Reality bites the sandwich generation

Two Gen Xers, Louise Watson from Natixis Investment Managers and Jacqui Fernley from Mason Stevens discuss Natixis IM’s Generation X report and the financial worries of this generation. Also known as the ‘sandwich generation’, Gen Xers are stuck between two more populous and influential generations and many of them are struggling with the twin problems of caring for ageing parents while still looking after, and financially supporting, their children.

Louise and Jacqui discuss:

• How the financial advisory and investment landscape has changed over the past 20 years
  
• Investment strategies for people at all stages of their journey to financial freedom
  
• How Gen Xers may be able to overcome their worries about financing their retirement
  
• How higher inflation is affecting retirees’ plans
  
• Their careers and the under-representation of senior women in financial services

Louise Watson: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers Australia, where we bring you insights from our global collective of experts to help you make better investment decisions. I'm Louise Watson, Head of Country for Natixis Investment Managers in Australia and New Zealand.

And today I'm joined by the formidable, Jacqui Fernley, the CIO of Mason Stevens. I must start this podcast by giving a special introduction to Jacqui. She's someone that I have known and admired for quite some time and even had the pleasure of working together, at our days at Challenger and Fidante. Jacqui is someone of remarkable intellect and enthusiasm for markets. She truly is a market animal. She lives and breathes markets. And I'm really looking forward to getting some of those insights from her today and hearing about the role that she has at Mason Stevens and how Mason Stevens’ clients have benefitted from her advice.

So Natixis recently released its Gen X Report aptly named Reality Bites, a very famous movie from our Gen X era, starring Winona Ryder and Ethan Hawke. Fabulous soundtrack if you haven't already listened to it. And it's really the genesis for inviting Jacqui on this podcast today because we're both part of Gen X. And Jacqui and Mason Stevens have some really interesting insights about Gen X and the sandwich generation, their hopes and fears and how they're approaching investing and retirement. But our conversation will also cover off from some broader matters about the financial advisory and wealth management landscape in Australia.

So Jacqui, you've had such a long career in markets. You've been an analyst, a portfolio manager, and now a chief investment officer. How did you make it this far and what excites you about the role at Mason Stevens?

Jacqui Fernley: Thanks, Lou. Very humbling and I'm honoured and extremely proud to be sitting here with you today. I love markets as you just defined, and I think the role as a chief investment officer in general allows me to expand that fascination with investing in markets across a broad array of asset classes and into the alternative asset classes sphere. And so I just love learning. I love looking at different investments and comparing them, contrasting them across the sphere to build portfolios that will actually deliver what clients are actually trying to achieve. I'm deeply passionate about that as well. So my role at Mason Stevens allows me to do that, working hand in glove with some of the country's best wealth managers, and it's a really exciting, but busy role that I live.

And in terms of how I got here, certainly and for everyone listening, I'm a testament to the fact that careers are not necessarily linear. You can definitely have your ups and downs and I certainly did. But with every down, with the benefit of hindsight, I can say that it allowed me to learn something, move forward and get the next role which then again, broadened my sphere and allowed me to learn again. And it is the combination of what I've done in the last 25, 30 years, making me feel very old right now, that actually allows me to do this role. And it hasn't been smooth sailing, but character is defined by how you pick yourself up and brush yourself off after disappointment. I'm a firm believer in failing forward, and certainly that's my career.

Louise: That's so fascinating and I think that journey that you've described about it being non-linear and almost like a jungle gym of appointments and layering all that expertise has brought you to this really critical nexus of our industry, which is really where financial advice is intertwined with markets and portfolio management.

So one of the things we also like to talk about in our industry is how much it's changed. And as people who strongly identify as Gen X, when superannuation was in its infancy, we were still in high school or just finishing school. It didn't seem so relevant back then. And when we've talked about this before, you sought financial advice from a stockbroker, if you had the money to access one. But now that's been very much democratised and it's much more accessible. How have you found that part of the journey?

Jacqui: It's certainly been something fascinating to watch. And having worked in both institutional funds management and wealth, that transition and where each wealth practice is up to is really quite different. And so I'm deeply passionate about managed accounts and really getting the investment decision off the desk of an advisor and into a investment committee that's professionally managed and managed to mandate. But that transition is again, the latest of the journey. But we've gone from 30 years ago where most advisors learn how to trade stocks, BHP, Rio, to multi-asset portfolios with ETFs and direct equities and managed funds all combined. And that complexity is not something that they're necessarily trained in.

And it really now is meaning that an advisor's role and they're wonderful at it, is client relationships, client acquisition, client retention, strategic advice. And then the second mantle equally important is the investment solution that comes off the back of that. And the separation of those two things is where the market’s moved.

Louise: In our Natixis's Gen X research, three in 10 people said they'll never have enough to retire, and nearly half of respondents said they're worried about running out of money in retirement. That's really concerning. For Gen Xs who feel this way, what do you think are the most important things for them to do or consider as they plan their finances for retirement?

Jacqui: The first thing I would say is that hope is not a strategy. It is not too late to put plans in place for retirement even if you're sitting in your early 50s or late 50s. Equities as an investment class or an asset class, they're compounding machines. Fundamentally, it's time in market, not trying to time markets that will actually build wealth. So clearly the sooner you start investing, the better. However, you can't put your head in the sand and pretend that it's going to be okay. A capable advisor can actually provide you with the strategic advice and then complement that with an investment solution that works for you.

Louise: I really love that concept of time in markets rather than timing the market. And I guess what you're saying there is, don't try and be a market wizard. And I often say about Gen X is that we've weathered so many storms, so many cycles including the recession we had to have in Australia, the tech boom, living through the GFC, a pandemic. I think when Gen Xers think about the markets, did all of these events make us more conservative?

Jacqui: There is no doubt that there is that element. If I think about my own journey, I started my first role in 1994, so just as Australia was coming out of a reasonable recession. I lived through Asia crisis, tech wreck, COVID, GFC was a big one and all the gyrations in between. But frankly if I'd put 10% of everything I earned since 1994 into the market today, I would be wealthier than I am today. And that's the point. The market will move, but it'll gyrate around a trend and you really just want to get onto that trend.

Louise: Yeah, and another thing we hear from our investors as well is the point about the impact of inflation and the impact that that's having on their retirement. And in this study, 41% of Gen Xs said that they're worried about the impact of inflation on their retirement.

Jacqui: But one of the things I found most fascinating by your Gen X Report was the fact that Gen Xers - they're looking for 13% per annum return above inflation, which frankly is a highly aggressive target. And certainly to achieve if you can in fact achieve that would require not only an aggressive asset allocation, but probably leverage as well. So there seems to be somewhat of a disconnect between investment return expectations as well as the risk required to achieve them.

Louise: Absolutely. I think that journey between asset allocation and achieving a 13% return, it requires skill and professional advice.

Jacqui: Absolutely. Inflation is incredibly important for an investment strategy. Asset correlations, and I'm going to get a little bit technical with you for a second, change based on the level of inflation. And in simple terms if inflation is say above 3%, then stocks and bonds can become positively correlated. Below 3%, they are generally in history negatively correlated. And it's simply because central banks can't step in and actually support equities or growth assets with interest rate cuts in a higher inflationary environment.

So it really is when you think about all the noise in markets and how fearful we can often become because we can sell ourselves stories about if Trump gets in, this will happen. If this happens, or China, geopolitical risk, yada, yada, yada, I could name a thousand different stories that you can tell yourself. The reality is risk is ever present in markets, but cutting through the noise of markets is really key.

And the two things that matter is inflation, growth, the direction of each of those things, and then the combination of those directions. So that might sound a little bit complicated. But it essentially means that there are four regimes and those four regimes start with Goldilocks, that's inflation down and growth is up. That is the most enjoyable environment for markets and it's incredibly compelling for risk assets specifically, but also equities.

To the right if you want to think about quadrants, and we have shared this diagram in the notes, is reflation where inflation is up and growth is up. Also, really quite compelling for risk assets. But in that environment you want to have some inflation protection in portfolios, real assets, commodities, as an example.

To the bottom right of the quadrants is an inflationary environment where inflation is up and growth is down. That tends to be a negative, risk off event.

And then the fourth piece, which is deflation, which is often aligned to a recession, that is when inflation is down and growth is down. And that tends to be a particularly significant draw down event in equities markets.

So those four regimes really drive the way in which asset classes behave based on the two things that matter, which is direction of inflation, the direction of growth, and the combination of those two things. So it's a lot to get your head around and I've shared a few diagrams. But when you simplify everything and all the noise, it fundamentally comes down to that.

Louise: And I guess taking the noise away and simplifying things is something that you can really help investors with. And whilst we all want to be in that Goldilocks environment and have that backdrop to invest in, that's not always the case. And you've described a number of market forces there that we need to think about, whether it's geopolitical events, inflation, advice is going to be key.

Another trend we're seeing is demands for bonds and fixed income investments. And I'm interested to get your thoughts, Jacqui, on opportunities and markets today, what your clients are doing and always interested to hear what family offices are doing.

Jacqui: I think this ties back to the conversation we were having earlier around inflation. And fundamentally because of Covid and this incredible scenario that we all lived through, what we saw where interest rates fall to essentially zero, and then globally central banks have shifted and normalised interest rates in a very swift timeframe. That was a period of time that was very difficult for fixed income as an asset class, but what it's now allowed is returns available in fixed income due to those high interest rates to actually look quite compelling. There's significant carry in the asset class even with credit spreads being a little bit tight at the moment.

Additionally, to that, to the extent that we actually do see recession, if in fact that occurs and our view is that the risks are increasing into 2025. Bonds in a portfolio provide that protection or can provide that protection should interest rates and central banks actually start to cut and inflation fall. So as a consequence, it's actually quite compelling to consider, or ensure, that you've got, one, an appropriately structured multi-asset portfolio, but your fixed income sleeve, there's a case for it to be overweight at this point in time.

Louise: Yeah, we would agree with you and we've seen Loomis Sayles, one of our affiliated managers come to Australia and open up their strategy to wholesale investors in this market. So that's something that's really high on our priority list as well.

Jacqui: And in a family office context, what we are seeing across that component of our client base is a lot of direct bond investment in order to actually take advantage of what the market is offering at the moment.

Louise: That's amazing. I mean that's another way that we've seen advice and access to markets really evolve over the years.

Jacqui: Yes. I mean in simple terms, the investment team that I lead, we are here to solve the problems of those wealth practices that are servicing their clients now. Sometimes that's a retail investor, sometimes it's a wholesale investor, but often it's a ultra-high net worth family office. And the complexities there are significant.

Louise: The family office perspective brings another really important point to the fore and that's intergenerational wealth transfer. And in previous podcasts we've done with Simon Kuestenmacher, a demographer, he spoke at length about the transfer of wealth from baby boomers to Gen X and a key trend within that is that more than 50% of the assets will land in the hands of women. And I think it's really important that women focus on investing personally but also professionally. And we saw a really interesting report come out in our industry in Australia two weeks ago. And I'd love you to touch on that, Jacqui, and get your thoughts on that.

Jacqui: Sure. So Future IM/Pact released its Path to Parity Report recently, which said among other things that while a greater percentage of front office investors are female, up 4% to 28%. Female representation at the director portfolio manager level is disappointingly down 4% to just 19%. It appears that despite all of our efforts, and I will be really clear, there has been many efforts in the industry promoting women to a senior level and then retaining them is still a major problem.

Louise: Completely agree. I think that's a real challenge still for our industry is to attract women but also promote them and keep them there.

Jacqui, you're certainly one of the success stories in our industry and we're so lucky as a cohort that you have had such a successful journey. And you're so generous with your networks, and how you help others. You've managed to have such a successful career journey while raising children. You're a fabulous parent and you've raised two amazing young people who are now entering the workforce.

We've talked a lot about Gen X today, so what would you say to people starting their careers at this point, both financially and personally?

Jacqui: Thanks again, Lou, walking out of here all pumped up. I have two wonderful children. Alex who is 21, she's studying biomedical engineering, and my son Zach who is 24, who is just about to finish his electrical apprenticeship. They're both at home and the one thing for both of them that we do is we don't charge them rent. But I have an agreement with them that 10% of what they earn is invested and I help them to invest it. Because honestly and I said this earlier, if I had invested 10% of everything I've ever earned and not spent it, I would be in a better position. And I'm really trying to get them to recognise that just that saving plan, and putting it away, and getting it in market is probably one of the most important things that they can do. Thanks Lou. 

Louise: Thank you so much, Jacqui, for coming in today and we're delighted to be a partner of Mason Stevens.

Jacqui: As am I for Natixis.

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