Global macroeconomic uncertainty, currently centred around Greece, appears to be encouraging more investors to take the ‘diversified’ approach and invest in multi-asset portfolios.
Research from FundsNetwork shows that in May all three Investment Association Mixed Investment sectors featured in the top-10 best selling categories among advisers, although UK equity income remained top of the pile.
“With Greece’s fate still to be decided and further geopolitical risks on the horizon, we can expect continued market nervousness in the foreseeable future,” explains Danny Wynn, head of fund partners at FundsNetwork.
“As a result, we expect investors to maintain the current trend and continue to further diversify their portfolios to protect themselves from more uncertainty and potential market volatility.
“The increasing number of multi-asset solutions [in the wider sense of the term] in our top 10 is also a strong indicator of the changing nature of advisers’ investment propositions. It will be interesting to see how these trends evolve.”
In terms of performance for the year to date of the four IA mixed-asset sectors – Mixed Investment 0-35% Shares, Mixed Investment 20-60% Shares, Mixed Investment 40-85% Shares and Flexible Investment – the top performer has been the most unconstrained of the selection.
The Flexible Investment sector has delivered an average return of 4.09 per cent for the year to June 29, although in the five-year period it is the Mixed Investment 40-85% Shares sector that performed strongest with an average return of 46.79 per cent, data from FE Analytics shows.
It is therefore not surprising that the 10 best performing funds from the four categories across the 10 years to June 29 are split equally between the Flexible Investment and the Mixed Investment 40-85% Shares sectors.
But with the looming interest rate rise in the US, growing concerns over a ‘Grexit’ (Greek exit from the eurozone) and the volatility in the Chinese stockmarket that has led to the government publishing draft rules allowing the state pension fund to buy stocks, where should investors be looking?
Talib Sheikh, manager of the JPM Multi-Asset Income fund, points out that in spite of the weakness in some commodity-driven sectors, “fundamentals in the high-yield area of the market remain supportive, with strong corporate balance sheets and solid growth in revenue being maintained, coupled with strong earnings and cashflow”.
Meanwhile, Pierre Sarrau, deputy chief investment officer of multi-asset strategies at BlackRock, notes that many of the forces influencing global markets have no precedent. He suggests that against this backdrop investors have formed two competing narratives: an optimistic one, with a typically slow post-crisis recovery plus a benign technology revolution; and a pessimistic one, where secular stagnation is caused by chronically insufficient investment and consumption globally.
He warns: “Investing in this climate is difficult, but we believe there are still some broad conclusions that can be drawn. Global growth should strengthen, thanks to several tailwinds. Lower oil prices provide a fiscal stimulus of 1-1.5 per cent of GDP, depending on where they stabilise, while recovery is under way in the major advanced economies but monetary tightening is likely to be delayed as inflation remains below target.
“Even in Europe – where the crisis has left a toxic legacy of high leverage and unemployment – there are certain tailwinds, including the impact of quantitative easing, healthier banks and fiscal policy that is no longer contractionary.”
In terms of equities versus fixed income, Mr Sarrau notes: “Once it became clear the deflation threat was off the table and bond yields would not fall indefinitely, the negative yields at which many bonds were trading looked anomalous.
“Meanwhile, equity markets have been far less volatile. There has been an impressively long and deep rally in all developed markets, but this reflects an optimism about future earnings that may prove to be over optimistic. If expectations change, there could be significant price adjustments there too.”
Elsewhere within the fixed income space, Mr Sheikh notes emerging market debt offers “both a compelling yield in the low interest rate environment and attractive valuations relative to other fixed income markets”. But with the outlook remaining uncertain, it seems the decisions by policymakers in the second half of the year could have a significant impact on investor sentiment.
Nyree Stewart is features editor at Investment Adviser
