Investors ride market to record highs but ignore lessons from COVID-19 crisis

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By Victor Huang, Practice Leader, Milliman Australia


"Investment markets are at a unique juncture", says Victor Huang, Practice Leader, Milliman Australia.  Equities are at record highs yet one can reasonably question whether the foundation keeping these valuations aloft is solid. Fiscal and monetary stimulus has kept economies and business activity above the fray of the COVID-19 pandemic below, yet this support has an end point.

Australia's GDP is expected to fall by about 3% in the September quarter – the second largest fall in history thanks to lengthy lockdowns in New South Wales and Victoria[1].

While Australia's high adult vaccination rates are now leading the way out, there is much uncertainty looking forward.

No-one can be quite sure about the emergence of more transmissible and deadlier virus variants while rising inflation caused by supply chain issues presents another bump in the road.

Meanwhile, the US economy is firing and the US Federal Reserve has recently announced it would begin tapering asset purchases as part of a monetary normalisation.

This is positive but leaves investors with little room for error, according to the International Monetary Fund (IMF).

"Compressed volatility and elevated equity price valuations point to the possibility of rapid repricing of financial assets in the event of a reassessment of the outlook," the IMF said in its forecast update for its annual meeting in October[2].

"More generally, in a context of stretched asset valuations, investor sentiment could shift rapidly because of adverse news on the pandemic or policy developments."

A key question investors face is inflation, given a sustained rise would challenge the role of bonds in traditional balanced portfolios. With interest rates at historic lows, the diversifying power of bonds versus equities has been eroded.

Australia's underlying inflation is rising at 2.1% reflecting higher oil prices, residential construction and strained global supply chains[3]. The RBA is not expecting the surge in inflation that has struck some other countries but no-one can be sure whether the current surge is transitory or structural.

The US CPI rose 5.4% over the 12 months ending September 2021[4] - it's highest level in 30 years as Americans have indulged their pent-up demand following the pandemic. The Fed's long-term target is 2%. Meanwhile, millions of jobs have not yet been recovered suggesting an uneven economic recovery.

[1] Opening statement to the Economics Legislation Committee | (2021, November 09). Retrieved from

[2] World Economic Outlook, October 2021. (2021, October 12). Retrieved from

[3] Today's Monetary Policy Decision | Speeches. (2021, November 02). Retrieved from

[4] Consumer Price Index Summary. (2021, November 09). Retrieved from

Victor Huang - Milliman

Victor Huang - Milliman

Investors such as retirees left exposed ?

The COVID-19 pandemic has pushed the market into a new regime following years of easy monetary policy. Inflation is rising, a virus can shut down the economy at short notice, yet assets remain highly valued.

Certain types of investors cannot accept these risks, yet their portfolios are being managed using the same strategies popularised decades ago. Diversification has its place, but it will be less effective against a broad-based market downturn.

Retirees must make complex trade-offs such as maximising retirement income; risks such as longevity, market and inflation, while retaining flexibility to use their funds when they need to during retirement.

The impact of not directly managing risk appropriately can be catastrophic. Retirees need to remain focused on the long-term given retirement can last more than 20 years but they cannot ride out a downturn in the same way as younger investors.

They are drawing down a retirement income and so crystalising losses, rather than building their retirement savings by purchasing assets when they are cheap. When a downturn strikes early in retirement – known as sequencing risk – it can quickly erode a lifetime of savings.

The Productivity Commission has said luck gets more important the longer people work. Luck should not play such a critical role in something as important as retirement – it takes better risk management.

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Productivity Commission calculations. Technical Supplement 6. Commission, C. (2019, January 10). Superannuation: Assessing Efficiency and Competitiveness - Productivity Commission Inquiry Report. Retrieved from Results are based on 10 000 bootstrapping replications with a block of 5 years. The upper 5 per cent upper fractile is the value of the balance above which 5 per cent of outcomes occur, while the 5 per cent lower fractile is the value of the balance below which 5 per cent of outcomes occur. The variation relative to the average balance is the coefficient of variation (the standard deviation of the balances at any given age and the average balance for that age from the simulations). The results were compared with the Monte Carlo program, and had a trivial impact on average balances. The 5th percentile balances were up to 12% less for the bootstrap results, but the effects on the 95th percentile were negligible. The coefficient of variation was higher for the bootstrap model by about 15%. Modelling of life‑cycle outcomes produced smaller variations than these, and justified the use of the simpler and more flexible Monte Carlo method.

Institutional investors such as large insurers have been using futures contracts to hedge their liabilities for decades. These techniques are also now being used by super funds and retail investors as a direct way to manage these rising risks.

Milliman's SmartShield portfolios are being used by an increasing number of financial planners through managed accounts on HUB24 and Netwealth to offer a different pathway for those concerned about risk.

Each of the portfolios include a built-in futures-based systematic risk management strategy designed to smooth market volatility and dampen sustained market drawdowns.

The smoother ride expected with these portfolios, can help stop investors engaging in value-destroying behaviour such as buying high and selling low when a downturn hits – just as happened when the COVID-19 meltdown occurred.

Explicit portfolio protection also gives investors the confidence to increase their exposure to growth assets to combat longevity and inflation risks, knowing that the risk management will kick-in when needed.

Retirees need to make their savings last for more than two decades on average – they cannot park their money in 'safe' cash or term deposits.

It's time for a new approach to risk before the next inevitable downturn strikes and leaves many investors unable to enjoy their retirement.


Victor Huang, is Practice Leader for Milliman Australia

For more information about Milliman’s SmartShield Managed Accounts, please email This email address is being protected from spambots. You need JavaScript enabled to view it..  

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