InvestSMART's Balanced Portfolio: March Quarter Review 2021

•    The portfolio appreciated 1.40 per cent after fees in the March quarter.
•    No changes were made to the portfolio during the quarter.
•    The yield on the portfolio is approximately 2.40 per cent.
•    Since inception the portfolio has averaged 6.02 per cent after fees.

It was a slightly subdued quarter for the Balanced Portfolio with defensive assets suffering falls that where offset by the growth side’s surge. It’s rare to see a quarter of trade like the one we have just seen, and you need to put it into the perspective of your risk profile and your investment time horizon to understand that missing the surge from the growth side of the portfolio is not part of your long-term strategy.

We should address the fixed income side of the portfolio and we stress the following point – fixed income is one of the core asset classes of any investment portfolio. It provides a strong and solid foundation; its income component provides a consistent long-term income rate, and the capital component is majority backed by sovereign governments or tier-1 corporations.

But we also need to remember that fixed income, like any floating market, can be subject to short bouts of volatility. Its normal advantage is that these bouts of volatility are mild in comparison to its riskier peers such as equities and property but that’s not always so.

In the Balanced Portfolio we hold the iShares Australian Fixed Income ETF (IAF) for your Australian treasuries’ exposure. Its biggest holding is the Australian government 10-year bond and as this chart shows very clearly, the Australian 10-year bond was sold off in the quarter causing its yield to rise which saw IAF’s sell off mirroring that of the 10-year.

This fall was not isolated to just Australia. Internationally, treasuries suffered a similar fate and actually led to a debate over the merit of fixed income, with some even suggesting it’s facing an ‘existential crisis’ and that it no longer has a place for investors. This is disingenuous, as the same chart above shows the incredible positive movement throughout 2019. We even warned investors back then that that kind of appreciation was abnormal in the fixed income sphere and not to expect this kind of move on a long-term basis.

We are here to remind you of the same point but in reverse – fixed income will return. If we look at the Australian 10-year bond, its price is currently below its ‘face value’ (for more on the inner workings of fixed income, click here to view our fixed income series)

Furthermore, the performance of the Balanced Portfolio during this period needs to be looked at in the context of risk and your tolerance of risk. It also needs to be looked at in terms of your time horizon.

The minimum investment time horizon for a balanced investor is 4 years so if we compare the ASX 200 to the Balanced Index over that time, it puts the last quarter in perfect perspective as this chart shows.

The intra month and quarterly movements of the Balanced Portfolio are significantly less than that of the ASX 200 which is exactly what one should expect. The other advantage illustrated here is that the portfolio does have exposure to growth markets being the ASX 200 (IOZ) and the Global Index (VGS) meaning it captures the outperformance over its more defensive assets but is buffered from the falls risk markets are exposed to i.e., events like COVID-19.

It should also be pointed out that the Balanced Fund is diversified across asset classes, not just one asset class. We have seen several investors of late comparing diversified investments to single asset class investments. This too goes against a long-term strategy as yes there will be periods when single asset classes outperform such as equities, but the associated risk and the inevitable declines will lead to you breaking your strategy and missing your time horizon goals. 

Investors should continue to apply their personal risk tolerance to their investment goals and although the portfolio was flat over the past quarter, its overall long-term performance shows that it is one of the best investment options to absorb volatility in the market but outperform the single asset classes like cash.