How the cost-of-living crisis affects multi-asset

Managers have been tilting portfolios towards healthcare, European energy and other sectors that will be less affected by the drop in real consumer disposable incomes caused by record levels of inflation.

For example, Guillaume Paillat, multi-asset fund manager at Aviva Investors, says the team is "particularly focused on a fall in real disposable incomes against a backdrop of high inflation".

He says: "While global inflation has resulted in a broad down trend for markets, not all sectors and industries have been affected by the Cost of Living crisis in the same way.

"Overall, we have tilted our portfolios towards sectors that have more stable input costs and more limited economic sensitivity such as healthcare, and towards European energy due to constrained supplies and a pivotal role in decarbonisation and energy security policies."

The feast or famine profile of the profits is not one we would want too much exposure to. What’s more, the regulatory risk is also growing.Hinesh Patel, Quilter Investors

Similarly, Jean-Yves Chereau, Partner at J. Stern & Co, says: "Our core focus is on selecting high-quality companies and businesses, and the natural bias is therefore towards high-end products and luxury items, which will have less sensitivity to lower consumption and more flexibility to manage costs.

"As for energy, it is currently the case that inflationary pressures come from higher energy prices, so an energy exposure is a reasonable hedge.

"However, we tend to have a structural exposure to the energy sector because it is a good generator of cash flow and income yield in general, but especially in the current environment."

Keeping an eye on consumers

Hinesh Patel, outgoing portfolio manager at Quilter Investors said it was important to keep an eye on the consumer, especially as the cost-of-living crisis is expected to continue well into 2023. 

Patel says: "Ultimately, the cost-of-living crisis means there is less money available for discretionary spending and growth, which means increasing revenue and/or profitability is harder to come by.

"In this environment, market leaders and disruptive companies are the ones we tend to skew towards. The bottom line is that fully active management and stock picking, as opposed to owning the ‘market’ at large, is what will help deliver stronger returns."

However, Quliter Investors is not keen on taking its share of the bumper profits from big oil across multi-asset portfolios.

The cost-of-living crisis clearly feeds into spending patterns.James Penny, Tam 

Patel, whose departure from Quilter was announced on December 1, explains: "While energy companies are recording bumper profits, the feast or famine profile of the profits is not one we would want too much exposure to. What’s more, the regulatory risk is also growing.

"While having a little exposure to selective opportunities in the energy sector is not a bad thing, it is important to strike the right balance."

For James Penny, chief investment officer at Tam Asset Management, the cost-of-living crisis definitely has an effect on positioning. 

He says: "The cost-of-living crisis clearly feeds into spending patterns, housing demand, economic growth and consumer discretionary stocks (the list goes on).

"Given this, the implications of a slowdown in spending patterns, as a result of the cost-of-living crisis, remain fundamental to investment positioning. Likewise, changes in the severity and longevity of the crisis also have an effect on positioning."

Adviser view

Ben Seager-Scott, head of multi-asset funds for Evelyn Partners, believes it is important for advisers and clients to understand the different ways in which inflation - now at a 41-year high - is affecting their own lives as well as the wider economy.

He says: "Rising inflation and the cost of living crisis is manifesting in a number of different of different ways.

"The detrimental effect on growth stocks from the technical element of discounting means many multi-asset funds are seeking greater stylistic balance including value names and defensive names."

At the same time, as people are forced to tighten their belts and change their spending habits, he warns that discretionary consumer goods and services might face headwinds, while consumer staples are likely to be more resilient.

But Seager-Scott warns: "However, these shouldn’t be binary calls, and when there are broad sell-offs in the market, this can be a good opportunity to top-high high conviction ideas that are intended for the long-term."

simoney.kyriakou@ft.com