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How multi-asset managers are combating inflation

How multi-asset managers are combating inflation
Photo by Lukas via Pexels

Yazz once sagely sang: "The only way is up", and that, it appears, is true of inflation.

Globally, economies and consumers are feeling the effects of the energy crisis, the war in Ukraine, supply shortages and price inflation.

But while central banks raise rates in a bid to dampen inflation's steady climb, and while those rates lead to potentially higher interest on cash savings accounts, investors are still generally concerned about the effect of inflation on their portfolios.

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Aviva Investors's multi-asset fund manager Guillaume Paillat states that, in a high-inflation environment, multi-asset diversification is "harder to achieve, given the rise in the equity/bond correlation, challenging the traditional role of fixed income duration as a diversifier".

So how are multi-asset fund managers structuring portfolios in a high-inflation environment?

Skewing portfolios towards sustainable companies, going underweight durations in bond allocations and maintaining a bias towards quality growth are a few of the ways that some multi-asset managers are shoring up funds. 

Hinesh Patel, portfolio manager at Quilter Investors, says the team had already been continuing to focus on quality companies with pricing power in equities and being underweight duration in bond allocations – particularly given ongoing interest rate changes.

For J Stern & Co's partner Jean-Yves Chereau, managing short-duration exposures makes a lot of sense right now. 

He says: "We are managing the mix of securities that are less sensitive to interest rates – for example, within fixed income [looking at] higher-yielding corporate bonds, with short duration.

"We are also looking at securities like equities, which have some sensitivity to higher rates, but whose fundamentals are very strong, whatever the economic environment, and which have the pricing power to offset the negative effects of higher prices while pushing through higher prices for their products and services."

Multi-asset manager Ben Seager-Scott works for Evelyn, which is often at the front line dealing with the investing public.

He says that mostly, multi-asset fund managers are doing enough to structure portfolios against a high-inflation environment – including Evelyn's own range. 

Seager-Scott says: "To an extent, it depends what you mean by a high-inflation environment – inflation is currently run at exceptionally high levels, which has driven an initial shock reaction from markets.

"For investing, however, it is future inflation and expectations of inflation, that is more pertinent, so it depends what inflationary environment you are looking to manage for in the future."

Diversify, diversify, diversify

What about alternatives or finding assets that have less correlation to each other?

Chereau comments: "The addition of non-correlated securities or investment opportunities also allows for the portfolio to have a lower volatility than would be the case in times of stress."

Paillat states that, in the context of soaring inflation, managers "need to work harder to build resilient portfolios by using further diversifiers".