One new Managed Account solution reshapes risk and return, bringing unique benefits to advisers & their clients


We talk to Simon Ho, Portfolio Manager at Milliman about the design of SmartShield, how it works and why it provides a compelling reason for advised clients to stay invested, through all market conditions.

In the Australian market, SmartShield stands unique among more than 3,700 funds management products[1]. Recognising that investing is not a one-way bet, the portfolios directly manage risk while still generating competitive returns.

Although research shows that risk is not as strong an influence on investment decisions as investment returns[2], financial advisers know better.

The steep COVID-19 downturn, resulted in equity markets losing about one-third of their value, which caused emotions to run high. This left investors prone to making poor decisions. Meanwhile, retirees that found themselves over-invested in equities, were left exposed to sequencing risk.

Taking an alternative approach requires some investigation.
So we explored the evidence in a conversation with Simon, about how SmartShield works.

How does the risk management work?

SmartShield dynamically hedges the portfolio against volatility and extended market downturns by reserving a small portion of the portfolio to trade futures. This is the same strategy used by large insurers and institutional investors over many years to hedge their long-term liabilities.

It provides a cushion against severe downturns and ongoing volatility – not a guarantee – making it different than products of the past. This predictable, ruled-based system also preserves liquidity for investors.

"This is done systematically," says Simon. "The level of hedging is adjusted daily based on the market environment and implemented by our trading team in Sydney, Chicago, London and Amsterdam in real-time throughout the day."

The actual hedging level varies based on expected versus actual market volatility, and the level of market drawdowns. This approach provides downside protection, but also smooths returns over time.

The graph below shows this downside protection in action (and the limits of portfolio diversification as a risk management strategy during a market crash).

Graph one Milliman

Note Prior to 3/3/2020 SmartShield performance is derived from hypothetical backtesting and actual results thereafter.

What type of assets are held by the SmartShield portfolios?

SmartShield was designed to be similar to most other portfolios for ease of implementation, so it offers four managed account portfolios: Moderate, Balanced, Growth and High Growth. The strategic asset allocation of each fund is based upon the Morningstar Multi-Sector Market Indices – with one important difference.

"We allocate approximately 10% more growth assets compared to the benchmark," Ho says.

"This is to recognise the fact that we can dial up and down the equity exposure as part of our risk management process through trading futures. This gives the portfolio extra power during benign periods, knowing that in volatile times we can hedge the equity exposure rather quickly as we have demonstrated during COVID."

This extra allocation to growth assets has been fine tuned to offset hedging costs over the long term and maintain performance when markets are slowly trending up, over an extended period.

How do Milliman keep the fees so low?

Many of the funds management products that offer some form of protection in the past came with high fees. So, for a start, SmartShield is a different type of product. It offers downside protection through futures, which are highly liquid and are expected to cost less than similar option strategies.

"If you were to buy a put option on the market, it is expected to cost more over the long-run, partly because you're buying it through an investment bank which may need to cover their capital charges and profit margins"

An advantage that Milliman also has, is it’s a global business, established in 1942, and it has significant trading infrastructure in place because it implements these strategies across more than $50 billion (USD) in assets, for global clients and asset owners.

"Due to our sheer economies of scale, we're able to offer low-cost risk management solutions to retail clients," Ho says.

The underlying investments in each portfolio are inherently low-cost because they are invested in exchange-traded funds offered by Vanguard, iShares, and BetaShares. This keeps the products very competitively priced with the total investment costs sitting below 50 basis points.

What type of returns should investors expect?

The SmartShield portfolios aim to deliver similar investment returns as their benchmark – the Morningstar Multi-Sector Indices. However, the downside protection makes the SmartShield managed account portfolios' risk profile different.

"Volatility will be a lot more subdued," Ho says.

In fact, the volatility of the SmartShield portfolios was approximately one-third of the volatility of their respective Morningstar multi-sector indices during the COVID-19 downturn. This clearly demonstrates the effectiveness of the downside protection.

The hedging strategy can drag on performance during positive markets, but this is partly offset by the extra 10% allocation to growth assets.

How can an adviser best use SmartShield?

While SmartShield is primarily targeted toward pre-retirees and retirees, it offers a solution for many different types of investors:

- retirees or those approaching retirement who are exposed to sequencing risk.
- risk averse investors who may withdraw their money at a low point in the market
- investors who would prefer not to ride out a potential long market downturn

Ho says SmartShield's downside protection and lower volatility means advisers don't have to try and time their market calls, which is notoriously difficult to do.

"A lot of advisers' clients have their assets in cash-like assets," he says. "It's quite tiring to keep having conversations with investors about when we are going to move that 'dry powder' into growth assets again. SmartShield takes a lot of the guesswork out of the adviser's hands."

Trying to time the market often means missing out on a market recovery. The upswing after COVID-19 was one of the fastest in history, meaning many investors who had moved to cash, actually missed out.

SmartShield offers a genuine solution for investors who need the potentially higher returns of growth assets yet can't accept the higher risk that comes with it.


[1] Review of competition in the Australian funds management industry | ASIC - Australian Securities and Investments Commission. (2021, June 14). Retrieved from

[2] High historical returns are a strong determinant of investment allocation decisions, while risk factors are not strong influences on investment decisions, according to a study that looked at net cash flows data from 1991 to 2013. Gupta, Rakesh & Jithendranathan, Thadavillil, ‘Fund flows and past performance in Australian managed funds’ (2012) 25(2) Accounting Research Journal 131. Retrieved from


Simon Ho is a Portfolio Manager at Milliman Australia

You can check the potential benefits of downside protection on your client portfolios at

For more information about SmartShield and Milliman go to


Milliman Pty Ltd ABN 51 093 828 418 AFSL 340679 (Milliman AU) for provision to Australian financial services (AFS) licensees and their representatives, [and for other persons who are wholesale clients under section 761G of the Corporations Act]. Not for public use or distribution. Past performance is not indicative of future results. Recipients must make their own independent decisions regarding any strategies or securities or financial instruments mentioned herein. Milliman does not make any representations that products or services described or referenced herein are suitable or appropriate for the recipient. Many of the products and services described or referenced herein involve significant risks, and the recipient should not make any decision or enter into any transaction unless the recipient has fully understood all such risks and has independently determined that such decisions or transactions are appropriate for the recipient. Any discussion of risks contained herein with respect to any product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved. The recipient should not construe any of the material contained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not act on any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisers. Milliman does not ensure a profit or guarantee against loss. Materials may not be reproduced without the express consent of Milliman.

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