2020 is almost over. But even with perfect hindsight, it is still hard to believe the year we have had. A global pandemic. A deep global recession. Widespread global quarantine. Travel restrictions. Financial market turmoil. And higher equity prices. US equities are currently around 14% higher than they were at the end-2019. Despite the challenging economic environment, global equities have delivered good returns relative to history.

Time to review

December is a good time to review the outcomes over the year with our 2020 Medium-Term Outlook, which we released in February. Our Medium-Term Outlook takes a view over a five-year period, and provides concrete recommendations for portfolios.

Review Resilience and Reduce Surprises

Our 2020 Medium-Term Outlook recommended focusing on portfolio resilience. Resilience is mitigating downside risks. But it is not just adopting a defensive bias. It includes participating in the upside. We recommended this because we expected a recession to take place in 2020. We got that recession. But not for the reasons we expected. This is important. Our portfolios were prepared for downside. But we were focusing on resilience. We were ready to participate in the upside post-recession. How did our recommendations hold up?

4 recommendations, 10 actions

In the scorecard below, we have laid out the 4 recommendations and 10 actions from our 2020 Medium Term Outlook. The Commentary column provides the key concept from the Outlook. We have assessed the actions against actual economic and market outcomes. We include some actual context from the discretionary (managed account) portfolios that we make available to clients in Australia and Hong Kong.

Medium-Term Outlook view	Commentary	Assessment
Improve portfolio diversity
Review exposure to risky assets.	Reducing equity exposure but not removing it could improve portfolio resilience.	Our lower allocation to equities in March resulted in a smaller drawdown relative to the market.
Review exposure within asset classes.	Small but meaningful adjustments to investment grade credit allocations could improve resilience.	We reduced most of our exposure to corporate credit in late-2019 and allocated to high quality sovereign debt. This provided considerable support during early 2020.
Consider alternatives within the portfolio.	Alternatives with lower risk could enhance resilience during market turbulence.	Our defensive alternatives had limited correlation with equity markets even during March, helping to cushion portfolio drawdowns.
Review portfolio risks
Identify and manage liquidity risks.	Specific asset classes including credit can become illiquid and subject to volatile price shifts lower.	We had almost no exposure to high yield corporate debt, which became very illiquid in March 2020.
Use scenarios to qualify resilience.	Building a range of scenarios to stress the portfolio can lead to more resilient portfolios.	Our scenario analysis helped us identify a better economic outlook from April, allowing us to add risk and participate in the upside.
Dynamically manage macro exposures
Be wary of conditional correlation.	Lower quality bonds do not provide downside protection. Focus on sovereign bonds to improve portfolio resilience.	Our fixed income allocations were largely to sovereign bonds. These assets were important in protecting on the downside in early 2020.
Reduce risk now to increase later.	Reduce equity risk now, to increase exposure at better valuations.	We started to increase allocations to equities from mid-March 2020, moving to a significant overweight position from June.
Reconsider manager selection
Be discerning in alternative exposure.	Some alternatives can improve portfolio resilience during market cycles.	We avoided major blowouts from our alternatives, with many delivering positive returns through February, March and April.
Don’t forget fixed income.	Portfolio resilience can by improved by allocating across alternative credit and sovereign debt strategies.	Our alternative credit and sovereign debt allocations were important in preventing large drawdowns, providing a strong base to reallocate to equities.
Be style aware.	Blending different styles appropriately can improve resilience during challenging markets.	Our focus on quality equities in early 2020 was helpful in March. We moved to a value bias in August, capturing some of the rotation from growth that took place in Q4 2020.

Remain focused on the fundamentals

Our 2020 Medium-Term Outlook provided a clear set of recommendations that have been very useful for portfolio allocators and investors through 2020. Dependable and insightful investment consulting is more important than ever. We are proud to report that our discretionary managed account portfolios have proven resilient. We were able to protect on the downside. Our reduced allocation to equities meant that performance was cushioned in the March drawdown. Importantly, the Medium-Term Outlook recommendations meant we were ready to reallocate to equities during the upside. We are able to share the strong performance history for our Australian managed accounts available as SMAs and MDAs upon request. Similarly, the performance of our Hong Kong discretionary accounts are available on request. Reach out to our Portfolio Advisory Service to find out how we can assist you with managing your investment challenges.

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