchmark, benefiting in part from its credit exposure.

The Russell Investments Floating Rate Fund and global high-yield debt also outperformed. The Russell Investments Australian Bond Fund recorded positive absolute and excess returns over the period. Metrics Credit also performed well, with Australian loans continuing to generate income-like returns. Looking ahead, we expect higher levels of volatility to continue, with active management to play an important role in navigating through it. We expect to increase growth asset exposure on major market reversals and decrease growth asset exposure on market rallies. This is a very important time to remain flexible as there are competing forces related to inflation and growth. We retain the same themes as recent months, i.e. a preference for emerging markets over developed markets and overweights to both global small caps and floating rate credit.

The Portfolio typically invests in a diversified investment mix with exposure to growth investments of around 30% and defensive investments of around 70% over the long term, however the allocations will be actively managed within the allowable ranges depending on market conditions.

Global share markets made good gains in November, driven in part by hopes the US Federal Reserve (Fed) may soon pivot to smaller rate hikes amid speculation US inflation has peaked. The Fed raised interest rates by a further 0.75% early in the period after headline inflation jumped 8.2% in the 12 months to 30 September. However, subsequent data showed that headline inflation slowed to 7.7% in the 12 months to 31 October, which was the measure’s lowest reading since January and less than the 7.9% rise the market had anticipated. Compounding this were the minutes from the Fed’s November meeting, which revealed a substantial majority of participants judged that a slowing in the pace of rate increases would likely soon be appropriate. Stocks also benefited from preliminary data that showed consumer prices in the euro-zone slowed in the 12 months to 30 November, Beijing’s decision to begin walking back some of its COVID-19 prevention measures and easing Sino-US tensions. Australian shares also performed well, benefiting from the Reserve Bank of Australia (RBA)’s decision to continue raising rates by just 0.25%, easing inflation and strong gains across the major miners.

Global bonds outperformed in November amid softer US and European inflation figures and the asset class’s traditionally defensive qualities in the face of heightened geopolitical risks.

The portfolio returned 2.21%^ in October. Overweights to listed growth assets, i.e. Australian and global equities, contributed positively to performance. An overweight to extended fixed income assets also added value.

Global share markets made strong gains in October even as the world’s major central banks continued to raise interest rates in the face of persistently high inflation. Investors were instead encouraged by speculation that officials may soon pivot toward a less aggressive monetary policy stance given the typical lag effects of higher interest rates and the potential impact that sharply higher rates will have on economic growth. Share markets also benefited from a series of positive US and European earnings updates, as well as speculation that stocks, which have sold off sharply so far this year, may have reached the bottom. Australian shares also performed well, driven largely by the Reserve Bank of Australia’s decision to cut interest rates by less than expected despite uncomfortably high inflation. Government bonds continued to underperform against a backdrop of rising interest rates.

During the quarter, we diversified listed real assets away from Australian listed property by selling the Vanguard Australian Property ETF and buying both the Vanguard International Property Fund and the Vanguard Global Infrastructure Fund. Further, we added emerging markets debt via the iShares J.P. Morgan USD Emerging Markets Bond ETF. We did this to gain exposure to a superior income and extended return source relative to global bonds. Overall, the portfolio is aligned with its long-term asset allocation as we wait patiently for opportunities in this volatile environment.

Global share markets fell in local currency terms in the September quarter. Much of the decline was driven by further, aggressive central bank activity globally and growing recession fears. In the US, the Federal Reserve raised interest rates twice, with chairman Jerome Powell making it clear that interest rates will continue to rise until price stability is restored; even if it means tipping the world’s largest economy into recession. Elsewhere, rising consumer prices in the euro-zone saw the European Central Bank (ECB) deliver its first rate hike in 11 years in July; the Bank lifting its main refinancing rate by 0.50%.

The ECB followed this up with a further, unprecedented 0.75% increase in early September. Meanwhile, the Bank of England raised rates twice over the period and warned of steeper rate hikes ahead after UK inflation hit double figures in July. Stocks were also impacted by ongoing geopolitical risks and disappointing Chinese growth. Australian shares made modest gains despite the Reserve Bank of Australia raising interest rates three times over the period as it tries to curb rising inflation; investors betting instead that the Bank may need to slow the pace at which it tightens monetary policy if growth slows too quickly. Government bonds underperformed, with yields continuing to rise amid sharply higher interest rates globally.

During the month, we used derivatives to add some downside protection to the dynamic real return core strategy. Overall, the portfolio is aligned with its long-term asset allocation as we wait patiently for opportunities in this volatile environment.

Global share markets fell in August. Stocks actually began the month well as investors adjusted their US rate hike expectations in the wake of better-thanexpected inflation data. However, comments from several US Federal Reserve (Fed) officials – all of whom reiterated the central bank’s determination to do what is necessary to control inflation – saw share markets reverse direction midway through the month. Stocks were also pressured by some surprisingly hawkish rhetoric from Fed chairman Jerome Powell, who reaffirmed his bank’s commitment to maintaining its current pace of rate hikes and cautioned against easing monetary conditions too early. Meanwhile, sharply higher inflation in the UK and Europe raised the prospect of even more aggressive rate hikes from the Bank of England and the European Central Bank. Stocks were also impacted by the ongoing uncertainty stemming from the war in Ukraine, heightened Sino-US frictions and fresh Chinese growth concerns. Australian shares rose as investors looked past yet another domestic rate hike and bet instead that the Reserve Bank of Australia may need to slow the pace at which it tightens monetary policy if growth slows too quickly. Government bonds were weaker, with longer-term yields rising amid expectations of further interest rate hikes globally.

The portfolio returned 3.06% in July. A rebound in credit contributed positively to performance; notably global high-yield debt and floating rate credit. In contrast, stock selection within equities and an underweight to government bonds detracted from overall returns.

Toward the end of the month, we introduced a couple of new strategies to further diversify the portfolio. Specifically, we added global property and infrastructure to diversify away from our Australian property exposure. Overall, the portfolio is aligned with its long-term asset allocation as we wait patiently for opportunities in this volatile environment.