Are we there yet?
The eyes of the financial world remain squarely fixed on inflation and the response of central banks. As we have highlighted in previous editions of this newsletter, the pace of the return of inflation to target range remains the central figure which will drive economic outcomes through 2023 and into 2024.
And our Reserve Bank – even in pausing for a second consecutive month – are by no means suggesting that their job is done. They are looking for clear, decisive movements in a range of economic data before they permanently – for this cycle at least – take their foot off the pedal and call ‘peak’.
You could mount an argument that we are at ‘peak’ of this cycle, the centrepiece being the June inflation print which came in softer than forecast suggesting we’re charting the right course for inflation to return to target range within what the RBA describes as a ‘reasonable’ timeframe.
That only speaks to one data-point in isolation however. While goods price inflation has eased, services price inflation is rising briskly. As is rental inflation, which remains elevated, with the RBA forecasting that inflation will remain above its target band until 2025. Couple that with the resilience in the unemployment print, which remains anchored near 50-year lows, the better view therefore – at least in our opinion – is that we’re not quite there yet in this hiking cycle.
Investing for inflation
This makes investing for inflation – and addressing its impact on portfolios – as critically important as ever. So how to best tackle investing through a period of high inflation? A period which may also bring rising interest rates, elevated volatility in markets, and a challenging macroeconomic environment.
Well, a carefully selected portfolio of assets is the right place to start. A portfolio of assets which are helping you achieve your investment outcomes, and speaks to your risk appetite. As the early onset of elevated inflation emerges, review and refine your investment goals and adjust your portfolios to suit.
If you are an income investor for example, consider whether you have allocations to variable rate products which can move upwards in a rising rate or inflationary environment, ensuring your income isn’t going backwards in real terms where combined your portfolio returns are being outpaced by inflation.
If you have an allocation towards growth assets, consider how they might perform – and how they have historically performed – through a period of high inflation. Through periods of volatility, some growth asset classes – such as shares – can go into an initial period of sell-off before a period of aggressive buy-back (i.e. market volatility!). Consider whether your investment strategies remain sound and – if so – ‘stick to the plan’. Or, consider whether additional diversification may help you through the volatility.
La Trobe Financial: Managing through inflation
The last 18 months has presented a unique environment: high inflation, rising borrower rates and property price depreciation. This has shone a light on the importance of selecting a manager with demonstrated ability to guide portfolios through volatility while delivering ongoing performance. Indeed, it is these more unique times which stresses the ability of an investment strategy to continue to perform.
At La Trobe Financial, we established each of our portfolio investment accounts on the simple premise that a diversified portfolio of high-quality, highly granular property credit assets performs across the cycle.
Each of our portfolios have been built with discipline over time: the careful selection of granular asset exposures, diversified across sector, loan size, borrower type, and security location. Our $9.5bn Credit Fund comprises 11,804 loans with an average loan amount of $739,115 and an average loan-to-value ratio of 64.6%. Geographically our assets follow the population, ensuring they remain within the broadest and deepest markets.
Combined, these settings have allowed each of our portfolio accounts to deliver their advertised distribution rates to investors – month after month, year after year – irrespective of the market or macroeconomic environment we have operated within, while no investor has ever suffered a loss of investor capital.
Portfolios constructed to withstand and to perform through all market and macroeconomic cycles, all through the lens of providing low volatility, variable monthly income to our investors.
That’s how La Trobe Financial invests through inflation.