Perpetual : Shape shifting – the investment trends that matter for NFPs in 2022

Like all other investors, Not-for-Profits have seen plenty of shifts affect their portfolios over the past two years. In this article we review the investment numbers from 2021, assess the forces set to dominate 2022 and discuss how Perpetual Private is helping NFPs shape their portfolios to manage those changes.

2021 - A good year for equities

The past year was a banner year for equity investors - whether you were holding Australian shares, global shares or listed property companies.

• For calendar year 2021, the S&P/ASX 300 returned 17.5% including dividends.
• Australian investors in unhedged international equities earned over 25% (MSCI ACWI Index).
• Listed property companies surpassed that. Investors in global Real Estate Investment Trusts (REITs) harvested returns of 33%. Australian REITS returned 27% for the year¹.

Cashed-up and ready to click 'buy'

What's underpinned all this good news? Australian companies continued to grow earnings, there were low interest rates and rising Chinese demand for our iron ore. Despite lockdowns, unemployment never took off - it's just hit a 13-year low. Many consumers had pockets stuffed with savings they were looking to spend and whilst Delta took its toll, the Australian economy held up surprisingly well. September quarter growth was down by only 1.9% - less than many expected.

In other developed economies, markets enjoyed continued support: high spending governments, low rates and a move away from punishing lockdowns thanks to higher vaccination rates - and Covid-weary electorates.

As we look forward, whilst COVID concerns remain, Omicron appears to be less dangerous than Delta and so it is not expected to affect investment returns significantly in 2022. However, a number of other headwinds endure.

The big new news for 2021 was the resurfacing of inflation. Booming demand for goods and supply chain issues saw US inflation hit 7% - the highest it's been since Ronald Reagan roamed the White House. This led to the first Central Bank (the Bank of England) pushing up rates with a number of others signalling they will increase rates in 2022 in order to manage inflationary pressures.

More recently, there has also been heightening geopolitical tensions between Ukraine, the West and Russia, as well as increasing trade tensions between China and the US and possible conflict over Taiwan.

With this as a backdrop, we anticipate continuing moderate to strong economic growth but with lower and more volatile returns in risky assets. In a rising rate environment, equities should continue to outperform bonds, however it's unlikely that the exceptionally strong market returns of 2021 will be repeated as central banks take action to cool economies.

Lessons for NFPs

So what can NFP boards learn from the past few years as they plan their strategies for 2022 and beyond? We asked Perpetual Private's Head of Investment Research, Kyle Lidbury.

Cash - still not king

The debate about rising interest rates is set to dominate 2022 but the bottom line is that cash rates in Australia have not risen for 10 years and any potential rising rate cycle will start at record lows - the current RBA cash rate is just 0.1%.

"NFPs often want to hold significant cash balances to give them flexibility when it comes to rolling out their programs," says Kyle. "But over the past 18 months, we've been working with our clients to manage their spending and cash more pro-actively so they get some cash off the balance sheet and into the market. That strategy could have generated a significant increase in returns for NFPs."

Kyle also warns NFP investors against the temptation of higher risk-free cash returns. "If your cash product says it's going to produce significantly higher returns than the cash rate, there's a reason. It's likely the product is investing - and trading in - credit assets. That's not necessarily a bad thing - but it does involve more risk - and NFPs need to understand that."

Aussie shares - a home ground advantage?

Home bias and potential dividend imputation refunds mean NFPs often lean heavily towards Australian shares in their portfolios. That's been a good decision for the past decade - the ASX/200 has had an average total return of 9.3% each year, with almost half of that returned as yield. If you include franking credits, which averages about 65% of the benchmark yield, tax-exempt Australian investors have enjoyed grossed up yields of circa 7% over the last 10 years.

Don't forget international shares

Diversification is always a good idea - especially when there's the risk of significant shifts in the market. Kyle Lidbury argues that NFPs should not ignore the potential of international shares. "International shares typically pay out less of their return in dividends, but they've outperformed Aussie shares by almost 5% p.a. for the last ten years, comparing the S&P/ASX300 vs the MSCI All Country World Index on an unhedged basis, including dividends. So an allocation to the world beyond our borders makes sense for NFPs as it does for most investors."

Perpetual Private's Quarterly Investment Update for September to December 2021 looks at all these issues in greater depth, with detailed analysis of individual asset classes including equities, fixed income, real estate, currency and alternatives.

Download the report

^{1. FTSE EPRA/NAREIT Developed Index and S&P/ASX 300 A-REIT (Sector) Total Return index, respectively}