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Driving safer returns with Milliman

Written by Milliman


Financial adviser Jack Hobbs has seen more than a few market downturns during his 40-plus years in the industry.

“Assets will go down in value at some stage, just like the sun gets up every morning and the sun goes down every afternoon,” Hobbs says. “The only one that won't go down is cash in the bank, but in the current environment, the return on that is very low.”

Current cash returns of less than 2% a year aren’t enough to sustain a portfolio for most Australians who are facing 20-plus years in retirement. And yet many also can’t face the risk posed by higher-growth assets such as equities that are required to generate the long-term returns they need.

It’s a core reason why Hobbs takes a different approach with his clients, investing in share funds that apply Milliman’s portfolio protection.

“You can have a no-loss situation by investing in cash, which generates low returns, or you can have potential for substantial upside growth with cushioned downside protection. When I explain it to clients they say ‘Yeah, we like that strategy’.

The Milliman strategy applies a hedge to investments, such as the Milliman Managed Risk Australian Share Fund, using exchange-traded instruments (futures). The rules-based protection is applied in direct response to market conditions: during periods of volatility protection rises, and then falls when markets are strong - meaning investors benefit from the extra exposure to growth.

However, investment returns have been generally strong for an extended period, with the global financial crisis now a distant memory for many Australians.

“People need to be aware it can happen again, and it will happen again – we just don't know when,” Hobbs says. “It's like insuring your house. People insure their house, but how many houses burn down? Not a lot. But it's still worth having insurance because you don't want to be put in a risk position where you can lose everything.”

An economic crisis has struck on average every six years since World War II, according to research by the World Competitiveness Centre. And in recent months, markets have become more volatile as concerns rise about the impact of a potential US-China trade war and rising US interest rates on global growth.

Many of Hobbs’ clients, who are self-employed in the regional hub of Toowoomba, understand how important it is to manage risk because they manage it in their own businesses. They also understand that the small cost involved in managing risk pays for itself over the long-term.

“I say to people you can't have maximum performance and maximum safety. It's a bit like, if you want to drive down the street at 200 kilometres an hour, you're going to get there quicker, but you're going to have risk on the way through. If you drive at 100 kilometres an hour, you'll have less risk, but it takes a bit longer to get there.”

That smoother ride also means pre and post retirement investors who want to take on more risk can potentially move into a higher risk profile with comfort thanks to the downside protection.

The result is a smoother ride for portfolios which are powered by consistent, compounding returns, enabling investors to reach their retirement goals with greater peace of mind.

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Unless otherwise specified, this document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at the date of publication. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Colonial First State is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension, FirstChoice Employer Super offered from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. It also issues interests in the Rollover & Superannuation Fund (ROSCO) and Personal Pension Plan (PPP) offered from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840. Colonial First State also issues other investment products made available under FirstChoice Investments and FirstChoice Wholesale Investments, other than FirstRate Saver, FirstRate Term Deposits and FirstRate Investment Deposits which are products of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is a wholly owned subsidiary of the Bank. The Bank and its subsidiaries do not guarantee the performance of FirstChoice products or the repayment of capital from any investments. This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) before making any recommendations to a client. Clients should read the PDS before making an investment decision and consider talking to a financial adviser. PDSs can be obtained from or by calling us on 13 18 36.


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