Page 1 - SMA changes rationale_Best of Breed Moderate

SMA Portfolio Change

Best of Breed - Moderate

As at 5 March 2024

Following a review of your SMA portfolio, we have made the following changes:

• We are reducing exposure to growth assets in your portfolio, your Moderate risk profile SMA
will now hold 40% growth assets (down from 50%) and 60% defensive assets (up from 50%).
• We are restructuring our exposure to infrastructure/property investments and adding some
hedging on currency.
• We are making a change to underlying investments within your portfolio.

Reduction in Exposure to Growth Assets

Why we are making the change

In 2023, we saw stronger than expected returns due to economic resiliency, fast-falling US inflation,
and strong investor sentiment. These trends have continued into early 2024. However, leading
economic indicators remain mixed, with early signs of weakness in employment data (which we
expect to continue), household savings buffers (which are becoming increasingly scarce), and central
banks holding the line on higher rates as they remain committed to taming inflation to maintain their
credibility. Therefore, we believe 2024 may be a tough year to navigate.

Presently, we are not concerned about the overall 2024 outlook as current data remains resilient.
However, we are adopting a cautious approach given tighter financial conditions (ie. higher interest
rates) and significant government debt loads. Historically this has meant weak to very weak economic
outcomes. In contrast, current market sentiment seems to imply all risks are now behind us and
central banks will come to our rescue. Unfortunately, hope is not an investment strategy.
The significant rise in central bank cash rates and hence bond yields, has made the return dynamics
on cash and bonds very attractive versus the last 10-15 years, with government bonds now yielding 4-
5% and investment grade corporate debt yielding 5-7%. Even short-dated cash and cash-like securities
(enhanced cash) are offering yields of 4-5.5%. Combining attractive yield opportunities with lower
volatility than equities, makes the risk / return dynamics on defensive assets too hard (and silly) to
ignore.

We have therefore reduced exposure to Growth assets (Australian equities, global equities, and
property/infrastructure) by 10% and subsequently increased Defensive assets (cash and bonds) by
10%, splitting the allocation equally across enhanced cash and bonds. The enhanced cash allocation
takes advantage of short-term higher yields and gives us the option to redeploy funds if we feel the
attractive defensive asset opportunities have played out or the risks we were concerned about have
passed.