Friday Highlight  

Diversification helps in times of stress

During market volatility seen in 2008 and last year, for example, only high quality government bonds tended to generate positive returns as investors focused on the most liquid, lowest risk asset classes.

Investing in commodities or other alternative assets would not have protected a multi-asset portfolio from losses in these periods. 

Predictability

Such concerns have had particular resonance in recent months, over a summer of concentrated unpredictability in areas such as geopolitics and trade negotiations.

Fears are increasing that the long-running global economic expansion seen since the global financial crisis may be coming to a close.

Certainly, economic growth has decelerated amidst higher levels of uncertainty associated with global trade and technology conflicts.

 

What options are open to investors worried by this volatility?

Moving entirely into cash or high quality government bonds seems less attractive when even 30 year gilts are yielding less than 1 per cent a year, and bank account interest rates are well below inflation.

Purchasing explicit protection for holdings via option markets can play a role, but such insurance is generally costly given elevated investor demand in periods of volatility.

It also brings increased complexity and timing risk to investor portfolios. 

At UBS Asset Management, we see clear demand for a product offering a clearer signpost to investors in terms of likely drawdown, while still aiming to deliver an attractive level of growth over the long term.

The UBS Multi Asset Diversified Growth Fund (UK) takes a diversified balance of asset class holdings as its first line of defence. It then marries this to a clear, systematic process to manage the risk of sharp losses within the fund.

In markets where assets held by the fund have increased or are stable in value, the fund will maintain high investment exposure.

Where the portfolio has suffered declines, exposure to risky assets is reduced and the proceeds are invested in cash and safe assets.

This is with the aim of limiting losses to approximately 10 per cent within a 12-month period – however, as with the nature of investments this cannot be guaranteed.

Holdings of risky assets are then increased again over time as tolerance for further losses permits (for example, during recovery periods). MADG (UK) is targeting what we see as attractive investment growth over the long term of five to ten years, with a comparator of cash plus 4 per cent per annum. 

While we remain of the view that the global economy can weather the current storm, we expect market volatility will continue to be higher than post-crisis averages as geopolitical risks remain elevated and the interaction of downside growth risks, potential tariff-driven inflation, and a range of possible monetary policy outcomes drive continued market uncertainty.