Professional investors and wealth managers advise against doing so, of course, but there may be instances where changes are needed in portfolios.
One example of this might be when an investor becomes more conscious of environmental, social and governance issues and wants their portfolio to reflect their ethical values.
Another example could be when a client decides to make a significant life change, either brought about because of economic or health factors, which necessitates a change.
Advisers have worked with their clients to decide on portfolios with the appropriate level of risk.But otherwise, investors have been urged not to follow through with a knee-jerk reaction to market movements.
Sheldon MacDonald, chief investment officer for multi-asset at Marlborough, speaks to FTAdviser about how advisers and their clients are expected to make sense of what is going on in the world right now.
FTAdviser: Should we all just be closing our eyes, leaving our portfolios alone, and riding it out?
Sheldon MacDonald: The key thing is to maintain a long-term perspective and avoid any knee-jerk reactions, because trying to time the market is very difficult indeed.
To succeed, you have to get two tricky decisions right: when to sell and when to buy back – and that’s a very tall order.
Multi-asset managers can add value for portfolios through tactical tilts based on shorter-term market dynamics. This is more nuanced than the ‘in or out of the market’ blunt instrument.
So, for example, we’ve been increasing exposure to equity income funds.
That’s in part because stocks paying attractive dividend yields have outperformed the wider market during periods of high inflation since the 1970s.
FTA: Investment specialists have been promoting the benefits of diversification for many years now, so has the message finally got through?
SM: We’re certainly strong believers in the value of diversification, which the Nobel Prize-winning economist Harry Markowitz memorably described as ‘the only free lunch in investing’.
The decade of almost free money from 2010-20, when interest rates were at historic lows, saw all risk assets appreciate together.
More recently, many assets have fallen together. So, the benefits of diversification have been less apparent.
However, we’re anticipating opportunities in many asset classes, but we’re also expecting further volatility, so to smooth out the investor journey, diversification will be key.
FTA: What sort of allocation strategies are multi-asset managers using right now to help protect portfolios against rising inflation and exogenic shocks?
SM: In the bond portion of our portfolios, we’re watching carefully for the right time to begin a tactical shift from short duration to longer duration.
Rising inflation has driven bond yields up, meaning bond prices have fallen. So short-duration strategies, which are less sensitive to these pressures, have outperformed.
However, longer duration bonds tend to perform better in recessionary periods, so when the time is right we’ll tilt our portfolios in that direction.
The portfolios available to investors today have benefited from years of evolution, bringing significant positive developments in areas including investment strategy, governance, fund selection and ESG.On the equity side, we expect volatility to continue. We haven’t yet seen the impact of rate hikes on company earnings, so we’re maintaining a defensive stance and, as I mentioned, favouring equity income funds.
We believe well-managed companies that have been able to deliver stable dividends, even in difficult times, are likely to be rewarded with higher share prices.
FTAdviser: Is it time now for investors to be considering alternatives in multi-asset portfolios, such as infrastructure, property, currency shorting, etcetera?
SM: Alternatives can bring important advantages, so they’re always worth considering. We’re holding infrastructure funds in some of our portfolios, because we believe infrastructure companies can provide useful inflation protection.
However, it’s important to be aware of the risks. With infrastructure, regulatory change can have a major impact.
Meanwhile, direct property investments carry liquidity risk and currency shorting is complex, and tricky to execute – plus, of course, currency movements are notoriously difficult to forecast.
With alternatives, it is essential to understand these risks and ensure exposure levels are appropriate.
FTAdviser: Is there additional cost associated with shorting strategies and with diversifying into alternatives, and how do multi-asset fund managers go about creating asset class diversification, without increasing incremental costs?
SM: Costs are slowly coming down across the board and, while the charges for funds investing in alternatives are still relatively high, they’ve been falling in the face of investor pressure.
It’s also important to remember these strategies will seldom form a very large part of a multi-asset portfolio, so the higher marginal costs are unlikely to significantly increase overall portfolio costs.
FTAdviser: If we were to create a multi-asset portfolio from scratch right now, how different would it look from existing multi-asset portfolios in the market, generally speaking?
SM: The portfolios available to investors today have benefited from years of evolution, bringing significant positive developments in areas including investment strategy, governance, fund selection and ESG.
I’d suggest these portfolios are much more closely aligned with the needs of investors than would be the case with a portfolio that was created ‘from scratch’, without the benefit of all that experience.
FTA: Everything right now seems risky to the average investor. How can multi-asset managers help to reduce the risks in portfolios other than just diversification?
SM: Tactical asset allocation shifts and portfolio construction measures that, for example, avoid over-concentration in a particular investment style, can play an important additional role in helping to reduce volatility in portfolios.
However, it’s important to remember that advisers have worked with their clients to decide on portfolios with the appropriate level of risk. It’s not the role of the investment manager to then unilaterally move the portfolio up or down the risk spectrum.
Instead, the portfolio manager will work within a predetermined risk framework, making carefully balanced adjustments.
Simoney Kyriakou is editor of FTAdviser
