It appears that the last nine years have been relatively easy for investors. Following the financial crisis, most assets classes rallied for two main reasons. Firstly, the potential upside was high and valuations were low. Secondly, global markets have been overwhelmingly driven by a sea of abundant liquidity. Nearly a decade on and that risk premia is coming into question. The objective of the intervention undertaken by many central banks in the form of quantitative easing was to inflate the price of risk assets, force the risk premia to contract and make cash more expensive to hold. Whilst this has served as a substantial support for global markets, the end of QE is now on the horizon. In Europe, we are in the early stages of the unwinding process while in the US, they are one step further ahead in returning to monetary normalisation by entering a rising interest rate environment.
We are now witnessing the implications of monetary tightening on asset classes with the return of market volatility and the breakdown in correlations between asset classes (the degree to which two securities move in relation to each other). This is where the benefit of a multi-asset investment approach comes in, through its ability to navigate an increasingly uncertain and rapidly changing opportunity set.
Multi-asset funds have evolved dramatically from the traditional balanced funds which rely on a simple mix of equities and bonds. The allocation to each is based on the fund manager’s macro view, with managers trying to time the market which has proven extremely difficult.
In the modern era of multi-asset funds, managers aim to have less concentration to correlated returns. This is achieved through dynamic asset allocation whilst also avoiding sectors or securities where investors are not compensated for the risk they take. Such funds present a better opportunity to navigate volatile markets. When allocating to multi-asset funds, the purpose is not to maximise returns without any consideration of risk, rather they aim to maximise the opportunities for risk-adjusted returns by expanding the opportunity set in the context of balanced diversification.
The principles of diversification are important to remember when reflecting on current market sentiment. We’re nearly nine years into a bull market in equities and thirty plus years in a bond bull market. Global equities haven’t just doubled; they have gone up over 250% in Euro terms. This stellar run in equities coupled with the extreme lows in volatility during 2017 may have had an impact on investor mentality. Many investors focus on chasing yield and return, while not respecting the associated risks that have been to a certain extend dormant due to accommodative monetary policy. The February market sell-off should serve as a reminder of the risks associated with equities.
Whilst we remain positive on equities and believe they can continue to do well, prudent investing points to a portfolio management approach into the future. In our view holding maximum levels of risk assets at these valuations, in light of the recently announced tariffs by the US, is not an optimal approach for a medium risk investor.
So what should investors consider?
Our preferred multi-asset fund is M&G Dynamic Allocation. Portfolio manager Juan Nevado’s approach of positioning segments of the fund long or short across equities and bonds on a global basis has allowed the fund to participate to a large extent in the upside while minimising the downside in markets. Since inception in 2009, the fund has provided investors with annualised returns of 6.8% with a volatility level of 7.7%, in comparison to MSCI World Index (Euro), with a 13% annualised return and a volatility level of 14.5%. It is our belief that this fund is well positioned to provide stable returns for the increasingly uncertain environment ahead, by identifying potentially rewarding investment opportunities across not just asset classes but geographies and capital structures.
To speak with a Portfolio Manager or Account Executive today, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.
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