Multi-assetJun 6 2023

Why multi-asset funds are still largely cautious

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Why multi-asset funds are still largely cautious
Caution is still the watchword as we head into Q2, according to investors. (Allan Mas/Pexels)

Multi-asset fund managers are still exhibiting cautious behaviour according to a senior investment analyst.

Alex Farlow, head of multi-asset fund research for Square Mile, said there has been a sustained note of caution in the market, reflected in portfolio allocations that skew slightly towards lower-risk asset classes. 

He said: "A lot of commentators believe we are closer to peak rates and the likelihood of a recession now is not completely off the table. 

"Of course, it depends who you talk to, but the expectation for the UK and the US is for a slowdown, while some people still think the UK is close to a recession."

Farlow said that if advisers were to consider the 2022 fourth quarter reporting season, there was a rally in equity markets and a lot of the multi-asset funds we look at too some risk off the table then, locking in gains on equities.

While Square Mile does rate managers who are contrarian, even these perma-bulls are a little bit more sceptical than they were.Alex Farlow, Square Mile

As a result, managers trimmed profits and some funds raised from that went into higher cash levels, or into government bonds.

He said: "A lot of this has been held as dry powder. Cash is being used defensively or as a 'let's wait and see' strategy.

"But not all managers are holding high levels of cash - some are using short-dated government bonds which are more liquid and cash-like."

Farlow said there was no particular pattern as to which type of portfolio was adopting this more cautious strategy. "It's not just the more cautious or low-risk-rated fund.

"Some of the more dynamic growth funds have been pushing cash levels up from 3 per cent to 4 per cent as at the end of 2022 towards 9-10 per cent."

For example, sister title Asset Allocator's proprietary database shows that although some discretionary fund managers have started to put their Q1 cash back to work, others have been pushing cash holdings towards 14 per cent as they move into the second quarter.

Caution is remunerative

And even in funds that are able to take on higher equity weightings, Farlow said some have been taking short positions. 

"If you're looking more broadly, people are still cautiously positioned. 

"We certainly have nobody who is a gung-ho outlier who is showing they are really going for risk at the moment. 

"While Square Mile does rate managers who are contrarian, even these perma-bulls are a little bit more sceptical than they were. Most are at the middle of their risk bands - neither too much risk on or too much risk off."

Partly this is because of the higher interest rates on cash in recent months, as the Bank of England and other central banks entered a rate-rising spree. 

The BoE pushed rates up from 0.1 per cent in December 2021 to 4.5 per cent in May 2023, making the returns on cash and government bonds much more attractive, giving managers a real return on their more defensive positions than they would have had in the past decade.

As reported by FTAdviser in May, Kelly Prior, investment manager for the Columbia Threadneedle multi-manager team, said "handsome" overnight deposit rates, as well as a series of central bank base rate rises, had made cash attractive as a short-term portfolio tool.