2023 in review: A year of volatility and uncertainty

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It's been a hectic 12 months in markets, and Chris Paton, chief investment officer at La Trobe Financial, reflects on how investors have responded to a year shaped by volatility.

Each year brings its own unique set of challenges and successes, especially for investors. In this respect, 2023 has been no different from other years.

However, the past 12 months have delivered more than their fair share of surprises, and if I could sum up 2023 in a single word it would be 'volatility'.

2023 a year in review sponsored

Not one, but two major conflicts

There are many things investors can plan for including fluctuations in markets and economic instability.

But 2023 dished up a combination of events that few could anticipate.

I'm thinking of the ongoing conflict in Ukraine, and more recently, the events unfolding in Israel.

On top of this, headlines in early 2023 were dominated by the collapse of US-based Silicon Valley Bank (SVB). It was a bank few Australians had even heard of until March 2023, but it was soon on everyone's lips for all the wrong reasons.

It brought back memories of the global financial crisis of 2008 and the extreme volatility that followed, with many wondering whether SVB's collapse would herald another global financial crisis.

More broadly, we've had 12 months of stubbornly high inflation coupled with a cost-of-living squeeze.

Against this backdrop, the Australian sharemarket dished up another year of volatility, and as I write in early December, homegrown equities are down 3% over the year.

Long story short, it's been a challenging year for many on the financial front.

"Permacrisis" is as much the word of the year for 2023 as it was for 2022.

Investors are seeking low volatility/high yield assets

What is clear is that many Australians have responded to volatility - coupled with thin (or thinning) household budgets - by exploring investments that combine healthy yields (a valuable source of passive income) with low volatility.

It's a shift that has driven significant inflows of capital into La Trobe Financial's suite of credit fund offerings.

As a guide, in the year to May 31, 2023, La Trobe Financial's flagship 12 Month Term Account recorded greater growth in funds under management than any other product in the same period within Australia's funds management industry.

It's a big claim, and to understand why this is happening, it's worth a quick recap of how La Trobe Financial's suite of credit fund offerings work.

An investment backed by property lending

We always say that it is the quality of the asset that drives the performance of the portfolio and the investment product.

The asset class of choice of La Trobe Financial's credit fund products is property credit. As an investor, you are investing not in a bank account, but in a managed fund comprised of a diverse basket, or portfolio, of mortgages secured by residential and commercial property located across Australia.

Put simply, the money you invest is loaned out to high-quality residential or commercial borrowers.

Australians have a strong understanding of how property and mortgages work, which is a plus for investors and speaks to one of La Trobe Financial's investment fundamentals - that of simplicity: The ability to be able to understand the asset class and what you're investing in.

La Trobe Financial delivers further confidence for investors through our deliberately conservative approach to portfolio construction and management.

Take for example, our maximum loan-to-valuation ratio, which is conservatively set at 75% of a residential property's value for our 12 Month Term Account. Across that portfolio, our loan-to-value ratio averages 63%, providing significant downside protection for investors.

In addition, we rigorously evaluate the quality of borrowers we lend to.

The upshot is that this approach has resonated with Australians looking to add a more defensive flavour to their portfolios.

High yields plus stability in an uncertain world

One of the golden rules of investing is the importance of diversifying.

This is particularly relevant given the volatility we have seen in equity markets through 2023. Diversifying - that is, spreading your portfolio over a variety of asset classes - not only reduces risk, it can also help to smooth out returns.

As a type of fixed interest asset class investment, credit funds add diversity to a portfolio. However, investors can go a step further by looking for a credit fund backed by a broad variety of underlying mortgages.

As a guide, La Trobe Financial's credit fund comprises more than 11,600 individual mortgage assets. That's a lot of diversity at play.

The good news is that the benefits of diversifying don't have to come at the cost of healthy returns. This too has underpinned investor interest in La Trobe Financial's credit fund through 2023, with each of our suite of credit fund portfolio products continuing to deliver high yields coupled with low volatility across the cycle.

Time to invest in experience

None of us know what 2024 will bring. But as an investment, credit funds can act as ballast in your portfolio, helping it find stability in an uncertain world.

What I can say with certainty is that La Trobe Financial has been helping Australians enjoy low-volatility returns - through good times and less certain times - with no investor in any of our portfolio accounts ever having suffered a loss of capital. And 2024 is shaping up to be a year to invest in experience.

La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence 222213 Australian Credit Licence 222213. Financial product advice in this article is general only and does not consider your personal circumstances. Past performance is not a reliable indicator of future performance. Consider the PDS and TMDs on La Trobe Financial's website latrobefinancial.com.au before investing.

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Chris Paton is chief investment officer at La Trobe Financial. He has more than 14 years' experience in banking, asset management and financial services and has held a number of senior roles since joining the business in 2017. Prior to joining La Trobe Financial, Chris worked in law specialising in the banking and finance sector. He holds Bachelors in Commerce (Distinction) and Law (Hons).