Multi-asset strategies face a tough year

This article is part of
Discretionary Management - March 2014

The best article headlines set the emotional compass of the reader and often play on the idea that outcomes are binary rather than on a spectrum.

So economies are either in growth or recession; financial markets are either in boom or bust; financial market sentiment is either dominated by fear or greed.

So after the excellent and welcome uplift in 2013 for the major developed world stockmarkets, led by Japan and the US, what might private client investment managers and their clients encounter in 2014? Boom or bust? Fear or greed?

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I suspect that, much like 2013, investors will spend much of 2014 worrying about what will happen if global economic growth slows; if interest rates rise; and if corporate profits growth is below consensus.

The truth about 2013 is that, notwithstanding the excellent rise in the major developed world stockmarkets, investors spent much of 2013 worrying about the future, taking the view that economies, financial markets and financial market sentiment were all in neutral rather than travelling in a particular direction.

In particular, investment managers have spent the past year worrying about how governments and central banks will finesse the ending of money creation and zero interest rates without causing economic expansion to stall.

So during 2013 equity markets rose on the hope of future corporate profits growth at the same time that bond yields rose on the fear that eventually central bank money creation would fuel inflationary pressures.

In the alternative asset space, the general valuation expansion (price-to-earning ratios) in equity markets left little room for fundamental research to deliver – so hedge funds struggled for another year. Gold fell by nearly a third yet other traditional stores of value, such as art (i.e. Francis Bacon) and cars (i.e. 1964 Ferrari 250) made new highs.

Looking ahead, with cash returns close to zero and bond yields rising, the challenge in 2014 for multi-asset class managers is to keep the (actual and implied) volatility of portfolios within acceptable parameters.

The consensus remains that equities are the only asset class offering above inflation returns and a decent yield. But, a portfolio invested 100 per cent in equities requires a longer term investment horizon and a capacity to stay invested during dips that few private clients or charities possess. Little has changed for 2014, except that the entry level for equity investments is now roughly 25 per cent higher than it was a year ago.

So gazing into the crystal ball it appears that, just like last year, the global investment tone for 2014 will be dominated by news from the western side of the Atlantic. The strength of the economic recovery in the US and the strategy of the Federal Reserve as it reduces its bond buying programme quantitative easing will be the key areas to watch in what looks like being another challenging year for multi-asset class strategies.

Graham Harrison is group managing director, Asset Risk Consultants