Managing volatility in retirement – lessons learnt during the Covid crisis by netwealth

Trend Hunter Series

Managing volatility in retirement – lessons learnt during the Covid crisis Extreme market volatility and large pension drawdowns can be problematic for retirees looking to secure their future income needs as highlighted by the recent covid-19 crisis. In this session, Milliman, Russell and Evidentia share how they are building resilient investment portfolios to manage market volatility and sequencing risk.

30 August 2021 This document is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

Before we get started

The views expressed in this presentation are those of the author and presenter and do not necessarily reflect those of Netwealth Investments Limited’s. It is a general summary only. It is not advice nor an endorsement of any product or service. Netwealth Investments Limited (Netwealth) (ABN 85 090 569 109, AFS Licence No. 230975) is a provider of investment products and services and information contained in this presentation is of a general nature which does not take into account yours or your client’s individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth (or its related parties) should obtain the relevant disclosure document at www.netwealth.com.au and consider consulting a financial adviser before making a decision and before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth (including its related parties) product. Whilst reasonable care has been taken in the preparation of this presentation using sources believed to be reliable and accurate, to the maximum extent permitted by law, Netwealth and its related parties, employees and directors are not responsible for, and will not accept liability in connection with any loss or damage suffered by any person arising from reliance on this information. This presentation is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

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Meet today’s Trend Hunters

Daniel Choo

Portfolio Manager, Multi-Asset

Russell Investments

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Durand Oliver

Head of Distribution (Australia)

Milliman

Greg Pease

Partner, Investment Committee Member

Evidentia Group

Russell Investments Daniel Choo

Portfolio Manager, Multi-Asset

Russell Investments

Managing volatility Russell Investments Managed Portfolios A dynamic, active and cost-effective suite of managed accounts

Daniel Choo, CFA Portfolio Manager, Multi-Asset Australia

Important information and disclosures Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (RIM). This document contains factual information only. The information provided is not intended to imply any recommendation or opinion about a financial product. RIM is not providing financial product advice in this document. The document has not been prepared having regard to any investor’s objectives, financial situation or needs. Before making an investment decision, an investor must obtain advice from a financial adviser and consider whether that advice is appropriate to their objectives, financial situation or needs. This information has been compiled from sources considered to be reliable but is not guaranteed. It is not intended to be a complete statement or summary. Past performance is not a reliable indicator of future performance. Any potential investor should also consider the latest financial product disclosure statement in respect of the Managed Portfolio (‘‘Disclosure Document’’) in deciding whether to make, or continue to hold, an investment in the Managed Portfolio. The Disclosure Document can be obtained by contacting a financial adviser or the relevant platform operator(s). RIM is part of Russell Investments. RIM is the issuer of the Russell Investments Funds and Russell Investments ETFs mentioned in this document in the description of detailed asset allocation of the Managed Portfolio. RIM or its associates, officers or employees may have interests in the financial products referred to in this information by acting in various roles, including trustee, investment manager, broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition, Russell Investments or its associates, officers or employees may buy or sell the financial products as principal or agent. This work is copyright 2021. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced by any process, nor may any other exclusive right be exercised, without the permission of Russell Investment Management Ltd.

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Diversification, active stock selection and dynamism is key… Russell Investments Diversified 50 Managed Portfolio allocations

17%

35%

Direct shares (active, multi-factor)

Mom COMMONWEALTH BANK (9.6%) Qual CSL LTD (7.5%) Mom BHP GROUP LTD (7.4%) Vol Val WESTPAC BANKING CORP (6.4%) Val NATL AUSTRALIA BK (6.2%) Val Mom ANZ BANKING GROUP LTD (5.2%) Vol TRANSURBAN GROUP (4.6%) Vol Val Mom MACQUARIE GP LTD (4.3%) Vol Val Qual TELSTRA CORP LTD (3.7%) Vol Qual Mom WESFARMERS LTD (3.6%) Vol Val SUNCORP GROUP LTD (3.1%) Vol Qual Mom GOODMAN GROUP (3.1%) DEXUS (2.9%) Gro Qual Mom ARISTOCRAT LEISURE (2.8%) Qual Val RIO TINTO LIMITED (2.7%) Mom Gro Mom JAMES HARDIE (2.5%) Vol SONIC HEALTHCARE (2.3%) Qual Mom FORTESCUE METALS (2.2%) Gro Val NEWCREST MINING (2.1%) Vol WOOLWORTHS GRP LTD (2.1%) Vol AMCOR PLC (1.9%) SOUTH32 LTD (1.7%) Mom Val Gro Vol COLES GROUP LTD (1.6%) WOODSIDE PETROLEUM (1.5%) Gro XERO LIMITED (1.5%) ORICA LIMITED (1.5%) Vol Val AURIZON HOLDINGS (1.5%) ALTIUM LTD (1.5%) Qual Gro Val AGL ENERGY (1.5%) AMPOL LTD (1.5%)

Mom

Val

Qual

Vol

Russell Investments Multi-Asset Income Strategy Fund

ETFs

iShares

Vol

Val

48%

Vol

Russell Investments

Gro Gro

Vanguard

Returns and costs

7.0% p.a.

Returns: (1 July 2019 to 30 June 2021)

~0.65% Gro

Cost: Investment fees including model fee

Other

Australian shares held in Managed Portfolio. Factor attributes shown above based on being a top 30 active weight for each factor.

External managers within Russell Investments Multi-Asset Income Strategy Fund.

Source: Russell Investments. Data as at 30 June 2021 for Russell Investments Diversified 50 Managed Portfolio.

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… when allocating in a crisis

60%

• • • •

Inflation too hot? China corporate regulations Lockdown/don’t lockdown? More stimulus!!

70%

Increased tilt

60% 50% Add equities and high yield debt

Add loans; trim equities and high yield debt

30%

20%

10%

Listed equities

Other growth

Reduce cash, increase inflation linked bonds

40%

30%

Loans

Source: Russell Investments. Data as at 30 June 2021 for Russell Investments Diversified 50 Managed Portfolio.

Key calls Key calls: March 2020

Decreased tilt

50% 40%

COVID-19 panic Recession US presidential election Vaccine approval?

Defensive assets (Bonds, cash and other) Defensive assets (with some income)

Return seeking assets (Shares and extended credit) Return seeking assets 70%

• • • •

“We believe equity value has improved after the large market falls. The cycle outlook is supported by the substantial amount of stimulus being implemented” Andrew Pease – Global Head of Investment Strategy

Sell defensive alternative strategies, bonds and cash

March 2021 “Remain overweight bank loans and securitised credit”

Other def

AU floating

Cash

Adam Smears – Senior Director, Investment Research (Fixed Income)

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Allocating through the core dynamic strategy Russell Investments Diversified 50 Managed Portfolio allocations

17%

35%

Direct shares (active, multi-factor)

Mom

Val

Qual

Vol

Russell Investments Multi-Asset Income Strategy Fund

ETFs

iShares

Vol

Val

48%

Vol

Russell Investments

Gro Gro

Vanguard

Returns and costs

7.0% p.a.

Returns: (1 July 2019 to 30 June 2021)

High yield debt

~0.65% Gro

European loans

Other

Australian shares held in Managed Portfolio. Factor attributes shown above based on being a top 30 active weight for each factor.

Cost: Investment fees including model fee

External managers within Russell Investments Multi-Asset Income Strategy Fund.

Source: Russell Investments. Data as at 30 June 2021 for Russell Investments Diversified 50 Managed Portfolio.

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Russell Investments Balanced Managed Portfolio Holdings and asset allocation FUND ALLOCATION

Leading active strategies

Aus Shares Global Shares

(where it matters)

Real-time adaptability (35% of the portfolio)

Compelling price (as low as 65bps)

Property Real Return Fixed Income

Cash

ACTIVE ALLOCATIONS %

Direct Australian Equities Vanguard Australian Shares Index ETF Vanguard U.S. Total Market Shares Index ETF iShares S&P Small Cap ETF Vanguard All-World ex-U.S. Shares Index ETF Vanguard FTSE Emerging Markets Shares ETF Vanguard Global Value Active ETF Russell Investments Global Opportunities Fund Vanguard Australian Property Securities Index ETF Russell Investments Multi-Asset Growth Strategy Fund Vanguard Global Aggregate Bond Index (Hedged) ETF Russell Investments Australian Government Bond ETF Russell Investments Australian Semi-Government Bond ETF Russell Investments Australian Select Corporate Bond ETF Platform Cash

ALLOCATION – ASSET CLASS %

Direct shares

22.1

Australian Shares

31.8

Dynamic real return fund / active funds

40.0

International Shares

30.0

Alternatives

3.4

Property & Infrastructure

8.3

GROWTH ASSETS

Source: Russell Investments. Data as at 30 Jun 2021

74.5

Global Bonds Australian Bonds Loans / Absolute return FI Australian short-term credit Defensive Alternatives Cash DEFENSIVE ASSETS

22.1% 1.8% 8.5% 1.9% 6.6% 1.1% 3.4% 2.2% 6.0% 34.4% 2.9% 3.9% 2.1% 0.9% 2.2%

4.7 9.4 7.0 0.1 1.0 3.3 25.5

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Milliman Durand Oliver

Head of Distribution (Australia)

Milliman

Managing volatility in retirement – lessons learnt during the COVID crisis 30th August 2021

HTTPS://ADVICE.MILLIMAN.COM/EN/

Limitations & disclaimers Milliman Pty Ltd ABN 51 093 828 418 AFSL 340679 (Milliman AU) for provision to Australian financial services licensees and their representatives, [and for other persons who are wholesale clients under section 761G of the Corporations Act]. This document is not for public use or distribution. The information contained in this presentation is for use by persons and institutions who are "wholesale clients” only. To the extent that it may contain financial product advice, it is general advice only as it does not take into account the objectives, financial situation or needs of any particular person. 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 AU 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 AU does not ensure a profit or guarantee against loss.

Introduction to Milliman

An actuarial, analytics and consulting firm specialising in risk management & investment solutions

Experienced Global leader Founded in 1947.

$210bn (AUD) of global assets Under management via our investment advisory, hedging and consulting services.

The global leader in the provision of actuarial and risk management services.

Independent Owned and managed by our principals. . 20+ years in capital markets Over 200 investment professionals, with 24-hour global trading operations conducted via offices in Chicago, Sydney & London.

Our independence – professional and business – is a key enabler to providing an objective and impartial approach.

Trusted Engaged by 44 of the top 50 insurers globally. 17

What trends are we witnessing?

The global retirement challenge What is it, and how do we solve it?

Retirees need exposure to growth assets We are living longer, which means we need our money to last longer too. It’s no longer sustainable to simply de-risk to defensive assets. In fact, given the time horizon, growth assets can tend to improve outcomes for retirees.

The fear of loss is now far greater

A study^ has shown that retirees fear a loss 5x more than they value a gain. This fear has also demonstrated that it can drive retirees to exit the market just after a downturn, in the hope of managing risk by accessing defensive assets.

Exposure to sequencing risk

The retiree’s fear of loss is well justified. Those who are close to retirement or are early into their retirement are most impacted by market drawdowns.

De-risking, combined with drawing down their portfolio in retirement, can intensify the impact of sequencing risk.

For example, a 30% market shock at age 65, can take 13 years of income away from a retiree’s portfolio, if the same shock happened to a 30 year old, only 5 years of income is lost.

^Source: AARP and the American Council of Life Insurers

The impact of market volatility What factors have influenced volatility?

• The last 18 months we have witnessed an enormous amount of volatility. • The extended lockdowns in Melbourne, Sydney and other major cities continue to put strain on the market. • Government subsidies continue to keep the economy afloat. • International partners like China and NZ restricting imports & export as well as travel. • Low vaccine rates and limited supply of vaccines have also impacted the markets.

The short-medium term outlook

•

The divide between risk and return has never been starker.

•

Major equity markets are hovering around record highs even though another COVID19 outbreak has shut down large parts of the Australian economy.

•

There are plenty of well-respected bodies who have warned about the uncertain conditions, which they believe will worsen.

•

The European Central Bank has flagged that risk around financial stability remains highly elevated.

Key lessons from past trends

•

Risk may be rising, but it has not yet crystalised.

•

This presents investors with a unique opportunity to review some key lessons to avoid making the same types of mistakes that have hurt portfolios during past crisis’.

Lesson one

Poorly timed investment decisions in a falling market •

Pressure during COVID saw poorly timed decisions being made.

•

Unfortunately, for these investors - by trying to time the market - they missed out on one of the fastest and strongest market rebounds in history.

•

Many investors are again susceptible to this type of risk and finding themselves readjusting their life and finances to a reality post COVID-19.

•

If markets were to sharply fall again, those investors already under-pressure are likely to switch again. 23

Lesson two

Retirees must be prepared as they already carry more risk

•

Record low cash rate means, traditionally 'safe' investments have been withering.

•

Many have been forced to invest more aggressively to maintain an income.

•

Time itself is a risk.

•

The impact of retirees drawing down from their savings while the market is falling is compounded.

•

Extreme volatility continues to be a risk and holds a similar negative impact.

Lesson three

Don't assume future crises resemble the past – they are all different •

Each crisis has its own drivers – which is easy to forget!

•

The COVID-19 downturn in 2020 was very different to the global financial crisis of 2007-08.

•

Both were very different to the dot-com boom (and bust) of the late 90s.

•

The bottom line is that no-one can predict the future, but we can estimate risk and undertake strategies that protect against it.

•

With risk and uncertainty rising again, investors need to re-assess their strategies ahead of any market shocks, in whatever form they take.

The Milliman SmartShield™ Managed Account Series

The building blocks

The vehicle used to incorporate protection within each portfolio

Even Keel Trust Australian Equities Total cost targeted to less than 50bps

International Equities Cash Property Australian Fixed Income International Fixed Income

Even Keel Unit Trust • Uses Milliman’s robust, institutional rules-based approach and technology. • Daily priced unit trust, fully liquid, ideal for super, pension or investment. • Lonsec ‘approved’ rating. • Uses cash and index futures to manage protection, keeping it fluid to market changes. 27

The benefits of SmartShield

Designed to shield against market risk enabling you to remain invested Low cost Total cost to client is targeted at less than 50bps for each portfolio, including risk management fee and underlying investment costs.

Applicable to any investor or advice model Typically targeted to pre-retirees and retirees, the protection flexibility means wealth accumulators can also access the portfolios. SmartShield can be a whole of account solution or can be the core element in a core/satellite model. Easily & efficiently implemented Each portfolio use Milliman’s robust rulesbased approach, and IP technology, to administer the portfolio protection, which has been used for our institutional clients for the last 20+ years.

Flexible, accessible & liquid Daily priced, liquid and transparent. The flexibility to turn on/off the risk management puts the adviser and client in control of the protection. A focus on growth An increased allocation to growth assets means more participation on the upside and more that can be protected on the downside

Protection against market declines The portfolios use cash and index futures to dampen volatility during large drawdowns, without cash locking clients Vs. similar options or bonds strategies.

How do we protect investors savings?

Dynamic risk management The strategy overview

The objective • Stabilise portfolio volatility around a defined target level. • Capture growth in rising markets. • Cushion against losses during sustained market declines.

Milliman Managed Risk Strategies A rules-based explicit risk management strategy that seeks to manage volatility and provide a cushion in sustained market drawdowns. Implemented with exchange traded futures contracts as an overlay to the existing equity allocations.

Dynamic risk management

Round the clock global monitoring • Daily updates to volatility models. • Continuously monitored risk positions. • Quickly rebalance any breaches in risk tolerances, in response to market movement. Maximising the benefits • Maintain enough exposure to equities to ensure clients receive full franking credits. • Clients continue to receive dividends from the core investments.

Institutional risk management • Risk managed overlay without the need to trade futures in a separate account. • Predictable outcomes due to rules-based approach to risk management. • Managed by an experienced global team with robust operational processes and systems.

The components of dynamic risk management Volatility management & options replication

Volatility Management

16% 14% 12% 10% 8% 6% 4% 2%

Morningstar Aggressive

SmartShield High Growth

Morningstar Aggressive average annualised vol

Smartshield High Growth average annualised vol

Jun-21

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Jun-15

Jun-14

Jun-13

Jun-12

Jun-11

Jun-10

Jun-09

Jun-08

Jun-07

Jun-06

Jun-05

Jun-04

Dampening volatility reduces client exposure to large drawdowns.

18%

Jun-03

•

Benefits from higher exposure to equities during low volatility periods when returns are generally higher, and vice versa in stressed market environments.

20%

Jun-02

•

Milliman overlay seeks to cap portfolio volatility over shorter time periods.

22%

Jun-01

•

Existing risk management methodologies maintain constant equity exposure irrespective of market conditions. Annualised Volatility

•

SmartShield High Growth - Rolling 365 days Annualised Volatility

The benefits

Combining ETFs and Futures to achieve the desired outcome Futures are incredibly similar to ETFs – they both give exposure to the same assets in a single investment So, why does SmartShield use both?

We use ETFs at the core for the individual asset exposure within SmartShield

We use Futures within the Even Keel Unit Trust to cover the risk management overlay

 Clients can continue to receive dividends and retain full franking credits

 Easy, liquid, low-cost trading

 Easy to understand and manage  Fits in with existing adviser processes

 No CGT on sale  Leverage – fine adjustments manage entire portfolios

As a global company, we have the capability to lower equity exposure by selling Futures SmartShield fully utilises this capability

What can investors expect?

SmartShield performance since inception High Growth Portfolio

Since Inception Performance

SmartShield High Growth

Benchmark

Performance p.a.

12%

11.9%

Volatility p.a.

10.6%

18.7%

Sharpe Ratio

1.13

0.64

Max Drawdown

-7.1%

-21%

Performance numbers are hypothetical from 31st December 2019 – 2nd March 2020, Actual from 2nd March 2020 – 30th June 2021.

The SmartShield GSS Series

Maximising the upside while minimising the downside

Moderate

Balanced

Growth

High Growth

The Netwealth SmartShield GSS Series leverages Milliman’s global risk management expertise to shield you from market risk, presenting greater overall portfolio strength and stability. Please speak with your Netwealth BDM for further information If you are a direct investor, please contact Netwealth directly or speak to your financial adviser. 35

Thank you Presented by Durand Oliver

Head of Distribution durand.oliver@milliman.com

Evidentia Greg Pease

Partner, Investment Committee Member

Evidentia Group

This document is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

Questions and answers

Thank you Trend Hunters Series – Coming up • Tue 31st Aug at 1pm - Outside the NASDAQ: Where to next for technology stocks? • Wed 1st Sep at 1pm - International investing: Your guide to emerging markets and the new world economy • Thu 2nd Sep at 1pm - How to build sustainable investment portfolios

Portfolio Construction Podcast In this podcast series, our investment research team pick the brains of key wealth management professionals to uncover unique insights on the investment areas they are most passionate about.