Let’s look at why that’s usually not the best idea. Studies of market timing show some sobering numbers – if you’re off by just a month on market tops and bottoms, you could end up with half the returns you’d get from simply staying invested. Even the most skilled investors would struggle to get that timing right consistently over 20 years.

What really matters is keeping your eye on what you own – companies with solid growth prospects and reasonable valuations. Sure, they won’t go up in a straight line. They’ll have their down days, sometimes when you least expect it. But if you’re holding quality businesses, these market swings often turn out to be just background noise in the long run.

We’re at one of those moments now where this discipline is being tested. This doesn’t mean blindly holding onto stocks that have become seriously overvalued. But there’s a reason the most successful investors tend to focus on individual companies’ prospects rather than trying to predict market crashes.

Looking at what markets did in 2024, we saw some pretty impressive numbers. The global stock market index (MSCI) jumped 24.3%, though performance varied quite a bit by region. Taiwan was the star performer, up 31.7%, while markets in the UK (+9.6%) and Europe (+11.9%) posted more modest gains. US tech stocks continued their strong run, pushing the NASDAQ up 29.6%, and even China’s market showed some recovery, with the CSI 300 up 18.2%.
But here’s some helpful context – when you look at returns over the past three years, things look quite different. Outside of Japan and Taiwan, even the stronger markets like Australia and the US S&P 500 only returned about 8.9% annually. European markets lagged, and Chinese markets lost ground during this period, mainly due to their property market and economic challenges.

Market performance table (as of 31/12/2024)

There’s been a lot of talk about whether markets, especially tech stocks, have gotten too expensive. But this isn’t quite like previous bubbles. While some caution is warranted regarding AI-focused stocks like Nvidia, many large technology companies demonstrate fundamental strength that wasn’t present in previous bubbles, such as the 2000 dot-com era. These companies now generate healthy cash flow yields comparable to bond yields, with strong growth trajectories.

On the interest rate front, we’re seeing short-term rates fall in most developed economies as inflation pressures ease up. But central bankers are being careful not to declare victory too soon – they remember all too well what happened in the 1970s when they celebrated too early.

What’s interesting is that while short-term rates are dropping, longer-term bond yields have actually risen over the past year. In Australia, the 10-year bond yield is up 0.40% this year. Current yields around 4-5% suggest investors are looking at a future where central banks hit their 2-3% inflation targets, giving a modest but positive real return.

Looking ahead, while some parts of the market (especially AI-related stocks) might look pricey, we’re still finding good opportunities in companies with strong fundamentals and competitive advantages. Right now, it’s more about picking the right stocks than making broad market calls – which fits right in with our approach of focusing on individual companies rather than trying to time the market.

The post The Price of Panic: Why Market Timing Costs More Than You Think appeared first on Private Portfolio Managers.

The last month has illustrated that with vengeance. What has actually happened? Earnings results are coming in pretty well in the main; not every company will do well, but in the main the results are good, some very good. The finance sector is not having major issues with loan books, always a good thing.

The Fed seems to be getting what it wants – the extreme tightness in the labour markets is diminishing, wider inflationary pressures have dropped sharply and are now close to their target level. So much so that they have signalled a rate cut in September. The yield curve has gone normal (that is yields are higher with increasing length of maturity) which is often cited as an indication of economic growth not recession. Interestingly, the Fed has some firepower this time. During the post GFC period the Fed had no further capacity to reduce interest rates – they were effectively at zero. At this point they are at over 5%! The Fed presently has its most powerful tool available to increase economic growth. Critically, the shortage of housing in the US (and many developed economies) is very high. Current demand has softened as a result of mortgage rates more than doubling, but it is likely to return once they are lowered, and that, we have been told is going to happen in September. With housing comes demand in a raft of other areas. That is, it has a big multiplier effect. This would not seem a time to feel overly pessimistic.

Prices, as we recently commented are high in the tech sector, but nowhere near the extent they were in earlier tech bubbles in 2000 and September 2021. The exception being in those extraordinary companies Nvidia (chip designer) and, for instance, ASML (the maker of chip making machines). There are quite a few more but it is not endemic by any means. Outside the tech sector there are plenty of sectors where the pricing of good quality stocks is attractive.

Our view is that markets have done the switch from flawless to hopeless while the real world is about to improve from currently being a bit below average. What would the US economy look like if the Fed reduced interest rates 1% or 2%?

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The emotional is driven by all sorts of things: this can be interest movements, wars (distressingly frequent, but not a good investment tool!), etc. Let’s focus on interest rate movements, as the biggest current concern.

The chart overleaf is the US short-term interest rate over the last 25 years. During the period post the GFC and Covid the rate was close to zero and earnings growth was high as you can see from Chart 2, but earnings growth was also high last year when interest rates were high and rising. There doesn’t seem to be much correlation.

You might argue that the rise in interest rates haven’t taken effect yet and the decline in earnings will come later, and that may be true. But downturns tend to be short and new highs in earning over the last 25 years have been made shortly after the previous peak.

This brings us to Chart 3. It shows the annual returns from the S&P500 (a broad index of US stocks). Talk about fluctuations, Howard wasn’t wrong!

You get exhausted just looking at it. The point being that the prospect of picking so many changes in direction is very low indeed, and the margin for error is tiny. Most people are better at picking one change of direction, either downturns or upturns, but hardly ever both; the result is not going to be good.

Perhaps a better strategy is to remain invested and forget the predictions that swing people’s emotions from one extreme to another. Over the last 25 years the market has produced a return of approximately 10.0% p.a., which is remarkably close to the average annual growth in Earnings Per Share of approximately 11.4% p.a. over the period.

Unless you genuinely enjoy playing roulette, and enjoy the thrill of wins and losses, the long-term approach seems a much better way to go.

Be aware though, it is not easy to maintain discipline, one’s emotions are difficult to control, particularly in collective situations. (If you are playing golf, play golf, don’t talk stocks! It’ll help both your score and your portfolio).

The Chart shows the US Federal Funds Rate – a short-term interest rate set by the Federal Reserve (the US central bank).

Chart 2 shows the collective earnings per share of the stocks that make up the S&P500 Index. Effectively it is as if all these companies were a giant conglomerate; usually shown as cents per share.

Chart 3 shows the change in total return, dividends and capital gains, from one year to the next. As can be seen the returns fluctuate from over 30% to declines of over 30%. Perhaps, the “Flawless/Hopeless Indicator”?

For further information on Private Portfolio Managers Pty Limited (PPM) and our service offering please contact Jill May, Head of Client Relationships or your Portfolio Manager on (02) 8256 3777 or jm@ppmfunds.com

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This missive comes to you from Taiwan where PPM is visiting IT companies. In the portfolios we have investments in companies, such as Nvidia, Microsoft, Amazon which ultimately rely on product that is only produced in Taiwan.

It is an underappreciated fact that this island, over which so much speculation has been expended, is absolutely critical to the growth of technology and in turn to the global economy. In the aftermath of Covid, virtually every consumer product was in short supply because there were insufficient chips available. As Chris Miller, in his highly acclaimed book “Chip Wars” observes, 60% of chips and 90% of the most advanced chips come from this island of roughly 24 million people so close to China (in fact the closest of the islands is only a few hundred meters from the mainland). Miller contends that if supply was to be disrupted it would bring on another global depression; this is not an exaggeration – if you were to think that the supply of most consumer products would collapse, data centres would quickly run out of capacity – commerce, as we know it would implode. You want to see inflation? This would put the 1970s inflation in the shade.

Don’t worry, MacNally’s identity states: the probability of an occurrence is inversely proportional to the square of the likely damage it would cause – so not much chance (the identity is also a useful tool in analysing climate apocalypse predictions).

Taiwan is all about semiconductors, the transistors that are now smaller than a corona virus and that control everything that moves in a modern economy. That Taiwan is so dominant is no harder to explain than why Silicon Valley dominates software. It is about the ecosystem, so many people doing the same thing creates an intensity of activity and investment and that in turn attracts more talented people, who attract more talent and so on. Much like industrial revolution England or renaissance Florence.

The biggest fish in Taiwan is Taiwan Semiconductor Manufacturing Company (TSMC). It produces nearly all the most advanced chips; no one else has been able to get close to the sophistication of their product. Their 3 nanometres process allows 300 million transistors per millimetre square (or 10 transistors could be mounted on the surface of a corona virus).

The production of high-end semiconductors is the most demanding industrial process ever. A manufacturer might be able to buy the equipment, themselves the most sophisticated machines ever built and built by only one company ASML in the Netherlands, but that doesn’t mean you can produce chips of this size economically or indeed at all. It’s like fitting out a restaurant kitchen with the best equipment – it doesn’t mean you will get three hats for the food you serve. The second best are still working on scaling up 3nm chips production while TSMC is a generation ahead and working on 2nm chips.

The importance of this is that AI, the new wave of technology, requires such immense computing power and only the chips and software designed by Nvidia and manufactured by TSMC will perform the job. To say that it is only these two firms is a simplification, they are at the centre of an immensely complex web of suppliers of technology and skills that encompasses the globe. It is not possible to untangle this web in a short period of time; one cannot simply re-locate it to a “politically” safe location like you might a Nike factory. This interdependence is very comforting in that everything depends on it; a breakdown of the system ruins everyone, the aggressor as much as the victim – it’s the doomsday argument.

In a broader sense, our view is that AI is of the same significance as the development of the semiconductor, which has changed the world economy and investment markets to such an extent they are unrecognisable from what preceded. AI is not just quirky stories made up on ChatGPT, but a technology that will fundamentally alter the way businesses are run and the economics of industries. As with all changes of this magnitude there will be winners and identifying them will produce rich rewards.

For further information on Private Portfolio Managers Pty Limited (PPM) and our service offering please contact Jill May, Head of Client Relations or your Portfolio Manager on (02) 8256 3777 or jm@ppmfunds.com

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Interest rates are of great importance in valuation of assets. Central banks continue to increase cash rates despite the issues that have arisen in the US regional banking sector (more on that below).

The chart to the left shows the Australian cash rate over the least year. To the right is the US cash rate over a similar period. Both show the rise from near zero to 3.85% in Australia and 5% in the US. Source: Trading Economics, FRED.

While cash rates have increased, the same is not true of both short and long terms bonds. As can be seen in the charts below the 2 year bond yields in Australia and the US are well below their recent highs and in Australia at about the same level as they were a year ago. In the US they are the same as they were in September 2022.

Source: DR Horton Q4 2022 Report

It could be interpreted that the market’s view is that inflationary pressures are coming under control and that in a reasonably short period of time they will be considerably lower. In the major league (the US) the 2 year Note yield is over 1% below the cash rate. The usual caveats apply; its foolhardy to predict economic outcomes, although betting against central banks give you better odds. (As a left of field comment, one might ask why the setting of interest rates does not go the way of fixed currencies, which were freed to set their own level (in Australia) 50 years ago. Would anyone go back to a managed exchange rate? The history of Governments setting prices and wages is uniformly awful, why should it be any better for interest rates (the price of money). The RBA Governor might like to be relieved of the impossible task of setting rates.

Back to latest victim of interest rate policy, the US regional banking sector. The price of bank stocks has come down in response to the failure of Silicon Valley Bank and a number of other regional banks, however, we think that the problem is narrowly confined and does not apply to Australian banks or indeed the major global banks in the US and the UK.

The problem for the regional banks arose out of the long duration of US mortgages, which are fixed for long periods (up to 20 and 30 years) together with investment of un-lent deposits in securities of long duration. Mostly the assets were of high quality, however, the liquidity mismatch became terminal when online withdrawals went viral.It is a cautionary tale when a 50-year-old bank with a spotless history of prudent lending is destroyed in a matter of days by online deposit withdrawal. It brings a new meaning to being cancelled! (The late Sir Les Patterson was not alone).

Interest rate rises discriminate; while for the mortgage holder, they cut household budgets and adversely affect consumption, for the unmortgaged (that is about 50% of Australian houses) they have little effect, or in the case of retirees with cash the household budget improves. Gone are the complaints that the bank pays them nothing for their deposits (if that is still the case perhaps, they should call their advisor for a better deal). Additionally, if they own an investment property there has been a tidy jump in rents.

The Bank of Mum & Dad is doing pretty well from the control of a scarce resource (housing) and cash on deposit. Not to mention their super has had a cracking FY2023 so far. Perhaps discretionary spending stocks with 50+ customers might be worth a look. A trip to Harvey Norman* or JB HiFi* for a new plasma TV and a new couch to watch it from? Or a cruise/tour bought from Hello World*? That’d be giving central bankers the bird.

Our contention is that using broad economic predictions as an investment tool misses the subtleties and variations important in investing. They also have completely the wrong timeframe; Recessions tend to be short, so if you are pessimistic, you have to be nimble to change course at the right time – often a difficult thing as bottoms mostly occur when the news is most bleak.
*The author is CIO of Private Portfolio Managers, which holds these stocks in its domestic portfolios.

For further information on Private Portfolio Managers Pty Limited (PPM) and our service offering please contact Jill May, Head of Client Relations or your Portfolio Manager on (02) 8256 3777 or jm@ppmfunds.com

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In an economic sense the most significant event in 2022 was the rapid rise in inflation and the equally rapid increase in interest rates by central banks in developed countries. It was the first time in 15 years that interest rates have increased significantly. The current levels are not high by historical standards and represent only a very modest margin over the “target” inflation rate.

A corollary of zero interest rates was that asset valuations became highly inflated. This was particularly the case in the technology sector which subsequently came under severe pressure. Many market darlings dropping 50% and some of the “unicorns” declined 80-90% or more. Companies in mature industries where valuations were less carried away did not suffer much or even went up.

Operating result for companies to date have showed resilience in the most part. However, fears of recession resulted in prices of companies perceived to be exposed were marked down. We would re-iterate the observation, made in the last article, in early December, that bad or extended economic downturns tend to be associated with financial crises – usually bank crises.

This was most recently the case in the GFC when lack of availability of bank lending hindered economic recovery.

This is not the case now and the bank sector is in rude good health. Lending has been conservative for many years, particularly leading up to the Hayne Commission. Bank balance sheets are very healthy and capital ratios are strong. There should be no impediment to the bank sector supporting the economy.

We feel that the current inflationary situation is a different order of magnitude to that of last major outbreak in the 1970s. At that time a number of attempts were made to quell the outbreak culminating in the draconian actions of the Federal Reserve under Paul Volker. On this occasion inflation was caught a lot earlier and two of the factors that have driven it seem to be abating already:

• Supply chains which were severely disrupted by the Covid have largely re-opened.
• Commodity price jumps caused by the Ukrainian war have retreated very substantially.

A remaining problem is shortages of labour and resulting increase in wage pressures. This is currently the subject of intense scrutiny.

There is widespread expectation of further increases in interest rates in the next six months although it is thought that the increases will moderate and settle at a slightly higher level than the present.

Our view is that the tightening will lead to a slowdown rather than a severe period of economic difficulties such as occurred during the GFC. None of the excesses of that period have occurred. The real estate boom we have seen has not resulted from wild bank lending and speculation in real estate. Rather the increase in house prices has been more as a result of shortages of housing, something that is also the case in the US and the UK. The significance of this is that there is not a backlog of inventory to be disposed of and a collapse in construction. The unfilled demand remains.

The market valuations having already declined significantly we feel that many companies represent good value. This extends to companies in the construction industry such as James Hardie and other beneficiaries like Harvey Norman. Quality retailers such as JB HiFi are also attractive.

It is significant that the US home builder DR Horton, which builds about 12% of the country’s single-family homes, has risen 50% from the lows of 2022. The chart below shows the number of homes built in the US over the last 30 years. The number of homes built in the recent past is below the long-term average and the average of the last 10 years is very low and has resulted in a shortage. A similar pattern exists in Australia and a number of other developed countries.

Source: DR Horton Q4 2022 Report

For further information on Private Portfolio Managers Pty Limited (PPM) and our service offering please contact Jill May, Head of Client Relations or your Portfolio Manager on (02) 8256 3777 or jm@ppmfunds.com

The post A Return to Normalcy appeared first on Private Portfolio Managers.

Last month we put two propositions:

1. Market falls tend to be over relatively quickly with the major of the fall occurring within 12 months; this may not be the end of a bear market, but most of the damage has been done by then.
2. Major economic downturns tend to be accompanied by financial system trauma; bank collapses are so devastating because the resulting lack of availability of funding makes economic recovery difficult and slow.

We observed that currently banks are financially very strong; they have had conservative lending policies, lots of capital and are unlikely to get into significant difficulty at this point. This would tend to make a nasty economic downturn seem unlikely. One could contrast the situation leading up to the GFC, 15 years ago, with the current one.

Markets have already declined for about a year, although the declines overall have been modest, 9% domestically and 10% for global markets (in A$), in the “flawless” sectors the declines have been very sharp. In the domestic tech sector the falls have been of the order of 45% and in the global sector 35%, with early stage companies falling 80% or more. Not vastly different from what occurred when the 2000 tech bubble burst.

As a result of these falls there are many companies, that were previously extremely expensive, have now moved back into the range of reasonable valuations. Examples we are thinking of are: Microsoft and Nvidia (a leader in high end chips and software for data centres and automation – this technology was derived from their long experience in video gaming).

The same pricing also applies to many of the stocks that are generally classified as cyclical. Examples in say, discretionary retailing, are Harvey Norman or JB HiFi in the domestic market or Home Depot in the US. We feel that the declines in share prices that have already occurred suggest that expectations of difficult economic circumstances are largely priced-in.

Others that fall into the same category are home building and building materials. Construction levels in the US in particular never reached more than long-term average levels, let alone boom conditions. House prices may have gone up, more from shortage than speculative excess. There certainly hasn’t been the overbuild that preceded the GFC. Companies with powerful market positions we think will continue to do well.

There are numerous industries in which the pricing of stock did not reach excessive levels during the speculative periods of the last four years. In a number of cases they have also declined in the last year and now are in our view, extremely attractively priced. Healthcare, ranging from hospital operators, pathology, pharmaceuticals and surgery equipment producers fall into this category. The finance sector also has many examples of quality operators trading at below book value (effectively valuing the franchises at below zero!).

We retain our view that inflationary pressures are moderating and have not become ingrained as they became in the 1970s and over time these pressures are likely to dissipate. Interest rates while they have risen sharply over the year, that has only returned them to more normal levels (remember when banks actually paid interest on deposits). Central banks have indicated a moderation to rises in the future as they assess the effects of recent rises – the lags are of variable extent and timing, as the RBA Governor reminded in a recent address.

While predictions about economic outcomes have to be given a wide margin for error (and possibly direction!) we would not be in the impending disaster camp, thus well-run companies at reasonable prices are very attractive to us. There seem to be a lot of these at present – one does not need to pick bottoms to make an attractive return.

For further information on Private Portfolio Managers Pty Limited (PPM) and our service offering please contact Jill May, Head of Client Relations or your Portfolio Manager on (02) 8256 3777 or jm@ppmfunds.com

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Over the past 7 years Private Portfolio Managers Pty Limited (PPM) has offered a fixed interest strategy in addition to our domestic and global equities strategies. At times it has proved a key component of the PPM investment philosophy as it has enabled us to build portfolios that have a suitable balance between safeguarding funds whilst positioning them to best capture opportunities when they arise.

At the time of writing, the yields on fixed and floating rate securities are substantially above the cash rate and are more in the 6%+ range.
We’re now going through a period where there’s concern about rising interest rates and inflation.
After 10 years of defensive assets such as cash and fixed interest delivering little income, yields are back again. Defensive assets which once formed a significant part of risk averse portfolios, are providing value again.

Portfolios of directly held Fixed Interest securities can significantly enhance the income for those who have for a long time held just cash bank balances. What’s more, they have the advantages of:

• Transparency
• Predictable income
• Flexibility

Fixed and Floating Rate Securities may not be as glamorous as equities but they are less volatile and certainly provide a solid foundation for surviving the inevitable fluctuations whilst protecting your funds. PPM would be delighted to arrange a meeting with you to discuss the benefits of Fixed and Floating Rate Securities as part of a balanced portfolio with known income streams.

For further information on our Fixed Interest service offering please contact Jill May, Head of Client Relations or your Portfolio Manager on (02) 8256 3777 or jm@ppmfunds.com

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Thank you for the opportunity to speak here today.

At past Jackson Hole conferences, I have discussed broad topics such as the ever-changing structure of the economy and the challenges of conducting monetary policy under high uncertainty. Today, my remarks will be shorter, my focus narrower, and my message more direct.

The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

The U.S. economy is clearly slowing from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers. Inflation is running well above 2 percent, and high inflation has continued to spread through the economy. While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.

We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. At our most recent meeting in July, the FOMC raised the target range for the federal funds rate to 2.25 to 2.5 percent, which is in the Summary of Economic Projection’s (SEP) range of estimates of where the federal funds rate is projected to settle in the longer run. In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.

July’s increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting. We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. Committee participants’ most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4 percent through the end of 2023. Participants will update their projections at the September meeting.

Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century. In particular, we are drawing on three important lessons.

The first lesson is that central banks can and should take responsibility for delivering low and stable inflation. It may seem strange now that central bankers and others once needed convincing on these two fronts, but as former Chairman Ben Bernanke has shown, both propositions were widely questioned during the Great Inflation period.¹ Today, we regard these questions as settled. Our responsibility to deliver price stability is unconditional. It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand. None of this diminishes the Federal Reserve’s responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.

The second lesson is that the public’s expectations about future inflation can play an important role in setting the path of inflation over time. Today, by many measures, longer-term inflation expectations appear to remain well anchored. That is broadly true of surveys of households, businesses, and forecasters, and of market-based measures as well. But that is not grounds for complacency, with inflation having run well above our goal for some time.

If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. Unfortunately, the same is true of expectations of high and volatile inflation. During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decisionmaking of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions. As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, “Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.”²

One useful insight into how actual inflation may affect expectations about its future path is based in the concept of “rational inattention.”³ When inflation is persistently high, households and businesses must pay close attention and incorporate inflation into their economic decisions. When inflation is low and stable, they are freer to focus their attention elsewhere. Former Chairman Alan Greenspan put it this way: “For all practical purposes, price stability means that expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household financial decisions.”⁴

Of course, inflation has just about everyone’s attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.

That brings me to the third lesson, which is that we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

These lessons are guiding us as we use our tools to bring inflation down. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.

1 See Ben Bernanke (2004), “The Great Moderation,” speech delivered at the meetings of the Eastern Economic Association, Washington, February 20,
https://www.federalreserve.gov/boarddocs/speeches/2004/20040220; Ben Bernanke (2022), “Inflation Isn’t Going to Bring Back the 1970s,” New York Times, June 14.
2 See Paul A. Volcker (1979), “Statement before the Joint Economic Committee of the U.S.
Congress, October 17, 1979,” Federal Reserve Bulletin, vol. 65 (November), p. 888, https://fraser.stlouisfed.org/title/federal-reserve-bulletin-62/november-1979-20459.
3 A review of the applications of rational inattention in monetary economics appears in Christopher A. Sims (2010), “Rational Inattention and Monetary Economics,” in Benjamin M. Friedman and Michael Woodford, eds., Handbook of Monetary Economics, vol. 3 (Amsterdam: North-Holland), pp. 155–81.
4 See Alan Greenspan (1989), “Statement before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 21, 1989,” Federal Reserve Bulletin, vol. 75 (April), pp. 274–75, https://fraser.stlouisfed.org/title/federal-reserve-bulletin-62/april-1989-20803.

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First, it is important to understand the differences and benefits between an IMA, an SMA, managed funds and other investment structures.

An IMA is a service – each investor’s portfolio is individual and tailored to their requirements

PPM is a specialist IMA provider with over 20 years experience in managing client portfolios in an IMA structure.

An Individually Managed Account or IMA is a discretionary management agreement whereby clients delegate the day to day investment decisions and implementation of their chosen investment strategy to PPM while retaining the full beneficial ownership of their investments. Their portfolios are bespoke and tailored to meet each clients investment requirements taking into consideration their individual preferences, taxation circumstances and investment objectives.

A client can transfer an existing portfolio ‘in specie’ without triggering any tax consequences and these will be incorporated into the clients individual portfolio and professionally managed.

PPM offers IMA services to clients with an investment of over $500,000 or who otherwise satisfy the Corporations Law definition of a “wholesale” investor.

An IMA may be described as “bespoke” or “tailored to each client”, but what exactly does that mean? How does a Portfolio Manager construct an IMA – an Individually Managed Account?

The construction of an IMA is a highly personalised service. The Portfolio Manager will initially meet with the client to discuss their investment objectives, then, in consultation with the client’s advisers will agree a core investment strategy (including a consideration of growth or income requirements, Australian and/or International equities mix) and their broader investment requirements. Each client will discuss their taxation status, investment restrictions, ESG considerations, and, if any existing holdings are to be included in the portfolio, via an ‘in specie’ transfer. The Portfolio Manager will then build a portfolio tailored to meet their investment objectives and requirements and actively manage it going forward.

In addition to quarterly and annual reports, the Portfolio Manager will meet with the client on a regular basis to discuss the portfolio(s) and explain any changes to it. Reporting is available online 24/7 via a secure portal on our website.

IMA examples

The best way to describe how an IMA works, and is tailored to each client’s requirements, is to give examples:

Example 1

Client Scenario: The client has an existing portfolio that has large capital gains on securities that might have been held for some considerable time. Maybe they inherited some of the holdings, as such are significant capital gains tax consequences if the holdings are sold. In addition, the client is a senior employee of a listed company and has a large exposure to their employer security through a staff share scheme (ESS). The client may not want additional exposure through their portfolio or superannuation fund to that company.

PPM IMA Solution: The PPM Portfolio Manager would construct an IMA portfolio to initially carve out both the ESS company exposure and those securities with large capital gains from the portfolio, and then over time actively manage the bespoke portfolio to give the client a more balanced and diversified overall portfolio.

Example 2 

Client Scenario: The client is paying a high personal tax rate and has equity investments both inside and outside their SMSF, for example in a family trust or in their personal name.

PPM IMA Solution: It consultation with the client’s adviser(s) and Portfolio Manager may structure the IMA portfolio(s), so the family trust holds the securities that are expected to generate long term capital gains and the superannuation fund holds securities that are more likely to generate income (particularly franked). As such the trust might hold the majority of the US securities (as they often generate capital gain rather than income) and the superfund might focus more on domestic securities as they produce more income and maximise the benefit of franking in the superannuation fund. The object being to create for the client a well-diversified Australian and Global equities ‘portfolio’ with the maximum efficiency from a taxation perspective.

These examples are for illustrative purposes only and each client’s individual circumstances will be taken into consideration in conjunction with the advice from the client and their investment advisers – however they demonstrate the individually tailored nature of an IMA and the clear benefits to those clients in the scenarios described.

An SMA is a product – each investor gets the same portfolio

Under an SMA – a client invests in a model portfolio managed by a professional investment manager, all trading, administration and investment reporting is taken care of for the client by the platform administrator. The client’s financial adviser will assist the client in determining whether an SMA is suitable to meet their investment requirements and which SMA or SMA models to select.

There are clear benefits of an SMA for a client. An SMA provides access to a professional manager and its research capability with the benefits of direct share ownership. Unlike a managed fund, each client is able to see exactly what investments are in their portfolio. Tax events and transaction costs are not shared across clients and the cost base of the clients investments will be the date of their investment in the model portfolio. Further, a model portfolio is typically a high conviction portfolio, with the total number of holdings in the model limited to 20-25 securities whereas in a managed fund the number of securities is typically not specified and is typically much greater. Finally, as an SMA model is administered on a platform, the client does not need to manage the trading, corporate actions or any administrative aspects of their portfolio. Clients receive online access to their model portfolio as well as regular reporting for taxation purposes. The client pays investment management and administration fees.

SMAs are suitable investment products for clients who want a direct investment portfolio without having to spend time selecting, managing and monitoring their portfolios  – as both the investment management and administration are handled by professionals. International SMAs enable clients to have direct access to international equities without the complexities and costs of managing international trading, custody and currencies.

PPM offers the Australian Equities Growth SMA and the Global Equities Growth SMA, for both general and superannuation investment.

PPM’s SMAs are structured under a managed investment scheme with the appropriate disclosure provided in a PDS by the platform provider. All compliance and administration is taken care of by the platform provider. Clients in consultation with their financial advisers can determine what model would best suit their investment requirements and can invest in a PPM SMA with as little as $20,000 under the Australian Equities Growth SMA or $50,000 for the Global Equities Growth SMA.

Clear benefits of IMAs and SMAs

The advantages of IMA and SMAs over other available investment structures are clear for clients. The table below details the key features of IMA, SMA and alterative investment structures. Direct ownership, transparency, cost and tax effectiveness are the core benefits IMA and SMA offer for investment management solutions for clients.

Key features of SMA & IMA compared to other common investment structures

Please contact our team for further information of PPMs service offering at ppm@ppmfunds.com or 02 8256 3777.

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