Rayner cautions over correlation threat to multi-asset

The multi-asset manager, who works alongside group head of multi-asset David Jane, said bonds and equities usually reacted differently to market events, but that more recently they had started to move in the same direction.

Mr Rayner said this was the second time in the past four years that these two asset classes had reacted the same.

“[The first was] in 2013 during the so-called ‘taper tantrum’, when the US Federal Reserve announced it would begin to wind down its quantitative easing programme later that year, which put pressure on both bonds and equities,” he said.

“The same is happening now with bonds and equities behaving in a much more dependent fashion.

“A similar dynamic is evident with the US dollar, which has been behaving less like a safe-haven asset.”

But Mr Rayner said the difference between 2013 and now was that there “isn’t an obvious risk event behind the correlation spike” this time.

“It might be the sharp rise in the price of oil or quantitative easing leading to ever tighter correlated herding behaviour and crowded trades, but it is definitely much less apparent,” he said.

The manager said this posed an issue for multi-asset portfolios because it would mean so-called safe-haven assets “don’t provide some diversification in periods of market stress”.

“The point that we emphasise when looking across asset classes is that relationships always change; sometimes gold is a better equity diversifier and in certain situations cash might be the only diversifier, but pragmatism is key,” he said.

“As always, the central problem for markets is to understand what’s actually happening beyond all the noise.

“Specifically, to what extent have underlying economies recovered, what does the inflation picture look like and how much impact are significant debt levels having in both of these regards?”

Mr Rayner said it “remains unclear” as to what was behind the recent jump in correlation and whether it had peaked.

“In the meantime, at a portfolio level our equity is broadly diversified across developed stockmarkets, our bond exposure minimises duration [interest rate] risk and emphasises credit risk, while our exposure to non-sterling currencies is minimal,” he said.

Earlier this year Miton changed the name of two of its multi-asset funds – previously run by Martin Gray – from CF Miton Strategic Portfolio to CF Miton Defensive Multi Asset, and the other from CF Miton Special Situations Portfolio to CF Miton Cautious Multi Asset.

The company also said it changed the investment objective for the CF Miton Strategic Portfolio to “allow a more flexible approach to multi-asset investing”.