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Multi-Asset Investing - June 2016Markets hovering in wait-and-see mode
Figures from the Investment Association (IA) show that Mixed Asset funds were the second most popular asset class in March with net retails sales of £190m, beaten only by equities.
But even with the benefits of diversification the fact that most asset classes and markets have struggled means that multi-asset funds have also suffered, with the IA Mixed Investment 20-60% Shares, Mixed Investment 40-85% Shares and the Flexible Investment sectors all lagging behind the UK All Companies and Global sectors in the six months to May 25 2016. Only the Mixed Investment 0-35% Shares sector outperformed the UK All Companies and Global equity counterparts with a return of 1.2 per cent, data from FE Analytics shows.
David Marchant, manager of the CF Canlife Portfolio funds, points out that while some multi-asset funds have produced modest gains in 2016, it has been “a bit of a challenge”.
“If you look at equities, UK equities are pretty much flat year to date, the US is up a fraction, and most other markets are down, so equities have not added a lot. Government bonds continue to remain at very low levels, while corporate bond spreads, after widening in the early part of the first quarter, have declined, and property is flat as well. It has been a tough first few months for markets generally.”
He attributes this to a number of factors including hints of weakness in global growth, with UK and US forecasts moving lower, and concerns at the start of the year about China.
“More recently for sterling assets we’ve had the worries around a ‘Brexit’ and the current uncertainty, at the margins, has put people off investing and has put a lid on the performance of many asset classes.”
As we move into the second half of the year, the result of the EU referendum on June 23 is likely to dictate how asset classes, and therefore multi-asset portfolios, perform in the short term.
Should the UK vote to remain in the EU, Mr Marchant says: “We would expect a modest bounce in equity markets in the UK and, to a lesser extent, in Europe probably. I’d imagine a slight rebound in investment spending. There is a case to say if you’re looking at making a significant investment in the UK, you’d be wise to wait at least a few more weeks to see the result of the referendum and whether it affects your decision. I’d expect a rebound in investment activity post that vote, and I’d hope growth expectations recover slightly as the year progresses.”
Although he warns: “Of course, all bets are off in a sense if we vote for a Brexit. While we might hope for the best in terms of asset prices, you have to prepare for the worst, so our relatively defensive positioning in terms of bonds should help.”
| Expert View: Multi-asset allocation |
Michael Schoenhaut, portfolio manager of the JPM Multi Asset Income fund, has made recent changes to his asset allocation to seek out the best sources of income, including reducing the equity allocation by more than 10 percentage points to around 35 per cent of the total fund, as valuations have become more challenged. He has also bought back into US investment-grade and high-yield debt. He explains: “In today’s low-growth environment, we prefer developed markets – the US and Europe in particular. We currently have a less than 1 per cent allocation to EM equities. We view the slowdown in China, decline in the price of oil, continued US dollar strength and anaemic global growth in general as just a few of the major headwinds that will continue to challenge EM countries. “We see little sign of these headwinds completely dissipating in the near future and maintain our preference for developed over emerging. However, we acknowledge that financial conditions have tightened across all countries, and have further reduced our EM exposure by selling some EM debt. This, along with the reduction in equities that began in the back half of 2015, was re-allocated to high-yield and US investment-grade corporates. We are cautiously positioned to take advantage of the slow but positive growth in developed market economies.” |
Matteo Germano, global head of multi-asset investments at Pioneer Investments, agrees that financial markets remain in a wait-and-see mode.
“Past weeks have been characterised by a wide trading range across almost all asset classes. The recent repricing of the probability of a June Fed hike has slightly penalised risk assets and pushed government yields higher. Credit markets remain supported by expansionary monetary policy, and emerging markets (especially fixed income) are benefiting from the weaker dollar, the gradual Fed approach and higher commodity prices. We don’t see many catalysts for further sustained rallies of risk assets in this phase.”
Nick Peters, portfolio manager for Fidelity Solutions, notes commodities have been the best-performing asset class year to date, driven higher by a weaker dollar, more encouraging data from China and a recovery in risk sentiment more broadly.
“In terms of investment trends, we are generally seeing a more cautious approach to investing at the moment. The managers we monitor are holding higher cash positions than would usually be the case in the expectation that there will be better opportunities to add in the coming months. This is particularly the case with value managers.
“With many in the markets of the opinion that equities and traditional fixed income are facing limited returns, investors are looking at other opportunities, such as hybrids and alternatives, to help to generate positive returns going forward.”
Nyree Stewart is features editor at Investment Adviser
