Investment Clock insights

Current multi asset positioning


Nersen Pillay

2 August 2018

Summer is normally volatile but this year we have particular challenges such as concerns about trade wars as well as interest rates rising gradually in the USA and UK, while the European Central Bank (ECB) is talking about ending its quantitative easing activity.


 

Source: RLAM; seasonal pattern of Global Equity returns since 1973. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested.
We expect further volatility this summer but this should benefit active multi asset managers like us. 
Diversification and Tactical Asset Allocation become even more important in volatile markets; reducing the risk in portfolios while still being able to deliver equity-like long run returns.

Source: RLAM; seasonal pattern of Global Equity returns since 1973. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested.

We expect further volatility this summer but this should benefit active multi asset managers like us. 

Diversification and Tactical Asset Allocation become even more important in volatile markets; reducing the risk in portfolios while still being able to deliver equity-like long run returns.

 

 

 

 

 

 

 

 

 

 

Source: Expected risk and return based on RLAM’s medium term capital market assumption as of March 2017. *Please note that this does not reflect the actual performance of the RL Funds and should be used for information purposes only, not as a reliable indicator of future performance. 

The chart above shows the benefit of diversification in terms of risk and return for different asset allocation benchmarks. A conservative strategy holding mostly bonds and cash (see the smaller orange oval on the left) has an expected return less than 1% on top of inflation with expected risk of around 4% per annum. By diversifying and holding a multi asset fund with 25% of assets in equities, property and commodities gives far better expected returns with very little increase in volatility. Similarly, a pure equity portfolio would be expected to generate long run returns of around 7% above inflation with historic risk of around 17%, according to our data. By diversifying, say allocating 10 to 25% to Store of Value assets, savers could potentially get equity-like returns but with far lower expected volatility.

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: RLAM. Tactical positions as of August 2018

We like to buy when others are fearful given a robust global growth outlook and interest rates expected to remain at relatively low levels. We bought equities aggressively during the February and March panics but since then, we have systematically taken profits, cutting our overweight to its lowest level since 2012, because of the various risks for markets currently. However, we have not gone underweight equities given global growth is strong, firms are taking on employees showing confidence, inflation is not threatening to rise sharply but appears to have peaked and sentiment is not at euphoric levels. We focus on the economic fundamentals because while rumours of trade wars can cause volatility, we have already seen that markets can rise sharply too when threats do not materialise. We are overweight (short duration) global high yield bonds as recession risk is still low. We are moderately overweight commodities as the level of global activity is likely to remain high and we favour the asset class as a hedge against geopolitical risk.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.