As policy makers embrace ever more radical options to kick-start global economies hamstrung by the pandemic, the task has become much trickier for those charged with constructing multi-asset portfolios.
Matthew Yeats, head of alternative and quantitative strategies at 7IM says the crux of the issue for asset allocators is the role of bonds in portfolios.
Traditionally asset allocators view government bonds as a way to diversify away from the risks associated with equities, but he says that over the past decade the persistent fall in bond yields, and consequent rise in the value of bonds means he feels bonds no longer have the same place in a balanced portfolio.
Yeats says many balanced portfolios were constructed on the basis of a 40 per cent allocation to bonds, but he believes that in the current market environment, a much smaller allocation to bonds is appropriate. His fixed income allocation has dropped to about 25 per cent, and alternative assets comprises the 15 per cent he has removed from bonds.
Lane Prevenost, global head of discretionary asset management at HSBC Asset Management, says that with bond yields so low, it is valid for investors to be concerned that they may not offer much protection in future, particularly if the risk a client is seeking to guard against is higher inflation.
Ursula Marchioni, head of BlackRock portfolio analysis and solutions for EMEA says it may be that clients are best off retaining their existing level of exposure to bonds, but creating a more diverse range of fixed income assets to make up the allocation than may have been the case in the past.
Sunil Krishnan, head of multi-asset investing at Aviva Investors, says the main outcome of the exceptional policies pursued by governments and central banks is that asset allocators now do not need to worry too extensively about forecasting the outlook for the economy.
He said instead of forecasting, he believes asset allocators need to focus more on the impact of possible changes to policies from central banks, which could be the catalyst for a change.
This is the opposite of what might have happened in the past, when market participants might have concentrated on forecasting the economic outlook, and treated the policy responses as a by-product of those.
He says the strength of policy responses in 2020 was such that the pandemic-induced recession “could start to just look like a blip in the chart”.
Good news is bad news
Krishnan says an outcome of the market trying to second guess the policymakers, rather than forecast the economy, has been the recent phenomenon of good economic news being treated by the market as bad news for the wider economy.
As economic and vaccine data proved positive, markets began to sharply sell off most equities and bonds, on the basis that such good news would lead to policy changes from central banks and governments, and those changes, particularly to interest rates, would have a profoundly negative impact on asset prices.