Last week, Director Jonathan Tolub attended the H&B Wealth Symposium Victoria, where discussions focused on portfolio construction trends and strategies. From the presentations, five key insights emerged with practical implications for managing investment portfolios.

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1. Shifts in Strategic Asset Allocations

Australian industry funds have significantly adjusted their asset allocations over the past 15 years. Allocations to Australian equities have declined, while international equities have increased, driven by stronger international returns and optimisation models. Infrastructure allocations have also grown, often at the expense of traditional defensive assets like fixed interest. These trends provide valuable context for evaluating strategic asset allocations.

2. Credit Opportunities in Fixed Income
A seasoned bond manager highlighted the attractive credit spreads available in Australia compared to the U.S. and Europe. For similar credit risks, Australian corporate bonds currently offer better compensation, reinforcing the case for local fixed-income exposure. However, the concentration of credit risk within the financial sector, particularly among major banks, remains an area for close monitoring.

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3. Alternatives to Private Credit

A global fixed income specialist discussed asset-backed securities as an alternative to private credit. Asset-backed securities provide diversification across consumer, real estate, and other sectors, with greater liquidity compared to traditional private credit vehicles. Though some investors may still associate asset-backed lending with the subprime mortgage crisis, the post-GFC era has seen this space evolve with many positives for investors to consider.

4. Opportunities in Japanese Equities

Japanese equities were a recurring topic, with a portfolio manager reinforcing the potential in this market. Structural corporate reforms initiated by former Prime Minister Shinzo Abe have driven higher share buybacks and dividends, supporting the case for overweight exposure. Japanese companies continue to hold excess cash compared to peers in the U.S. and Europe, suggesting further room for improvement.

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5. Complexity in Portfolio Construction

An experienced adviser coach outlined a thought-provoking "Complexity Pyramid" for financial advisers. Though aimed at the adviser-client relationship, it resonates with how we view portfolio construction. 

- Base Layer: Behavioural elements like value, quality, and size factor investing.

- Mid-Layer: Long-term valuation as the foundation of investment decisions.

- Upper Layer: Addressing situational complexities like supply-demand imbalances and technical, event-driven factors such as geopolitics.

- Peak: Technical, event-driven issues like geopolitics require constant assessment, reflecting a new emphasis we're increasingly seeing at industry events.

This layered framework aligns with a holistic approach to portfolio management, balancing long-term objectives with near-term dynamics.